Q2 2021 Western Digital Corp Earnings Call

[music].

Good afternoon, and thank you for standing by and welcome to Western Digital's fiscal second quarter 2021 conference call.

Personally all participants are in a listen only mode. Later on we will conduct a question and answer session at that time, if you would like to ask a question you May press star one on your phone as a reminder, this call is being recorded now I'll turn the call over to Mr. Peter Andrew You may begin.

Thank you and good afternoon, everyone. Joining me today are David Duckworth, Chief Executive Officer, and Bob You Lau Chief Financial Officer.

Before we begin let me remind everyone that today's discussion contains forward looking statements, including product portfolio expectations business plans.

In financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on form 10-K filed with the SEC 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-GAAP and comparable GAAP financial measures are included in the press release.

And other materials that are being posted in the Investor Relations section of our website.

With that I will now turn the call over to David.

Thanks, Peter and thanks, everyone for joining us today to start our second quarter results or at or above the upper end of guidance ranges. We provided in October.

We reported revenue of $3 9 billion and non-GAAP earnings per share of 69 cents.

These results reflect continued growth in retail in what was a seasonally strong quarter. In addition, stronger demand for our client SSD products as well as our notebook and desktop hard drives contributed contributed to upside in revenue.

We continue to work hard delivering for our shareholders customers partners and communities, we adapted to changes in our business and continue to manage the ongoing challenges presented by the pandemic.

Our results reflect the benefits of having such a diverse and deep product portfolio fantastic franchises, a vast customer base and now an optimized organizational structure.

As a result, we have a solid foundation to capitalize on the significant growth opportunities in front of us.

I'm excited about the progress we've made over the last few months and the recently established flash and HDD business units.

Both franchises are led by exceptional leaders, who are highly focused on executing their respective strategies by establishing their teams.

<unk> technology and product development, engaging with customers and analyzing and effectively capturing target end markets.

As we've highlighted on previous earnings calls, we are committed to delivering on our product roadmap, including advancing our product transitions, notably we are making great headway with the product transitions of our energy assisted hard drives and enterprise Ssds.

As you all know these transitions are multi quarter journeys, but I am pleased with our progress, which I'll detail shortly.

Although our progress to date is showing tangible results, there's still work to be done.

We remain extremely focused on enhancing our ability to drive continued innovation and sustainable long term shareholder value.

Let me now provide a recap of our flash and HDD businesses.

Within flash, we remain well positioned to address the digital transformation driven by businesses schools and consumers that continue to leverage technology as a daily necessity for work learning and a much needed form of entertainment.

The pandemic has not only accelerated this transformation by the way we all use the cloud, but it has spurred technological innovation by driving the ability to access the cloud using very powerful in advance and devices that.

On the increasingly pervasive ability to access store and share data from anywhere on any device has resulted in robust storage demand, particularly in smaller form factors, such as notebook tablet and chromebook.

The attach rate of client ssds into notebooks now exceeds 80%, while desktop penetration of client ssds is around 40%.

Furthermore, tablets, and chromebooks, which are all flash base represent a growing percentage of total PC demand.

Our leading position in client Nvme based ssds and our strong relationships with the major PC Oems drove our client SSD business to a record level of exabyte shipments.

Retail continued to perform well in a seasonally strong quarter and we achieved a two year high in revenue supported by the strength of our brand and the breadth of our portfolio.

We continued to make progress with our second generation enterprise SSD products, completing nearly 150 qualifications.

Importantly, we completed the qualification process at one cloud Titan, which was an objective we committed to last quarter.

We are shifting to this cloud Titan in the fiscal third quarter.

The second generation enterprise SSD qualification process is well underway with additional cloud Titans and large Oems.

From a technology perspective, we began shipping our 112 layer fixed five technology and client SSD products in the December quarter fixed five remains the most capital efficient technology node in the recent history of NAND going back to the two D era and we are preparing.

For a significant ramp of this node through 2021.

Ultimately customers want the best product that offers a blend of cost performance and power and western digital provides that.

Our focus on technological and architectural innovations coupled.

Coupled with the benefits of size and scale that we have with our joint venture with Chiacchia has enabled us to deliver the industry's highest density per layer at the lowest cost per bit.

As the result of our inherent advantages with the joint venture, particularly our scale and consistent track record of technological innovation, we are able to deliver the required bit growth and performance with the lowest capital intensity in the industry. We are highly confident in our ability to continue this momentum.

As we ramp picks five through calendar year, 2021, and begin big six product position.

On the HDD side of the business upside demand in PC notebook and smart video more than offset weakness in capacity enterprise.

Assisting work from home and distance learning trends I touched upon earlier drove higher demand for both desktop and notebook PC hard drives and propelled retail hard drive revenue to a three year high.

The smart video business continue to recover growing 30% sequentially.

The biggest HD update is our solid progress against the initiatives, we outlined last quarter.

<unk> the qualification process at the cloud Titans with our mass market energy assisted hard drives.

I'm pleased to share that we have now completed qualifications at three of the four U S cloud Titans well.

Well, one now completed cloud cloud tightened qualifications slipped beyond our anticipated timeline in the fiscal second quarter.

Another cloud tightened qualification schedule to complete in the fiscal third quarter was completed in the second quarter.

With these significant milestones now behind US we have stage products in anticipation of the ramp of these drives as we continue through 2021.

With cloud digestion abating in the stabilization of OEM demand, we believe the demand and capacity enterprise bottomed in the fiscal second quarter and our intent anticipating a rebound in the fiscal third quarter.

18, terabyte is expected to be our leading capacity point as we head into the second half of the calendar year, which should propel nice growth in this segment going forward.

As the volume of these drives continues to ramp through the calendar year, we expect our revenue and gross margin to recover.

Before I turn it over to Bob I'll quickly summarize our perspective on what's to come we continue to deal with the far reaching effects of the pandemic and no one can be certain of what the new normal will look like however, there is no question. The accelerated digital transformation has only increased the rely.

<unk> on data and technology in both our professional and our personal lives, which we are confident we will have a lasting impact for years to come.

To this point some industry analysts are raising the possibility that in certain portions of the market such as the cloud the storage industry will not be able to meet the extraordinary demand for both flash and hard drive solutions over the course of the next 10 years Wes.

Western Digital's unique ability to provide flash and hard drive storage solutions for customers spanning individual consumers to cloud Titans highlights the value and importance of our broad portfolio and strong competitive position.

I'll now turn the call over to Bob to share details on our financial results.

Thanks, Dave and good afternoon, everyone.

As Dave mentioned overall results for the fiscal second quarter were at or above the upper end of the guidance ranges we provided in October.

<unk> was $3 9 billion.

Up slightly sequentially and down 7% year over year growth in client devices and client solutions was mostly offset by a decline in our data center devices and solutions and market.

Looking at our end markets client devices revenue was $2 1 billion.

10% sequentially and 19% year over year.

Work school and game from home trends continue to drive demand for both our flash and hard drive solutions for notebook and desktop applications.

In notebook and desktop are flash and hard drive revenue each grew over 20% sequentially, highlighting the power and value of our portfolio for our leading OEM customers.

Demand for our smart video hard drives was much stronger than expected growing 30% sequentially as demand continued to recover from the bottom set in fiscal fourth quarter of 2020.

During the height of the Covid related lockdowns.

And lastly, mobile revenue was down sequentially with growth and recently introduced five G phones offset by dynamics within China.

Moving on to data center devices, and solutions revenue was $807 million down, 29% sequentially and 46% from a year ago.

Revenue from both capacity enterprise hard drive in enterprise Ssds were down sequentially.

As Dave mentioned, we had an unexpected delay in our qualification at a cloud Titans.

As a result during the quarter our capacity enterprise drive shipments were negatively impacted and inventory grew.

We have since completed this qualification and as Dave noted given that a separate cloud tightened qualification was completed ahead of schedule. We now have three over for our cloud Titans qualified on our new energy assisted drives.

In addition, we are beginning to ramp our second generation enterprise SSD products through calendar year 2021.

Next client solutions revenue was above expectations at $1 billion.

Up 19% sequentially and 6% from a year ago, the work school and gaming from home trend benefited both hard drive and flash based products again, highlighting the powerful go to market synergies of this channel.

Turning to revenue by technology.

Flash revenue was $2 billion down 2% sequentially and up.

11% year over year.

Flash Asps were down 9% sequentially on a blended basis and down 6% on a like for like basis bit shipments were up 7% sequentially.

Hard drive revenue was $1 9 billion.

Up 4% sequentially and down 20% year over year on it.

Sequential basis total exabyte shipments were up 2%, while the average price per hard drive decreased 8% to $73.

As we move in to cost and expenses. Please note that all of my comments will be related to non-GAAP results from us stated otherwise.

Gross margin for the second quarter was 26, 4% up slightly sequentially and above the upper end of the guidance range provided in October.

Our flash gross margin was up <unk> seven points from the last quarter to 27, 1% as the mix shifted toward our client ssds and we experienced a strong seasonal quarter in client solutions.

We continued to achieve solid cost reductions.

Our hard drive gross margin was 25, 6% down <unk> six points sequentially.

The mix shift towards notebook and desktop hard drive and the early ramp of our energy assisted drives pressured our gross margin.

This includes COVID-19 related impact of approximately $32 million.

Yes.

Non-GAAP earnings per share was <unk> 69.

Above our guidance range opt.

Operating cash flow for the second quarter was $425 million and free cash flow was $149 million.

Capital expenditures, which include the purchase of property plant and equipment and activity related to flash joint ventures on our cash flow statement was a cash outflow of $276 million.

In the fiscal second quarter, we paid our $248 million in debt, including an optional debt pay down of $150 million and $35 million of the remaining <unk> convertible notes.

Our liquidity position continues to be strong at the end of the quarter, we had $3 billion in cash and cash equivalents and our gross debt outstanding was $9 $3 billion on.

Our debt to EBITDA ratio was three nine times in the second quarter on.

Our adjusted EBITDA as defined in our credit agreement was $3 5 billion flat sequentially, resulting in a leverage ratio of two seven times.

As a reminder, our credit agreement includes $1 billion in depreciation add back associated with the joint ventures.

This is not reflected in our cash flow statement.

Please refer to the earnings presentation on the Investor Relations website for further details.

Moving on to our outlook.

Our fiscal third quarter guidance is as follows.

We expect revenue to be in the range of $385 billion to $4.05 billion and we expect both HDD and flash revenue to be in a similar range in the third quarter as they were in the second.

This range is better than expected when you consider normal seasonality, which would have implied a 7% decrease sequentially in the third quarter.

We expect non-GAAP gross margin to be between 25, 5% and 27, 5%.

We expect flash gross margin to improve sequentially as we anticipate flash price declines will improve from the fiscal second quarter and cost reductions will continue.

Hard drive gross margin is expected to be down sequentially, primarily due to higher volumes of our 16 terabyte drive and a planned reduction in production volume.

We expect the 18 terabyte drive to be the leading capacity point as we head into the second half of the calendar year, which should propel growth in this segment going forward, we expect operating expenses to be between 705 and $725 million.

Interest and other expense is expected to be approximately $70 million.

The tax rate is expected to be approximately 23% in the third quarter.

And we expect non-GAAP earnings per share to be between 55, and <unk> 75 in the third quarter.

Sumit approximately 310 million fully diluted shares now I'll turn it back over to Dave.

Thanks, Bob.

As we discussed Western digital has worked hard to position ourselves to address this unabated growth in data and therefore storage technology and thanks to these efforts the market has aligned favorably for us were running two industry, leading technology franchises in end markets that will only continue.

To grow as the digital transformation further accelerates.

We know that our HDD business is less encumbered by workload mix shifts today and that our flash business is becoming more and more driven by applications. We also have made the right investments in our joint ventures with Chiacchia, our strategic differentiating asset.

This is an extremely exciting time for our company as we are focused on capitalizing on the tremendous opportunities in front of US. Accordingly, we will continue building momentum behind our business unit strategies company positioning strong brand and industry leading portfolio.

I'll now turn the call over to the operator to begin Q&A.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone.

Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

We ask that you please limit yourself to one question.

Our first question comes from the line of Aaron Rakers with Wells Fargo.

Yeah. Thanks for taking the question I'm, just kind of on the near line hard disk drive market I know that you talked about some puts and takes with regard to qualification cycle.

Terabytes, but I guess the question first of all can you help us understand what capacity shipments did in the quarter for near line.

Help us understand kind of the soup of the ramp that you expect on near line as far as possible over the next quarter or a couple of quarters looks like.

However, you want to kind of discuss your expectations on on.

On an equal <unk> ramping going forward. Thank you.

Yes.

Thanks Darren.

I'd say the mix last quarter was still $14 16 for the most part of course, there is some <unk> mixed in there, but as we as we said one of the big calls that we were working on kind of finished right in the first week of the following quarter. So we expect that now to start ramping.

I think as I said in the remarks, I think cloud digestion is abating. So there I think the different big players come out if it at different rates and are the first ones are already starting to come out and we expect other ones to pick up as we go through the year. So.

The big thing for US as we expect 18 to as we get into the middle part of the year, that's where the transition will happen with it being the leading capacity for us and as that happens that's a that's good for our business. So.

That's basically how we see it.

And what did capacity shipments near the corner.

Abuse of capacity shipment.

I mean, we don't split it out specifically, but you can see that on the data center devices and solutions, we were down quite a bit to net was driven both by the <unk>.

The enterprise as well as enterprise Ssds.

Okay. Thank you.

Sure. Thanks, Brian.

Thank you.

Our next question comes from the line of Joe Moore with Morgan Stanley.

Great. Thank you.

Thanks, Let me ask a question in terms of the NAND gross margins.

The improvement that you saw in the December quarter sequentially with prices down 6% like for like and the improvement that Youre seeing in Q1, where is that coming from and can you remind us where you are with the.

The startup expenses from the new fab rolling off.

Yeah, So what I would say kind of as we started talking about last quarter in the more transactional markets, we're seeing pricing get better.

We will see how that flows through to the negotiated markets over the next couple of quarters, but.

Basically as we went through the quarter, we saw retail and parts of the channel improve.

And as far as K, one costs, yes, I can I can update you on K. One so I think I had originally guided to around $50 million in K, one startup costs this quarter and we actually came in around $40 million and this quarter.

We are now and will be a normal production volume. So we're not going to continue reporting startup costs, because we're really not in startup mode anymore.

Great. Thank you and then in terms of your inventory level I think you said that day.

Inventory increase was mostly on the drive side, where are you in terms of your internal NAND inventory.

It is a flash inventory is pretty consistent with the last couple of quarters on we're not we haven't really built inventory on the flash side.

We really as we mentioned in our remarks really build some inventory in anticipation of the new dry on the new capacity enterprise drives shipping and that's kind of started at higher and higher volume. So as we go forward.

Great. Thanks, so much thanks.

Thanks, John.

Okay.

Thank you and our next.

Question comes from the line of <unk> Mohan with Bank of America.

Yes. Thank you.

Thanks for the color on the on the data Center side I was wondering just given your comments are on the qualification timing can Kansas segment grow in fiscal second half versus fiscal second half of 2020, especially given the comps get tougher.

By the end of the fiscal year.

Your comments on HDD gross margins are sort of worsening sequentially.

Is this basically are we waiting for one more quarter basically the end of the fiscal year before we see HDD margins pick up as you as you get material pick up on AT&T be or will these cloud sort of abatement plus the OEM pickup help by by our fiscal fourth quarter. Thank you.

Okay, Let me see if I can day.

Decompose that a little bit so yeah, we expect we expect to pick up and as we move throughout the year.

I think your call on the gross smart, we see we see the revenue coming back as we move into next quarter, and then getting better throughout the year would kind of guide one quarter at a time on how the year over year number on the top of my head, but you are right on margin, we kind of expect one more quarter of net.

It'd be flat to slightly down margin on the drive side.

And then we will start to see that accelerate especially as we move through into higher.

Percentage of AT&T.

Okay, great. Thank you.

Yeah.

Thank you.

And our next question comes from the line up Toshi Hari with Goldman Sachs.

Thanks Toshi.

Thanks, Thanks, so much for taking the question.

I wanted to follow up on.

Gross margins in your HDD business day.

David So again as you as you mentioned this quarter is going to be flat to down.

As you as you move forward.

With mix, improving hopefully COVID-19 costs abating at some point.

Maybe some of the costs related to energy assist going away.

Do you think getting back to 30% over the next year or so is a reasonable target or.

Is the margin profile structurally different today versus a year ago two years ago. Thank you.

No I think you hit on the issues. There I mean first of all Covid I think last quarter was about one 7% of the headwind in that business and mix, we talked about retail being multi year high.

But we believe as we get we go into 2018, we have a path back to the kind of margin profile, you're talking about we just need to get we just need to get the mix better I mean Covid zone.

A bit of a wildcard.

How fast.

It's really the freight costs, how fast we can get freight costs to come down it's been.

Obviously pretty pretty sticky about where it's been for the last couple of quarters.

And then as I said as we move into 18, and we see the cloud digestion fully come on to cloud digestion, I think you'll see a path back to the.

More.

Traditional margin structure.

Got it thank you.

Thank you.

Our next question comes from the line of Matt Hussaini with that strategy.

Yes, Thanks for taking my question on the fly zone can you. Please.

Provide some color as to.

What percentage of flash revenue were driven from gaming and how do you see that trending for the rest of day, you and I have a follow up.

Yes gaming was gaming is still.

I think it's not it's not as significant as it was last quarter given last quarter. There was a lot of buy in anticipation of the initial builds.

So I would say its down a little bit sequentially, but it's still a great market for us because we can play the console side of it and the retail.

With WD Black, which has been very very well received in the retail channels. It is.

Part of the reason the retail business is doing well and the margins are good as well.

We're investing in brand in addition to just the product so.

Sequentially down a little bit, but still expect it to be a good market as we move throughout the year.

Gotcha, and then one additional follow up on the flash side.

Last earning conference call you alluded to the fact that you on a couple of quarters away from finalizing.

Finalizing our contracts with Oems.

And as.

Prices or supply demand.

Tightens do you see on Oems.

Oems stepping up and signing longer term contract or is this just gonna be a guesswork as to how they plan for especially like one or two quarters out.

I think what I talked about last quarter was actually qualification at the Oems and that's a multi quarter activity the pricing is.

Negotiated on a quarterly basis, and there was kind of a.

A long term agreement on let's say on a year timeframe of what the target share is but that can move around a little bit but that gives you a sense about kind of how the market works.

But how do you see the dynamics look today compared to like our October conference call.

Of which part of the call or the share or the pricing well the quantification on how I think on.

As you look into the rest of it.

After you do you see more.

More of a pricing power coming back to the suppliers or is it still going to be a hard negotiation well.

Well I mean, so the qualification was all about our second generation Nvme enterprise SSD product, which is quite a mouthful, but.

That qualification I think last quarter I said, we are scheduled to startup qualification this quarter.

On October we were scheduled to startup qualification.

In our fiscal second quarter, which which did start and is underway.

And that is a multi quarter process and I'm, assuming it's successful will put us in a stronger position to ship that product into the OEM.

Into the big Oems So it's.

It's underway as I said in the prepared remarks, and I think I've been talking about now for a couple of quarters. The qualification in my book is the last phase of the development process. It.

It can move around a little bit, but the fact that it's underway.

Is a good sign for.

We're working to expand the Tam on that product.

Got it thank you.

Yeah.

Thank you.

Our next question comes from the line of C J Muse with Evercore.

Hey, Yeah. Good afternoon. Thank you for taking the question.

A question on the net side can you speak to what's driving the better than seasonal demand in Q1, and then beyond March on power.

Are you thinking about changes in your mix and what impact that will have on your gross margins. Thank you.

So I'll.

I'll take I'll give you a perspective sure Bob his perspective as well so we've been talking about retail for several quarters now.

It's been good with the team has been doing a great job launching new products I talked about WD black in the gaming.

Segment armour law security in enterprise SSD, So a lot of really good work there.

And so that continue we expect that there is momentum there let me put it that way.

PC notebook demand, we still see it as being strong.

And we talked about what I think was a significant milestone for us this past quarter was finishing the qualification.

Our second generation Nvme enterprise SSD product at one of the cloud Titans.

That finished right at the end of the quarter.

And we started shipping so that is a.

That's accretive as well.

Yeah, I don't have a lot to add I mean, I think it's on retail continues to be strong in this work from home environment and in the enterprise SSD business will just keep picking on them.

And just to follow up on on how Youre thinking about mix beyond the current quarter and what the implications are for margins.

Well I mean say.

Say, a little more linear.

We're still I mean, we still have a balance I would say we are focused on our balance portfolio.

We're clearly working on.

Improving our position on enterprise SSD, that's been a big goal for the company for even before I got here and our second generation product is things are going well I think 150 qualifications down including one of the one of the big cloud players, which is a big breakthrough.

We're still a client client SSD is obviously a strength for the company and has been for.

For a while.

About gaming last quarter.

And then mobile we still we still have a healthy mix into mobile I think we're under index to the market, but we're still in that market because it's very very important to be in that market. So I expect a balanced mix across that and then you know you're mixing some iot and automotive.

And you get most of the portfolio.

Thank you.

Thank you.

And our next question comes from the line of Sidney Ho with Deutsche Bank.

Great. Thanks for taking my question.

The question I have is on on NAND, It's Scott.

To see NAND margins, improving and price declines moderating.

Do you see industry supply demand balance for the rest of the year, maybe compare to what you think a quarter ago and how do you see your own bit shipment growth. This calendar year in kind of the shape shape on that towards the rest of this year.

Yeah.

I guess, what we would say about.

Investment in the industry is we're pretty much where we've been which we think the industry has been pretty good about this I mean, there's a lot of variability on on.

Investment on.

Supplier by supplier.

Capital cycles very.

Even node transitions within each supplier very about how much capital.

How much capital is required in our case fixed five is very capital efficient node <unk> six will require little more capital, we'll talk about that when we get there. So we still see we still see a pretty good balance we see strong demand drivers we see.

I think we see good growth this year.

Low <unk> low to mid thirties, and we see demand above that so I think you know nothing nothing we're seeing in the environment surprises us tremendously.

Okay. Thanks.

Thank you and our next question comes from the line of Patrick Ho with Stifel.

Thank you very much.

Dave maybe.

Qualitatively now that you've been at the company for almost a year without any I guess financial quality quantification.

Two business not businesses now separated where do you see the most improvement in the time that you've been here. So far is it in the R&D side of things are you more efficient they're manufacturing.

<unk> supply chain, where you've seen the most gain and where do you think as you go into your second year, you you see more opportunities to improve.

So I guess, what I would say is first of all it's been an extraordinary 10 months and especially to join the company at the beginning of a global pandemic.

I know that hasn't happened in our long times at least not mine.

And so I think it's been it's just been extremely impressive to see how the company has responded to that.

And the evolution of that in the early days.

A lot of issues on the supply side that have just been completely worked out and things are running extremely well.

I think we've made a lot of progress on the what just what she said really understanding where the synergies of this portfolio are which are on the go to market side and the fact that we bring a broader.

Our broader solutions to our customers and I think we understand our customers' requirements as well given that we can play.

Uh huh.

But to drive market and.

Flash market.

But the third but they're very different products and driving the roadmap southern mean on technology is extremely.

Really important in the separate those and the Bu and I think you know.

It's still pretty early but the impact of having two very accomplished leaders join an already strong team that it just has an immediate impact on clarifying the roadmap understanding.

Where we're investing our R&D dollars.

Engaging with customers in a way that can drive the portfolio. So I think we've made really good progress there, but I think it will continue to get better as we go and these leaders get in the in the groups get get more established and then the other thing I'll say, which is not.

Really something.

That I expect to get better I think it's something that I, just always want to reinforces the value of the partnership with Yorkshire, I've spent given I can't travel, which still spent a lot of time with the leadership. There obviously our teams work together on a day by day basis, I'm, not saying I'm not pointing this out.

The it works extraordinarily well.

It's just a tremendous strength of the company and it's been it's been really great for me to be a part of it over the last 10 months.

Great. Thank you.

Thank you. Our next question comes from the line of Mitch Steves with RBC capital markets.

Hey, Mitch.

Hey, How're you doing Sir I had two questions I'm actually going to focus a little bit more on the hard disk drive side. So first of all just kind of on the margin. If I look at the kind of the run rate of the business right now and I compare that to 2018. It was back then it was kind of on 27% gross margin business on a roughly 2 billion on revenue. So if I assume that COVID-19 related headwinds that kind of a <unk>.

<unk> issues are about 100 basis points of headwind to gross margin by about roughly accurate there.

I'll start with that one I have a follow up after that.

Yeah, I think it's closer to 170 basis points of a headwind.

So the number would have been kind of 27 to $27 three and I reference.

Yeah, Yeah, that's correct.

Okay, and then secondly on you guys used to disclose them.

A little bit more detail on the noncompete units.

Those are up pretty significantly Q over Q $8 to $10. One I'm. Just curious if you can give us any sort of like directionality on was it more consumer electronics or was it more of your branded units were doing better.

For the quarter.

Yeah, I don't want to get too much into specifics on one of the things. We did mentioned with smart video was up quite a bit sequentially and that's in the non compute area.

But you know.

Just on the on the hard drive side on client and notebook, we did really well.

Thank you and our next question comes from the line of Tom O'malley with Barclays.

Hey, guys. Thanks for taking my question. My question is really center around the transition of the two cloud Titans with HD qualifications, you said, one slips, but a little one came in a bit earlier can you talk about.

What the what the mix of those transitions kind of net to you you talked about obviously the gross margin slipping into the next quarter, but then kind of recovering so were seeing a bottom. There do you think that the out quarter is benefiting from this with the one coming on earlier or do you think it is a net negative transaction in the near term I just want to get a little bit more color about how it affects the <unk>.

The business into March.

Yes, I think so.

So if you look at last quarter. There was some business we expected to ship on 18 that we didnt because of qualification wasn't done.

Wrapped up I think the first week of January so.

Some of that business mixes into other capacity points and some of it goes to other suppliers.

And then on the other the other qualification that we didn't expect to finish until it wasn't we didn't end. The schedule was the end of the towards the end of this quarter were in that actually finished sometime last quarter very smooth.

So.

What it says is looking backwards that things could have been a little could've been a little better if they if the one would've finished on time with Boeing now theyre, both behind us so going forward, where we're in a position to start to ship <unk> to both of those customers as they ramp the capacity point.

Does that help.

Thank you and our next question comes from the line of Harlan sur with JP Morgan.

Hey, good afternoon, thanks for taking on.

Good afternoon, and thanks for taking my question on other gross margin on the flash side of the business you know good to see the inflection in gross margin in December you guys mentioned the startup costs are coming out here in the March quarter. So that's about 150 175 basis points gross margin tailwind to NAND and then on top of.

That you're seeing better pricing trends, and maybe getting a little bit of benefit from the higher.

The margin trends from your initial shipments of your Gen. Two nvme products. So on gross margins approaching 30% where on the March quarter, but maybe if you could just help me understand some of the puts and takes on gross margin for them.

Yeah. So I'll, let I mean, you talked about a number of the moving parts and we're definitely as I said earlier expecting gross margins to improve on the flash side.

We saw it in the last quarter, I'd say very good pricing trends in the transactional markets.

And the OEM markets, we negotiate one quarter at a time so you.

And we did that on between the middle of last quarter. So it's a little hard to say how much we will see there and then we're continuing to do a good job on the other part of the equation, which is cost reduction we still think we're very confident in our 15% year over year across decline. So so I think it's just a question of a.

How pricing plays out as we move forward, but I think we're in a very good place.

Yeah, absolutely and just a follow up so many of the suppliers moving your HDD and SSD controller chips foreseen tightness in wafer supply Assembly and test capacity.

Shipments here on the March quarter, potentially being somewhat held back because of lack of controller availability from someone's got a merchant or he said controller chip suppliers.

Yeah, there's no doubt things are tight and we're not immune from that I mean, clearly we have our financial plan covered.

With components, but.

When you do go looking for things from the semiconductor supply chain. It is tight right now so we'll see how it plays out during the quarter.

Thank you and our next question comes from the line of Nick Todorov with Longbow Research.

Yeah. Thanks, guys good afternoon.

I understand David I think you talked about seeing continued momentum in retail and P. CS, but maybe we can extend a little bit I would like to hear your thoughts about how you see those trends persisting as we look forward I know visibility is probably not as.

Good, but I just want to hear your thoughts how are you thinking as we go into the following quarters, the demand from Pcs and retails and work from home specifically.

Yeah, I mean, it's obviously a very dynamic environment.

With the pandemic and.

Seeing resurgence in certain parts of the world and more lockdowns in parts of the world.

So it's hard to it's hard to call it more than one quarter timing, we guide one quarter at a time, but I think I understand your question a little bit broader I guess, what I would say is there is in retail.

It really just dialed in like how to deal with this environment, we're in and the dynamic nature of it.

And I think that the new products that we've been launching have been well received again I mean, the WD black gaming product, we're doing co branding.

With other folks.

We introduce a product around security and storage that I think is going to be.

Good for us so a lot of investment in the brands, which are strong but make sure we keep share of voice high.

And it has been an area, where we've been able to get some momentum and keeps the momentum I think going couple of quarters back so but.

But it is to your point it is very dynamic given the COVID-19 situation.

And the locked down so we will see above seasonality performance Q1 is a seasonally seasonally weak quarter for retail but we're.

We're planning to do a little bit better than that.

Thank you Andrew.

Question comes from the line of Ananda Baruah with loop capital.

Hey, there.

Hey, good afternoon. Thanks for taking the question Yeah, I guess, if I could just go back to the to the gross margins on the flash side.

Longer term intermediate to longer term view.

I see a path to sustainably greater than 30% margins I think you've talked about in the past that you know it's so you know what are the kind of signpost there are mechanism to meet that.

Manifest to have that be the case I appreciate it.

Okay, I guess I can I can start with that and again as we all know a lot of it depends on the supply and demand and what's going on with the industry. We've been encouraged as we said about the the pricing on a transactional markets over the last few months.

As we move forward, we're pretty confident on the demand side for the year and there is just a obviously a big on demand on the on the mobile side, we think we're going to see very good demand on the enterprise Ssds, we've already have a strong position on client ssds. So we feel pretty confident on the demand side.

And we think the supply side it appears to be pretty rational and I think if that's the case, we should see margins improve from here, but I don't want to put a particular milestone or particular goal out there, but I think it's going to be a pretty good market in 2021.

Yeah, I think we've been signaling that about 2021 for a couple of quarters now now again, we don't want to get ahead of ourselves.

We do have more exposure to the transactional markets with helps when things start going in a positive direction, but it's got to flow through to the negotiated market still and.

We'll see how that plays out over the next couple of quarters.

They are saying the other thing I'll highlight on this is really important Bob touched on earlier is just that.

Make sure we maintain our cost position and you know as.

As I've highlighted a couple of times in the prepared remarks on what I said.

Earlier.

With our partner <unk>.

<unk>, we're the largest provider of NAND flash memory in the industry.

We jointly develop our technology roadmap. So we're heavily invested in that we.

We believe we've got tremendous technology that allows us to deliver.

The power performance.

It's we need you see our technology is.

Lower lower layer count than others that means it's more efficient process. So we feel good about that that sets us up to continue to drive to 15% year over year cost of client. So we got to make sure we keep our eye on that side of the equation as well.

Thank you.

And our next question comes from the line of Jim Suva with Citigroup investments.

Hey, Jim. Thank you Hello, and you have implemented a more tightly focused on your two different segments like flash and HDD side ramping up a little bit now on.

Those data has done the work to where we're actually so the food on all of our efforts now are those still kind of implementing a lot of those in the boot still has to be rolled out on their efforts because it seems like you know prior to this western digital has been very much non core a couple of years, sometimes execute very well on the other.

Times are good to slip up so I'm, just trying to figure out a way to midpoint on implementing all their challenges in the early on in there or are we actually at the point now where what they found on discovered and wanted to align that we should expect going forward. Thank you.

Yes, Jim I think that so first of all I think we see benefits of anytime you add too.

Our leaders to your business that have run multi 10 billion dollar portfolios.

On a technology space Youre going to get an immediate.

Benefit from that you just have two more very very senior business leaders that are looking at the portfolio. Every day that are engaging with customers every day reviewing engineering products every day and providing a level of perspective. It is highly developed.

And.

Their main job is to integrate all the different pieces together into a business. So you're going to see immediate on immediate benefit of that and we have.

But then theyre going to start working on okay.

Uh-huh, you'll start looking at the roadmap of our products and make sure I've got the right fit I'm investing in the right places.

To me your technology roadmap is kind of like an articulation of the future value of your company. What markets are you going to be and where are you going to invest and the timeline for those payoffs are different there's different time horizons to that so.

If you come into if you come into a technology franchise, when you own it and you're in the middle of a big engagement with a customer. For example, you now have another person that can get involved in that process and understands immediately how to engage in that in a very senior way how to communicate information.

To guide their teams and so I think you'll see an immediate benefit there as other parts of it where we're making decisions on what products are going to come to market in two years from now or three years from now and so.

And their job is to really integrate over all of those time horizons and get the best.

Result, given.

Given the investment we put into the business. So we've seen benefits already but there will there will be more to come and I think you will see a crisper execution and you'll see that the portfolio is optimized.

To give us the best return for the investment we're making.

Thank you Andrew next question comes from the line of Karl Ackerman with Cowen.

Yes. Good afternoon gentlemen, thank you for letting me ask a question hi.

I had a question just on I guess your hard drive business you know your your peer spoke about a recovery in data center and the first half of the year and I'm curious if that resonates with you such that you can achieve 35% exabyte growth for you in the airline business in fiscal 2021.

And I was also hoping you could juxtapose, what you're seeing across on Prem and cloud within that an airline business and then I guess thirdly, if I may you know I was hoping if you if you can't achieve that 35% actually by growth can you do that with your existing capacity today or if you could touch on your capacity expansion plans as well.

Thank you.

So I think to your first part of your question was about what are we seeing that when you say enterprise enterprise on Prem market. So.

On the airlines specifically, yeah in airline it I would say it's.

I think the.

Term I used in the prepared remarks was stabilization of the enterprise of the OEM market and I think that's kind of how we're seeing it.

It's.

On or above forecast of what our customers are telling us so it looks better I wouldn't it's certainly not pre COVID-19 he had.

You know, it's easier to judge going forward, but not back to where it was and that's not surprising given the environment, we're in as far as.

You know the cloud we talked about different cloud providers come out of digestion at different rates throughout the year and then as far as exabyte growth, we see that 30% to 35% in that range exabyte growth I think that's been the long term growth of the industry, we see that going forward again, I think coming out of the <unk>.

<unk> will see does that line tilt up or not given the dependence on technology in the cloud that we all see but we have yet to see that so well.

We see we see good growth in our in the capacity enterprise business as we move through the year.

Thank you Andrew.

The next question comes from the line of Street put jewelry with F N B C. Nico.

Thank you Hi, guys first I have a clarification for Bob.

Bob on the client devices growing 10% you said.

Desktop and notebooks grew 20% and video grew at 30%.

And there was an issue in China, just trying to understand what that was in mobile in China. The two on reference.

Yes, it was.

Actually Huawei, which we talked about last quarter and so we're not shipping to Huawei either from the flash side or on the hard drive side.

Okay.

Thank you and our next question comes from the line of Shannon Cross with Cross research.

I. Thank you very much I just had a question on Capex. It seems as Matthew had shifted a little bit more.

From a cash capex into that the flash ventures and I'm just curious how we should think about that especially on anything there and then also you know what are your thoughts on the amount of Capex, that's going to be needed over the next few years as you look at you know hopefully improving market. Thank you.

Yeah, Matt.

Good question and first of all what I would say is in terms of gross capex, which we define as our portion of the investments that are made in our flash joint ventures as well as investments we make on our on our own balance sheet for the backend of the flash business as long as the hard drive business, we expect gross capex of around 3 billion.

This year and that's been what we've what I've said in the last couple of quarters.

What's a little different this year relative to last year as we are investing more on the hard drive side as we look out over the next few years.

First priority is always going to be reinvested in the business and so we'll see how the growth goes over the next few years and make sure that we're investing to support the growth in the market, but you know.

Yeah, I think probably where we're at right now is about what I would think about for the future.

Great. Thank you.

Thank you Andrew.

Last question comes from the line of Steven Fox with Fox Advisors.

Hi, good afternoon. Thanks for thanks for squeezing me in.

Can you just maybe broadly talk about your thinking around edge.

Hedge cloud compute for 'twenty and 'twenty one.

It seems like based on what the service providers are talking about that this could be a year, where it starts to pick up noticeably and so where do you think they're going to play with nvme drives versus HDD and how do you think you're positioned competitively. Thank you.

Yeah, I mean, I think [laughter].

And that's a that's a potentially a very deep conversation. So how are we positioned I think we're positioned to actually quite well because we can play and if it's.

A lot of the heavy lifting of big time storage is H D. D is and will be for a long time, but obviously our enterprise SSD is going on is going to be a big growing market there as well.

Why we're so focused on our nvme enterprise SSD.

As far as how the architecture of the cloud plays out I mean clearly.

Clearly as we have more devices that are enabled at the edge I think youre going to see more points of compute and storage that get closer to that.

I agree with you this could be it could be getting closer it's been talked about for a while but you know I think this is this is something that's so exciting about our business I mean.

On the whole World is more technology enabled I think the pandemic accelerated that Ah I think the architectures to support that are going to continue to evolve and I think we have the portfolio that is well positioned.

No matter how that plays out we can play on the edge.

All the way to the device and clearly we play at the foundation of the cloud as well so it's a it's a fun place to be.

Thank you I would now like to turn the call back over to CEO. They gettler for any closing remarks alright.

Alright, everybody. Thanks for joining us today, we appreciate it we will see you during the quarter take care.

Thank you.

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

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Good afternoon, and thank you for standing by and welcome to Western Digital's fiscal second quarter 'twenty 'twenty One conference call.

Personally all participants are in a listen only mode. Later, we will conduct a question and answer session at that time, if you would like to ask a question you May press star one on your phone as a reminder, this call is being recorded now I'll turn the call over to Mr. Peter Andrew You may begin.

Thank you and good afternoon, everyone. Joining me today are David Duckworth, Chief Executive Officer, and Bob You Lau Chief Financial Officer.

Before we begin let me remind everyone that today's discussion contains forward looking statements.

Including product portfolio expectations business plans.

In financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on form 10-K filed with the SEC 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-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.

With that I will now turn the call over to David.

Thanks, Peter and thanks, everyone for joining us today to start our second quarter results were at or above the upper end of guidance ranges we provided in October.

We reported revenue of $3 9 billion and non-GAAP earnings per share on <unk>.

<unk>.

These results reflect continued growth in retail in what was a seasonally strong quarter. In addition, stronger demand for our client SSD products as well as our notebook and desktop hard drives contributed contributed to upside in revenue.

We continue to work hard delivering for our shareholders customers partners and communities, we adapted to changes in our business and continue to manage the ongoing challenges presented by the pandemic.

Our results reflect the benefits of having such a diverse and deep product portfolio fantastic franchises, a vast customer base and now an optimized organizational structure.

As a result, we have a solid foundation to capitalize on the significant growth opportunities in front of us.

I am excited about the progress we've made over the last few months and the recently established flash and HDD business units.

Both franchises are led by exceptional leaders, who are highly focused on executing their respective strategies by establishing their teams.

Are you, adding technology and product development, engaging with customers and analyzing and effectively capturing target end markets.

As we've highlighted on previous earnings calls, we are committed to delivering on our product roadmap, including advancing our product transitions, notably we are making great headway with the product transitions of our energy assisted hard drives and enterprise Ssds.

As you all know these transitions are multi quarter journeys, but I am pleased with our progress, which I'll detail shortly.

Although our progress to date is showing tangible results there is still work to be done.

We remain extremely focused on enhancing our ability to drive continued innovation and sustainable long term shareholder value.

Let me now provide a recap of our flash and HDD businesses.

Within flash, we remain well positioned to address the digital transformation driven by businesses schools and consumers. They continue to leverage technology as a daily necessity for work learning and a much needed form of entertainment.

The pandemic has not only accelerated this transformation by the way we all use the cloud, but it has spurred technological innovation by driving the ability to access the cloud using very powerful in advance and devices that increasingly pervasive ability to access store and share.

Data from anywhere on any device has resulted in robust storage demand, particularly in smaller form factors, such as notebook tablet and chromebook.

The attach rate of client ssds into notebooks now exceeds 80%, while desktop penetration of client ssds is around 40%.

Furthermore, tablets, and chromebooks, which are all flash base represent a growing percentage of total PC demand.

Our leading position in client Nvme based ssds that are strong relationships with the major PC Oems drove our client SSD business to a record level of exabyte shipments.

Retail continued to perform well in a seasonally strong quarter and we achieved a two year high in revenue supported by the strength of our brand and the breadth of our portfolio.

We continue to make progress with our second generation enterprise SSD products, completing nearly 150 qualifications.

Importantly, we completed the qualification process at one cloud Titan, which was an objective we committed to last quarter.

We are shifting to this cloud Titan in the fiscal third quarter.

The second generation enterprise SSD qualification process is well underway with additional cloud Titans and large Oems.

From a technology perspective, we began shipping our 112 layer fixed five technology and client SSD products in the December quarter fixed five remains the most capital efficient technology node in the recent history of NAND going back to the two D era and we are preparing.

For a significant ramp of this note through 2021.

Ultimately customers want the best product that offers a blend of cost performance and power and Western digital provides that our focus on technological and architectural innovations.

Coupled with the benefits of size and scale that we have with our joint venture with Chiacchia has enabled us to deliver the industry's highest density per layer at the lowest cost per bit.

As the result of our inherent advantages with the joint venture, particularly our scale and consistent track record of technological innovation, we are able to deliver the required bit growth and performance with the lowest capital intensity in the industry.

We are highly confident in our ability to continue this momentum as we ramp <unk> five through calendar year, 2021, and begin big six product position.

On the HDD side of the business upside demand in PC notebook and smart video more than offset weakness in capacity enterprise.

Persisting work from home and distance learning trends I touched upon earlier drove higher demand for both desktop and notebook PC hard drives and propelled retail hard drive revenue to a three year high.

The smart video business continue to recover growing 30% sequentially.

The biggest HD update is our solid progress against the initiatives, we outlined last quarter completing the qualification process at the cloud Titans with our mass market energy assisted hard drives.

I'm pleased to share that we have now completed qualifications at three of the four U S cloud Titans well.

Well, one now completed cloud cloud Titan qualification slipped beyond our anticipated timeline in the fiscal second quarter.

Another cloud Titan qualification schedule to complete in the fiscal third quarter was completed in the second quarter.

With these significant milestones now behind US we have stage products in anticipation of the ramp of these drives as we continue through 2021.

With cloud digestion abating in the stabilization of OEM demand, we believe the demand and capacity enterprise bottomed in the fiscal second quarter and are anticipating a rebound in the fiscal third quarter.

18, terabyte is expected to be our leading capacity point as we head into the second half of the calendar year, which should propel nice growth in this segment going forward.

As the volume of these drives continues to ramp through the calendar year, we expect our revenue and gross margin to recover.

Before I turn it over to Bob.

Quickly summarize our perspective on what's to come we continue to deal with the far reaching effects of the pandemic and no one can be certain of what the new normal will look like however, there is no question. The accelerated digital transformation has only increased the reliance on data and technology in <unk>.

Both our professional and our personal lives, which we are confident we will have a lasting impact for years to come.

To this point some industry analysts are raising the possibility that in certain portions of the market such as the cloud the storage industry will not be able to meet the extraordinary demand for both flash and hard drive solutions over the course of the next 10 years West.

Western Digital's unique ability to provide flash and hard drive storage solutions for customers spanning individual consumers to cloud Titans highlights the value and importance of our broad portfolio and strong competitive position.

I'll now turn the call over to Bob to share details on our financial results.

Thanks, Dave and good afternoon, everyone.

As Dave mentioned overall results for the fiscal second quarter were at or above the upper end of the guidance ranges we provided in October.

<unk> was $3 $9 billion.

Up slightly sequentially and down 7% year over year growth in client devices and client solutions was mostly offset by a decline in our data center devices and solutions and market.

Looking at our end markets client devices revenue was $2 1 billion.

10% sequentially and 19% year over year.

Work school and game from home trends continue to drive demand for both our flash and hard drive solutions for notebook and desktop applications.

In notebook and desktop are flash and hard drive revenue each grew over 20% sequentially, highlighting the power and value of our portfolio for our leading OEM customers.

Demand for our smart video hard drives was much stronger than expected growing 30% sequentially as demand continued to recover from the bottom set in fiscal fourth quarter of 2020.

During the height of the Covid related lockdowns.

And lastly, mobile revenue was down sequentially with growth and recently introduced five GT phones offset by dynamics within China.

Moving on to data center devices and solutions revenue was $807 million.

Down, 29% sequentially and 46% from a year ago.

Revenue from both capacity enterprise hard drive in enterprise Ssds were down sequentially.

As Dave mentioned, we had an unexpected delay in our qualification at a cloud Titan as a result during the quarter our capacity enterprise drive shipments were negatively impacted and inventory grew.

We have since completed this qualification and as Dave noted given that a separate cloud tightened qualification was completed ahead of schedule. We now have three over for our cloud Titans qualified on our new energy assisted drives.

In addition, we are beginning to ramp our second generation enterprise SSD products through calendar year 2021.

Next client solutions revenue was above expectations at $1 billion up 19% sequentially and 6% from a year ago. The work school and gaming from home trend benefited both hard drive and flash based products again, highlighting the powerful go to <unk>.

Market synergies of this channel.

Turning to revenue by technology.

Flash revenue was $2 billion down 2% sequentially and up.

11% year over year.

Flash Asps were down 9% sequentially on a blended basis and down 6% on a like for like basis bit shipments were up 7% sequentially.

Hard drive revenue was $1 9 billion.

Up 4% sequentially and down 20% year over year.

On a sequential basis total exabyte shipments were up 2%, while the average price per hard drive decreased 8% to $73.

As we move in to cost and expenses. Please note that all of my comments will be related to non-GAAP results from us stated otherwise.

Gross margin for the second quarter was 26, 4% up slightly sequentially and above the upper end of our guidance range provided in October.

Flash gross margin was up <unk> seven points from the last quarter to 27, 1% as the mix shifted toward our client ssds and we experienced a strong seasonal quarter and client solutions.

We continued to achieve solid cost reductions.

Our hard drive gross margin was 25, 6% down <unk> six points sequentially, the mix shift towards notebook and desktop hard drive and the early ramp of our energy assisted drives pressured our gross margin.

This includes COVID-19 related impact of approximately $32 million.

Non-GAAP earnings per share was <unk> 69 cents above our guidance range.

Operating cash flow for the second quarter was $425 million and free cash flow was $149 million.

Capital expenditures, which include the purchase of property plant and equipment and activity related to flash joint ventures on our cash flow statement with a cash outflow of $276 million.

In the fiscal second quarter, we paid off $248 million in debt, including an optional debt pay down of $150 million and $35 million of the remaining sandisk convertible notes.

Our liquidity position continues to be strong at the end of the quarter, we had $3 billion in cash and cash equivalents and our gross debt outstanding was $9 3 billion.

Our debt to EBITDA ratio was three nine times in the second quarter on.

Our adjusted EBITDA as defined in our credit agreement was $3 5 billion.

Flat sequentially, resulting in a leverage ratio of two seven times.

As a reminder, our credit agreement includes $1 billion and depreciation add back associated with the joint ventures.

This is not reflected in our cash flow statement.

Please refer to the earnings presentation on the Investor Relations website for further details.

Moving on to our outlook, our fiscal third quarter guidance is as follows.

We expect revenue to be in the range of $3 $85 billion to $4.05 billion.

And we expect both HDD and flash revenue to be in a similar range in the third quarter as they were in the second.

This range is better than expected when you consider normal seasonality, which would have implied a 7% decrease sequentially in the third quarter.

We expect non-GAAP gross margin to be between 25, 5% and 27, 5%.

We expect flash gross margin to improve sequentially as we anticipated glass price declines will improve from the fiscal second quarter and cost reductions will continue.

Hard drive gross margin is expected to be down sequentially, primarily due to higher volumes of our 16 terabyte drive and a planned reduction in production volume. We expect the 18 terabyte drive to be the leading capacity point as we head into the second half of the calendar year, which should propel growth in this segment.

Going forward, we expect operating expenses to be between 705 and $725 million.

Interest and other expense is expected to be approximately $70 million.

The tax rate is expected to be approximately 23% in the third quarter.

And we expect non-GAAP earnings per share to be between 55, and <unk> 75 in the third quarter.

Assuming approximately $310 million fully diluted shares.

Now I'll turn it back over to Dave.

Thanks, Bob.

As we discussed Western digital has worked hard to position ourselves to address this unabated growth in data and therefore storage technology and thanks to these efforts the market has aligned favorably for us were running two industry, leading technology franchises in end markets that will only.

<unk> to grow as the digital transformation further accelerates.

We know that our HDD business is less encumbered by workload mix shifts today and that our flash business is becoming more and more driven by applications. We also have made the right investments in our joint ventures with Chiacchia, our strategic differentiating asset.

This is an extremely exciting time for our company as we are focused on capitalizing on the tremendous opportunities in front of US. Accordingly, we will continue building momentum behind our business unit strategies company positioning strong brand and industry leading portfolio.

I'll now turn the call over to the operator to begin Q&A.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

We ask that you please limit yourself to one question.

Our first question comes from the line of Aaron Rakers with Wells Fargo.

Yeah. Thanks for taking the question.

Just kind of on the new airline hard disk drive market I know that you've talked about some puts and takes with regard to qualification cycle.

Whereby but I got the question first of all can you help us understand what capacity shipments did in the quarter for near line or just help us understand the kind of assumed for the ramp that you expect on near line as far as capacity shipped over the next quarter or a couple of quarters.

However, you want to kind of discuss your expectations on.

On an equal.

Going forward. Thank you.

Yes, I would say.

Thanks Darren.

I would say the mix last quarter was still $14 16 for the most part of Christopher <unk> mixed in there, but as we as we said one of the big calls that we were working on.

Finished right in the first week of the following quarter. So we expect that now to start ramping.

I think as I said in the remarks, I think cloud digestion is abating.

I think the different big players come out of it at different rates.

The first ones are already starting to come out and we expect other ones to pick up as we go through the year. So.

The big thing for US as we expect 18 to as we get into the middle part of the year, that's where the transition will happen to that being the leading capacity for us and as that happens.

That's good for our business so.

Hum.

It's basically how we see it.

And what did the capacity shipments near the corner.

To use the capacity shipment.

I mean, we don't split it out specifically, but you can see that on the data center devices and solutions, we were down quite a bit to net was driven both by the <unk>.

The enterprise as well as enterprise SSD.

Okay. Thank you.

Sure. Thanks Darren.

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley.

Great. Thank you.

So let me ask a question in terms of the NAND gross margins.

The improvement that you saw in the December quarter sequentially with prices down 6% like for like and the improvement that Youre seeing in Q1, where is that coming from and can you remind us where you are with.

The startup expenses from the new fab rolling off.

Yes, so what I'd say.

Kind of as we started talking about last quarter in the more transactional markets, we're seeing pricing get better.

We will see how that flows through to the negotiated markets over the next couple of quarters, but.

Basically as we went through the quarter, we saw retail and parts of the channel improve.

And as far as K, one costs, yes, I can I can update you on <unk>. So I think I had originally guided to around $50 million and <unk> startup costs. This quarter and we actually came in around $40 million and this quarter.

We are now and will be a normal production volume. So we're not going to continue reporting startup costs, because we're really not in startup mode anymore.

Great. Thank you and then in terms of your inventory level I think you said that day.

Inventory increase was mostly on the drive side, where are you in terms of your internal NAND inventory.

The flash inventory is pretty consistent with the last couple of quarters.

And we're not we haven't really built inventory on the flash side.

We really as we mentioned in our remarks really build some inventory in anticipation of the new dry on the new capacity enterprise drives shipping and that's kind of started at higher and higher volume. So as we go forward.

Great. Thanks, so much thanks Jeremy.

Thank you. Peter next question comes from the line of <unk> Mohan with Bank of America.

Hi, there yes. Thank you.

Thanks for the color on the on the data Center side I was wondering just given your comments are on the qualification timing, Ken Kansas segment grow in fiscal second half versus fiscal second half of 2020, especially given that the comps get tougher.

By the end of the fiscal year and your comments on HDD gross margins.

Sort of worsening sequentially.

Is this basically are we waiting for one more quarter basically the end of the fiscal year before we see HDD margin pick up as you as you get material pick up on AT&T be or will these cloud sort of abatement plus the OEM pickup help by by our fiscal fourth quarter. Thank you.

Okay, Let me see if I can.

Decompose that a little bit so yeah, we expect we expect to pick up and as we move throughout the year.

I think your call on the gross margin, we said, we see the revenue coming back as we move into next quarter, and then getting better throughout the year would kind of guide one quarter at a time on on how the year over year number on the top of my head, but you are right on margin, we kind of expect one more quarter of NAV.

And be flat to slightly down margin on the drive side.

And then we will start to see that accelerate especially as we move through into higher.

Percentage of AT&T.

Okay, great. Thank you.

Thank you Andrew.

Our next question comes from the line of Toshi Hari with Goldman Sachs.

Hey, Toshi.

Thanks.

So much for taking the question.

I wanted to follow up on.

Gross margins in your HDD business Dave.

David So again as you as you mentioned this quarter is going to be flat to down.

As you as you move forward.

With mix, improving hopefully COVID-19 costs abating at some point.

Maybe some of the costs related to energy assist going away.

Do you think getting back to 30% over the next year or so is a reasonable target or.

Is the margin profile structurally different today versus a year ago two years ago. Thank you.

No I think you hit on the issues. There I mean first of all Covid last quarter was about one 7% of a headwind in that business and mix, we talked about retail being multi year high.

But we believe as we get we go into 2018, we have a path back to the kind of margin profile, you're talking about we just need to get we just need to get the mix better I mean COVID-19.

A bit of a wildcard.

How fast.

It's really the freight costs, how fast we can get freight costs to come down it has been.

Obviously pretty pretty sticky about where it's been for the last couple of quarters.

And then as I said as we move into 18, and we see the cloud digestion fully come on to cloud digestion, I think youll see a path back to the.

More.

Traditional margin structure.

Got it thank you.

Thank you.

Our next question comes from the line of Matt Hussaini with that strategy.

Yes, thanks for taking my question.

On the fly Scott can you please.

There was some color as to.

What percentage of flash revenue was driven from gaming.

And how do you see that trending for the rest of day, you and I have a follow up.

Yes gaming was gaming is still.

I think it's not it's not as significant as it was last quarter given last quarter. There was a lot of buy in anticipation of the initial builds.

So I would say its down a little bit sequentially, but it's still a great market for us because we can play the console side of it and the retail.

With WD Black, which has been very very well received in the retail channels. It is.

Part of the reason the retail business is doing well and the margins are good as we're investing in brand. In addition to just the product so.

Sequentially down a little bit, but still expect it to be a good market as we move throughout the year.

Got you and then one additional follow up on the flash side.

Last earning conference call you alluded to the fact that you on a couple of quarters away from.

On finalizing contracts with Oems and as.

Prices or supply demand.

On a tightened do you see them.

Oems stepping up and signing longer term contract or is this just going to be guesswork as to how they plan for especially like one or two quarters out.

I think what I talked about last quarter. It was actually a qualification at the Oems and Thats, a multi quarter activity the pricing is.

<unk> negotiated on a quarterly basis, and there was kind of a.

A long term agreement on let's say on a year timeframe of what the target share is but that can move around a little bit but that gives you a sense about kind of how the market works.

But how do you see the dynamics look today compared to like our October conference call.

Of which part of the call or the share on the pricing well the qualification and how.

I think as.

As you look into <unk>.

After you do you see.

More of a pricing power coming back to the suppliers or is it still going to be a hard negotiation.

I mean, so the qualification was all about our second generation Nvme enterprise SSD product, which is quite a mouthful, but.

On that qualification I think last quarter I said, we are scheduled to startup qualification this quarter.

I said in October we were scheduled to startup qualification.

In our fiscal second quarter, which which did start and is underway.

And that is a multi quarter process and.

Assuming it's successful put us in a stronger position to ship that product into the OEM.

Into the big Oems so.

It's underway as I said in the prepared remarks, and I think I've been talking about now for a couple of quarters. The qualification in my book is the last phase of the development process. It.

It can move around a little bit, but the fact that it's underway.

As a good sign for.

<unk>.

We're working to expand the Tam on that product.

Got it thank you.

Thank you.

Our next question comes from the line of C J Muse with Evercore.

Hey, Yeah. Good afternoon. Thank you for taking the question.

A question on the NAND side can you speak to what's driving the better than seasonal demand in Q1, and then beyond March on how are you thinking about changes in your mix and what impact that will have on your gross margins. Thank you.

So.

I'll take I'll give you a perspective should Bob his perspective as well so we've been talking about retail for several quarters now.

It's been good with the team has been doing a great job launching new products I talked about <unk> black and the gaming.

Segment armour law security in enterprise SSD, so on a really good work there.

And so that continue yes, we expect that.

There is momentum there, let me put it that way.

PC notebook demand, we still see it as being strong.

And we talked about what I think was a significant milestone for us this past quarter was finishing the qualification on.

Our second generation Nvme enterprise SSD product in one of the cloud Titans.

That finished right at the end of the quarter.

And we started shipping so that is a.

That's accretive as well.

Yes, I don't have a lot to add I mean, I think it's a retail continues to be strong in this work from home environment and in the enterprise SSD business will just keep picking up.

And just to follow up on on how Youre thinking about mix beyond the current quarter and what the implications are for margin.

Well I mean.

Say, a little more linear.

I mean, we're still I mean, we still have a balance I would say we are focused on our balance portfolio.

We're clearly working on.

Proving our position on enterprise SSD, that's been a big goal for the company for even before I got here.

On our second generation product is things are going well I think 150 qualifications down including wanted to one of the big cloud players, which is a big breakthrough.

We're still a client client SSD is obviously a strength for the company and has been.

For a while we've talked about gaming last quarter.

And then mobile we still we still have a healthy mix into mobile I think we're under indexed to the market, but we're still in that market because it's very very important to be in that market. So I expect.

Balance mix of prostate and then you mix in some Iot and automotive.

And you get most of the portfolio.

Thank you.

Yeah.

Thank you Andrew.

Our next question comes from the line of Sidney Ho with Deutsche Bank.

Great. Thanks for taking my question.

Just a question on habits on on NAND, It's Scott.

Good to see NAND margins are improving and price declines are moderating.

How do you see industry supply demand balance for the rest of the year, maybe compare to what you think a quarter ago and how do you see your own bit shipment growth. This calendar year in kind of the shape of the shape of that Scott.

Rest of this year. Thanks.

I guess, what we would say about.

Investment in the industry is we're pretty much where we've been which we think the industry has been pretty good about this I mean, there's a lot of variability on on.

Investment on.

Supplier by supplier.

Capital cycles very.

Even node transitions within each supplier very about how much capital.

How much capital is required in our case <unk> five is a very capital efficient no data six will require little more capital, we'll talk about that when we get there. So we still see we still see a pretty good balance we see strong demand drivers we see.

I think we see bit growth this year.

Low <unk> low to mid thirties, and we see demand above that so I think nothing nothing we're seeing in the environment surprises us tremendously.

Okay. Thanks.

Thank you next.

Next question comes from the line of Patrick Ho with Stifel.

Thank you very much a day.

Maybe.

Qualitatively now that you're on.

Been at the company for almost a year.

Well I guess financial quality quantification.

With the two business not businesses now separated.

Where do you see the most improvement in the time that you've been here. So far is it in the R&D side of things are you more efficient their manufacturing supply chain, where you've seen the most gain and where do you think as you go into your second year, you see more opportunities to improve.

So I guess, what I would say is first of all it's been an extraordinary 10 months and especially to join the company at the beginning of a global pandemic.

I know that hasn't happened in our long times at least not mine.

And so I think it's been it's just been extremely impressive to see how the company has responded to that.

And the evolution of that in the early days a lot of issues on the supply side that have just been completely worked out and things are running extremely well.

I think we've made a lot of progress on the what just what she said.

Really understanding where the synergies of this portfolio are which are on the go to market side and the fact that we bring a broader.

A broader solution to our customers and I think we understand our customers' requirements as well given that we can play.

And mark to drive market and.

Flash market.

But they're very different products and driving the roadmap southern mean on technology is extremely.

Really important in the separate those and the Bu and I think we are.

It's still pretty early but the impact of having two very accomplished leaders join an already strong team. It just has an immediate impact on clarifying the roadmap understanding.

Where we're investing our R&D dollars.

Engaging with customers in a way that can drive the portfolio. So I think we've made.

Really good progress there, but I think it will continue to get better as we go and these leaders get in the in the groups get get more established and then the other thing I'll say, which is not really something.

That I expect to get better I think it's something that I just always want to recent forces the value of the partnership with Yorkshire, and I've spent given I can't travel, which still spent a lot of time with the leadership. There obviously our teams work together on a day by day basis, I'm, not saying I'm not pointing this out because.

John.

It works extraordinarily well.

It's just a tremendous strength of the company and it's been it's been really great for me to be a part of it over the last 10 months.

Great. Thank you.

Thank you. Our next question comes from the line of Mitch Steves with RBC capital markets.

Hey, Mitch.

Hey, How're you doing Sir I had two questions I'm actually going to focus a little bit more on the hard disk drive side. So first of all just kind of on the margins. If I look at the kind of the run rate of the business right now and I compare it to 2018. It was back then it was kind of on 27% gross margin business on a roughly 2 billion on revenue. So if I assume that COVID-19 related headwinds that kind of a <unk>.

Lighting issues or about 100 basis points of headwind to gross margin by about roughly accurate there.

I'll start with that one we have a follow up after that.

Yes, I think it's closer to 170 basis points of a headwind.

So there are a number would've been kind of 27 to $27 three and I reference.

Yes, that's correct.

Okay, and then secondly on you guys used to disclose.

A little bit more detail on the Noncompete unit I think those are up pretty significantly Q over Q $8 to $10. One I'm. Just curious if you can give us any sort of like directionality on.

Or was it more consumer electronics or was it more of your branded units were doing better for the quarter.

Yeah, I don't want to get too much specifics on one of the things. We did mentioned with smart video was up quite a bit sequentially and that's in the non compute area.

But.

We're just on the on the hard drive side on client and notebook, we did really well.

Thank you and our next question comes from the line of Tom O'malley with Barclays.

Hey, guys. Thanks for taking my question. My question is really centered around the transition of the two cloud Titans with HD qualifications, you said, one slips, but a little one came in a bit earlier can you talk about what the what the mix of those transitions kind of net you talked about obviously the gross margin slipping into the next quarter, but then kind of recovering so we're seeing a bottom there.

<unk> do you think that the out quarter is.

On a fitting from this with the one coming in earlier or do you think it's a net negative transaction in the near term I just wanted to get a little bit more color about how it affects the business into March.

Yes, I think so.

So if you look at last quarter. There was some business we expected to ship on 18 that we didnt because of qualification wasn't done.

Wrapped up I think the first week of January so.

Some of that business mixes into other capacity points and some of it goes to other suppliers.

And then on the other the other qualification that we didn't expect to finish until it wasn't we didn't end. The schedule was the end of the towards the end of this quarter were in that actually finished sometime last quarter very smooth.

So.

What it says is looking backwards that things could have been a little bit could have been a little better if they were at the one would've finished on time, but going now theyre both behind us so going forward. We're in a position to start to ship <unk> to both of those customers as they ramp the capacity point.

Does that help.

Thank you and our next question comes from the line of Harlan sur with JP Morgan.

Hey, good afternoon, thanks for taking them on.

Good afternoon, and thanks for taking my question on other gross margin on the flash side of the business you know good to see the inflection in gross margin in December as you guys mentioned the startup costs are coming out here in the March quarter. So that's about 150 on.

Is it 75 basis points gross margin tailwind to NAND.

And then on top of that Youre, seeing better pricing trends and maybe getting a little bit of benefit from the higher.

The margin trends from your initial shipments of your Gen. Two nvme products. So our gross margins approaching 30% here on the March quarter, but maybe if you could just help me understand some of the puts and takes on gross margins for NAND.

Yes, so I'll, let I mean, you talked about a number of the moving parts and we're definitely as I said earlier, you're expecting gross margins to improve on the flash side.

We saw in the last quarter I would say very good pricing trends in the transactional markets.

The OEM markets, we negotiate one quarter at a time so.

And we did that obviously in the middle of last quarter. So it's a little hard to say how much we will see there and then we're continuing to do a good job on the other part of the equation, which is cost reduction we still think we're there.

We're confident in our 15% year over year cost decline. So so I think it's just a question of how pricing plays out as we move forward, but I think we're in a very good place.

Yes, absolutely and just a follow up so many of the suppliers of your HDD and SSD controller chips, we're seeing tightness on wafer supply assembly and test capacity.

Shipments here on the March quarter, potentially being somewhat held back because of lack of control or availability from some of your merchant <unk>.

<unk> controller chip suppliers.

Yes, there's no doubt things are tight and we're not immune from that I mean, clearly we have our financial plan covered.

With components, but.

When you do go looking for things from the semiconductor supply chain. It is tight right now so we'll see how it plays out during the quarter.

Thank you and our next question comes from the line of Nick Todorov with Longbow Research.

Yeah. Thanks, guys good afternoon.

I understand moving I think you talked about seeing continued momentum in retail in Pcs, but maybe we can extend a little bit I would like to hear your thoughts about how you see those trends persisting as we look forward I know visibility is probably not as.

Good, but I just want to hear your thoughts how you're thinking as we go into the following quarters the demand from Pcs in retail with work from home specifically.

Yes, I mean.

It's obviously, a very dynamic environment.

With the pandemic and seeing.

Seeing resurgence in certain parts of the world and more lockdowns in parts of the world.

So it's hard to it's hard to call it more than one quarter time, we guide one quarter at a time, but I think I understand your question a little bit broader I guess, what I would say is that in.

In retail we've really just dialed in like how to deal with this environment, we're in and the dynamic nature of it.

And I think that the new products that we've been launching have been well received.

Again, I mean, the WD black gaming product, we're doing co branding.

With other folks.

Introduce a product around security and storage that I think is going to be.

Good for us so.

A lot of investment in the brands, which are strong let make sure we keep share of voice high.

And it has been an area, where we've been able to get some momentum and keeps the momentum I think going couple of quarters back so.

But it is to your point, it's very dynamic given the COVID-19 situation.

Walk down so.

We will see above seasonality performance Q1 is seasonally seasonally weak quarter for retail, but we're.

We're planning to do a little bit better than that.

Thank you and our next question comes from the line of Ananda Baruah with loop capital.

Hi, there.

Hey, good afternoon, thanks for taking the question.

Yeah, I guess, if I could just go back to the to the gross margins on the flash side.

Longer term intermediate to longer term view, you guys see a path to.

Is sustainably greater than 30% margins I think you've talked about in the past.

If so what are the kind of signpost there are mechanism to meet that manifest to have that be the case I appreciate it.

Okay, I guess I can I can start with that.

As we all know a lot of it depends on the supply and demand and what's going on with the industry. We've been encouraged as we said about.

The pricing in the transactional markets over the last few months.

As we move forward, we're pretty confident on the demand side for the year and there is just obviously.

Big demand on the on.

On the mobile side.

We think we're going to see very good demand on the enterprise Ssds, we've already had a strong position on client ssds. So we feel pretty confident on the demand side and we think the supply side. It appears to be pretty rational and I think if that's the case, we should see margins improve from here, but I don't want to put on a particular milestone or particular goal out there but.

I think it's going to be a pretty good market in 2021.

Yes, I think we've been signaling that about 2021 for a couple of quarters now now again, we don't want to get ahead of ourselves.

We do have more exposure to the transactional markets with helps when things start going in a positive direction, but it's got to flow through just the negotiated market still and.

We'll see how that plays out over the next couple of quarters.

The other thing the other thing I'll highlight on this is really important Bob touched on earlier is just.

Make sure we maintain our cost position.

And.

As I've highlighted a couple of times in the prepared remarks on what I said earlier.

With our partner Chioggia, we're the largest provider of NAND flash memory in the industry.

We jointly develop our technology roadmap. So we're heavily invested in that.

We believe we've got tremendous technology that allows us to deliver.

The power performance.

Bits, we need you see our technology is.

<unk>.

Lower lower layer count than others had means that its more efficient process.

So we feel good about that that sets us up to continue to drive to 15% year over year cost declines. So we got to make sure we keep our eye on that side of the equation as well.

Thank you.

And our next question comes from the line of Jim Suva with Citigroup investments.

Hey, Jim. Thank you Hello, and you have implemented a more tightly focused on your two different segments, the flash and HDD side long term.

For a little bit now I'm day.

Those data has done the work to where were actual so the food on all of our efforts now are those still kind of implementing a lot of those who still have to be rolled out over at first because it sounds like you know prior to the western digital has been very much non core a couple of years, sometimes execute very well on others.

Client to slip on so I'm, just trying to figure out how we went to midpoint.

Implementing all the changes or the early on either or are we actually at the point now where we're.

They found and discovered and wanted to align what we should expect going forward. Thank you.

Yes, Jim I think that so first of all I think we see benefits of anytime you add too.

Our leaders to your business that have run multi $10 billion portfolios.

On the technology space Youre going to get an immediate.

Benefit from that you just have two more very very senior business leaders that are looking at the portfolio every day that are engaging with customers every day reviewing engineering products every day in.

In providing a level of perspective it is highly developed.

And.

Their main job is to integrate all the different pieces together into a business. So youre going to see a media an immediate benefit of that and we have.

But then theyre going to start working on okay.

Uh-huh, you'll start looking at the roadmap of our products and make sure I've got the right fit on investing in the right places.

Your technology roadmap is kind of like an articulation of the future value of your company. What markets are you going to be and where are you going to invest and the timeline for those payoffs are different there's different time horizons to that so if.

If you come into if you come into a technology franchise, new owners and you're in the middle of a big engagement with a customer. For example, you now have another person that can get involved in that process and understands immediately how to engage in that in a very senior way how to communicate information.

On a guide their teams.

So I think you'll see an immediate benefit there as other parts of it where we're making decisions on what products are going to come to market in two years from now or three years from now and so.

Their job is to really integrate over all of those time horizons and get the best.

Results given the investment we put into the business. So we've seen benefits already but there will there will be more to come and I think you will see a crisper execution and youll see that portfolio is optimized.

To give us the best return for the investment we're making.

Thank you Andrew next question comes from the line of Karl Ackerman with Cowen.

Yes. Good afternoon gentlemen, thank you for letting me ask a question hi.

I had a question just on I guess your hard drive business your peer.

Spoke about a recovery in data center.

In the first half of the year and I'm curious if that resonates with you.

Such that you could achieve 35% exabyte growth for your near line business in fiscal 2021.

And I was also hoping you could juxtapose what you are seeing across on Prem and cloud within that an airline business.

And then I guess thirdly, if I may.

I was hoping if you if you can't achieve that 35% extra by growth can you do that with your existing capacity today or if you could touch on your capacity expansion plans as well. Thank you.

So I think your first part of your question was about what are we seeing that when you say enterprise enterprise on Prem market. So.

Airlines, specifically, yes airlines it I would say it's.

I think the.

Term I used in the prepared remarks was stabilization of the enterprise of the OEM market and I think thats kind of how we're seeing it.

It's.

Yes.

On or above forecast of what our customers are telling us so it.

It looks better I would certainly not pre COVID-19.

It's easier to judge going forward, but not back to where it was and that's not surprising given the environment. We're in.

As far as.

Yes.

We talked about different cloud providers come out of digestion at different rates throughout the year and then as far as exabyte growth, we see that 32% to 35% in that range exabyte growth I think that's been the long term growth of the industry, we see that going forward.

Again, I think coming out of the pandemic, we'll see does that line tilt up or not given the dependence on technology in the cloud that we all see but we have yet to see that so we see we see good growth in <unk>.

Our capacity enterprise business as we move through the year.

Thank you and our next.

Next question comes from the line of <unk> jewelry with F N B C. Nico.

Thank you Hi, guys first I have a clarification for Bob.

Bob on the client devices growing 10% you said.

Desktop and notebooks grew 20% and video grew at 30%.

And there was an issue in China, just trying to understand what that was in mobile in China that you are referring to.

Yes, it was.

Actually Huawei, which we talked about last quarter and so we're not shipping to Huawei either from the flash side or on the hard drive side.

Okay.

Thank you Andrew next question comes from the line of Shannon Cross with Cross research.

Thank you very much I just had a question on Capex. It seems as if you had shifted a little bit more.

I think from <unk>.

Cash capex into that.

The flash ventures.

I'm just curious how we should think about that as far as anything there and then also what are your thoughts on the amount of Capex, that's going to be needed over the next few years.

As you look at you know hopefully improving market. Thank you.

Yes.

Good question and first of all what I would say is in terms of gross capex, which we define as our portion of the investments that are made in our flash joint ventures as well as investments we make on our on our own balance sheet for the backend of the flash business as long as the hard drive business, we expect gross capex of around $3 billion.

This year and that's what we've what I've said in the last couple of quarters.

What's a little different this year relative to last year as we are investing more on the hard drive side as we look out over the next few years.

Our first priority is always going to be reinvest in the business and so we'll see how the growth goes over the next few years and make sure that we're investing to support the growth in the market.

Uh huh.

Yes, I think probably where we're at right now is about what I would think about for the future.

Great. Thank you.

Thank you and our last question comes from the line of Steven Fox with Fox Advisors.

Hi, good afternoon. Thanks for thanks for squeezing me in.

Can you just maybe broadly talk about your thinking around.

Edge cloud compute for 2021.

It seems like based on what the service providers are talking about that this could be a year, where it starts to pick up noticeably and.

And so where do you think you're going to play with nvme drives versus HDD and how do you think you're positioned competitively. Thank you.

Yes, I mean I think.

And that's a.

Potentially a very deep conversation. So how are we positioned I think we're positioned to actually quite well because we can play in.

If it's.

A lot of the heavy lifting of big time storage as HDD is and will be for a long time, but obviously.

Enterprise SSD is going on is going to be a big growing market there as well.

Why we're so focused on our nvme enterprise SSD.

As far as how the architecture of the cloud plays out I mean clear.

Clearly as we have more devices that are enabled at the edge I think youre going to see more points of compute and storage that get closer to that.

I agree with you this could be it could be getting closer it's been talked about for a while but.

This is this is something that's so exciting about our business I mean.

The whole world is more technology enabled I think the pandemic accelerated that.

I think the architectures to support that are going to continue to evolve and I think we have the portfolio that is well positioned.

No matter how that plays out we can play on the edge all the way to the device and clearly we play.

Foundation of the cloud as well so it's a it's a fun place to be.

Thank you I would now like to turn the call back over to CEO day Gettler for any closing remarks.

Alright, everybody. Thanks for joining us today, we appreciate it we will see you during the quarter take care.

Thank you.

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