Q3 2021 Western Digital Corp Earnings Call

[music].

Good afternoon, and thank you for standing by welcome to the Western Digital fiscal third quarter 2021 conference call presently all participants are in a listen only mode.

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 telephone as a reminder, this call is being recorded now I will turn the call over to Mr. Peter Andrew you may begin.

Thank you and good afternoon, everyone. Joining me today are David <unk>, Chief Executive Officer, and Bob <unk>, Chief Financial Officer, Bob.

<unk>, we begin let me remind everyone that today's discussion contains forward looking statements, including product portfolio expectations business plans trends and financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties, we assume no obligation.

To update these statements. Please refer to our most recent 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.

<unk> 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.

Thank you Peter good afternoon, everyone and thanks for joining the call today.

We reported solid third quarter results above the guidance range provided in January with revenue of $4 1 billion non-GAAP gross margin of 27, 7% and non-GAAP earnings per share of $1 <unk>.

Sequential revenue growth was driven by increasing momentum of our high capacity energy assisted drives and our second generation Nvme enterprise SSD is improving NAND flash pricing trends along with the continued accelerated digital transformation across end markets.

We continue to manage the impact of the pandemic, we know that the world does not only more technology enabled but also more technology dependent than ever before.

From the intelligent edge to the cloud data storage is a fundamental component underpinning the global technology architecture.

Western digital strengths in technology and cost leadership expansive product portfolio and broad routes to market are providing a foundation upon which we are solidifying our position as an essential building block of the digital economy.

The strength combined with our increased operational and strategic focus enabled by our new business units structure are driving results as we continue to face a dynamic environment. We are seeing the benefits of the synergistic value in the breadth of western digital's portfolio and our unique ability to deliver both hard drive.

<unk> and flash solutions to our diverse end markets and customer base.

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

Within flash the depth and breadth of our product line distribution channels cost leadership and customer base are significant differentiators, our ability to act swiftly and shift bits to meet customer demand in various end markets ranging from data centers to retail enabled us to grow.

Both revenue and gross margin in the third quarter.

Within data center devices and solutions, we experienced significant growth in the quarter with our second generation Nvme enterprise SSD at a cloud Titan in.

In addition, we are seeing many cloud customers also utilized NAND flash for their consumer product lines. This creates many opportunities for us as a strategic partner as we continue to diversify and balance the end markets we serve.

We are already achieving significant progress in VR headsets game consoles and other at home Entertainment devices, where we have experienced over 10 times bid growth last calendar year and expect to double again this calendar year.

In client devices continued strength in PC demand along with the new game console ramps drove sequential revenue growth above typical seasonal trends.

Retail remains of high performing end market as our brand recognition broad product portfolio and extensive distribution channels continued to distinguish western digital from our competitors in particular, it was a solid quarter for gaming with our WD Black product line, having maintained strong levels.

Of interest as gamers have gravitated towards more customized solutions.

By delivering reliable performance expansive storage capabilities and a hyper realistic gaming experience our industry, leading WD back black portfolio is trusted by gamers to perform their best.

We are also excited about the future as western digital technology roadmap and cost leadership will continue to drive our ability to meet customers' needs fixed five is in the midst of a significant ramp exceeding customer expectations and delivering the reliability and performance our customers depend upon.

Rover the technology advancements, we made with fixed five have allowed us to achieve the scale efficiency and fifth growth needed, while using a lower number of layers, resulting in lower costs and lower capital intensity. We continue to expect <unk> five bit crossover later in 2020.

One <unk>.

Finally in February we revealed fixed six our next generation Flash device based on 162 layer in <unk> technology.

Developed in partnership with key Osha, that's part of our long standing successful joint venture fixed six features numerous architectural advanced advancements, including improved lateral scaling which allows us to deliver this high performing product at an optimal cost. This marks another major milestone.

In our 20 year relationship with <unk> and together, we will continue to drive innovative innovation to meet the needs of our respective customers and their diverse applications.

Yeah.

In HDD revenue growth was led by capacity enterprise drives a trend that tilts. The overall HDD market to growth as demand for capacity enterprise drives will more than offset the decline in client drives.

Meanwhile, retail HDD demand was better than expected supported by continued work from home distance learning and at home Entertainment trends, we continue to see enterprise demand stabilizing and expect to pick up his employees returned to work.

We have completed qualifications for our energy assisted drives with nearly all our cloud and enterprise customers, including all of the cloud Titans and expect an aggressive ramp of our 18 terabyte hard drives.

Building on this success, we have entered into long term agreements with a number of our cloud Titans for 18 terabyte drives these commitments underscore our product leadership and the importance of capacity enterprise drives to our data center customers.

As we continue to navigate challenges brought on by COVID-19, we know that the world does not only more technology enabled but also more technology dependent we believe this is a fundamental and sustainable trend highlighting the importance of western digital's broad portfolio of storage solution solutions.

And we're encouraged by what's ahead.

And flash improving pricing trends in the retail and transactional portions of the market are translating to better pricing and the negotiated portions of the market and we expect this trend to continue in the fiscal fourth quarter.

Our unique ability to provide high volumes of flash and hard drive solutions through extensive distribution channels into diversified end markets provides us with broad demand visibility, enabling our team to optimize product mix and profitability.

In the cloud we remain uniquely positioned to benefit from the strong growth in this sector, where NAND flash and hard drives are complementary solutions.

We expect this strength to build as we progress through the calendar year led by the ramp of our 18 terabyte hard drives as well as broad based growth in flash.

And while we are excited about these drivers we are also keeping close watch on some headwinds.

To date, we have been able to largely mitigate the impact of the industry wide semiconductor component shortages through proactive supply chain management. We are however, experiencing tightness and controllers as well as flash, which could limit potential upside in the future.

We also recognize that while the pandemic effects are lessening in some regions. Other words are unfortunately experiencing another wave of cases.

We are actively managing through this environment, which continues to have ongoing impacts to our business.

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 third fiscal quarter were above.

Upper end of our guidance ranges provided in January from.

<unk> revenue and gross margin improvement were the primary contributors to the upside versus guidance.

Total revenue was $4 1 billion up 5% sequentially and down 1% year over year.

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

Down, 6% sequentially and up 10% year over year.

On a sequential basis client SSD revenue was flat.

And notebook and desktop PC hard drive revenue was down.

Though a decrease of less than what we're used to seeing based on typical seasonality.

Gaming revenue grew while mobile revenue was down on a sequential basis.

Moving on to data center devices and solutions revenue was $1 $2 billion.

Up 53% sequentially, but down 19% from a year ago.

Revenue from both capacity enterprise hard drives and enterprise Ssds grew sequentially.

We were encouraged to see the sequential growth driven by our new energy assisted hard drives at 16, and 18 terabyte capacity points and our second generation Nvme enterprise SSD products, both targeted for the cloud and large scale enterprise Oems.

Lastly, client solutions revenue was $888 million.

Down, 12% sequentially and up 8% from a year ago.

Turning to revenue by technology Flash revenue was $2 2 billion.

7% sequentially and up 6% year over year.

Flash Asps were down 2% sequentially on a blended basis and flat on a like for like basis.

Flash bit shipments increased 8% sequentially.

Hard drive revenue was $2 billion.

Up 3% sequentially and down 7% year over year on.

On a sequential basis total hard drive exabyte shipments increased by 7%, while the average price per hard drive increased 14% to $82.

As we move to costs and expenses. Please note that my comments will be related to non-GAAP results unless stated otherwise.

Gross margin for the third quarter was 27, 7% up one three percentage points sequentially. This was above the upper end of the guidance range provided in January.

Continued success in driving down costs, coupled with an improving pricing environment and our ability to shift fits to more attractive end markets drove our flash gross margin of two nine percentage points sequentially to 30.0%.

Our hard drive gross margin was 25% down <unk> five percentage points sequentially.

Noted last quarter production ramp costs of our new energy assisted drives and a planned reduction in overall units shipped pressured gross margin.

This also includes COVID-19 related impact of $31 million or approximately one six percentage points.

Operating expenses of $732 million were higher than guidance due to a larger than expected variable compensation accrual tied to our improved profitability.

With our improving profitability our tax rate in the fiscal third quarter was 8%, which was well below our prior expectations.

And directly resulted in a <unk> 17 benefit to our earnings per share.

We now expect our tax rate to be 17% for fiscal year 2021.

Earnings per share was $1 <unk>.

Excluding the tax benefit earnings per share was still well above guidance.

Operating cash flow for the third quarter was $116 million and free cash flow was negative $11 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 $127 million.

In the fiscal third quarter, we paid off $212 million in debt, including an optional debt paydown of $150 million.

We will also be making an additional optional debt payment of $150 million. This friday, highlighting the confidence we have in our cash flow generation for the fourth quarter.

Our liquidity position continues to be strong at the end of the quarter, we had $2 7 billion in cash and cash equivalents and our gross debt outstanding was $9 billion.

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

Resulting in a gross leverage of two six times.

As a reminder, our credit agreement includes a $1 billion add back depreciation 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 fourth quarter non-GAAP guidance is as follows we.

We expect revenue to be in the range of four four to $4 6 billion.

And we expect both hard drive and flash revenue to be up sequentially.

We expect gross margin to be between 30 and 32%.

We expect both flash and hard drive gross margin to improve sequentially as well.

We expect operating expenses to be between 760 and $790 million.

Interest and other expense is expected to be between 68 and $73 million.

The tax rate is expected to be approximately 17% in the fourth quarter and the fiscal year.

We expect earnings per share to be between $1 30, and $1 60 in the fourth quarter, assuming approximately 317 million fully diluted shares outstanding.

Now I'll turn it back over to data.

Thanks, Bob.

As technology continues to advance our powerful portfolio will remain centered on developing solutions to our customers' evolving storage needs.

Western Digital's unique ability to offer complementary flash and hard drive products benefits the industry, our customers and our company as a whole.

While market conditions continue improving I believe the organization and leadership changes made over the last year are now delivering more agility better execution and a stronger portfolio and collectively are driving results in unlocking the underlying strengths of western digital.

We're in a unique leadership position and feel confident that we can continue to drive innovation, while delivering value for all of our stakeholders.

We will now begin the Q&A session.

Thank you, ladies and gentlemen, as a reminder to ask a question.

One on your telephone we ask that you. Please limit yourself to one question on one follow up question.

John Your question. Please press the powerful please standby, while we compile the Q&A roster.

Our first question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yes, thanks for letting me ask the questions and congratulations on the on the execution in the quarter.

I guess the first question I have is you mentioned in your prepared remarks about establishing long term purchase agreements with some of the cloud customers are cloud Titans.

Can you help us appreciate that a little bit more can you give us any context on how those agreements are structured are they volume related are they taken pay just any kind of clarity on that and how that would compare to kind of prior engagements with those customers on on product cycles.

Yeah, Hey, Aaron Thank you.

It's something we've been working on.

For a while I guess I mean, when I got here a year ago. It kind of struck me that it was a big business and it was very transactional.

And the more certainty we can put around it would be better for all of us.

Especially going into a world, where we're going to be investing capital in this business, we're trying to judge supply and demand.

And get that right as the market shifts to capacity enterprise so.

They are multi quarter agreements as you would imagine and we talk about the amount of demand, they're going to it's going to have and we set a price for that period. So as opposed to just going quarter by quarter. We're we're extending that out to multi quarter agreements to give us both more visibility around the business.

Okay, and I guess, maybe somewhat related to that.

Just thinking about the hard disk drive business as my follow up is.

I guess the simple question is how do we go from a 25% gross margin back to what I think is still probably the target of at least 30% if not higher gross margin and hard disk drive how do we think about the variables to bring us back to that 30% plus level.

Well I think I mean.

So the first part is getting out of COVID-19 I think we had a 161, 6% impact on gross margin due to COVID-19. So that continues.

To be an issue and we're all hoping things continue to get better there.

Obviously mix is a question on issue as we get more more client and the work from home that's not necessarily a bad thing, but it's definitely a different margin profile.

And then getting to the getting to scale on the capacity points, where we can continue to drive the cost down and we can't control the pricing in the in the in the market but.

Continuing to deliver a strong <unk>.

Proposition for our customers and that's what we're continuing to do we believe we have a long roadmap of continued density in areal density improvements on HDD is there the foundational storage elements in the cloud, which I think is a very good place to be and so we're working on it from from all of those angles.

Okay. Thank you. Thank you.

Alright. Thanks. Thank you. Our next question will come from C. J Muse with Evercore. Please go ahead.

Yeah. Good afternoon. Thank you for taking the question I guess first question was hoping to discuss just overall gross margins so very nice uplift there.

And in particular your cost of sales on the NAND side Mark.

March quarter were fairly strict calculating and clearly better than what we saw across most other NAND players. So.

Can that 20% improvement year on year continue as we go through the year and what other kind of drivers should we be thinking about impacting gross margins into June.

Yes, So we're happy where the technology is I mean, I think we're going to work.

Phil.

We target, 15% some quarters, we do better some quarters.

Maybe we do a little worse on that we're in we're in a good spot and you know a lot of the a lot of the portfolio is on fixed floor, which is a very high performing node for us. So.

We're very happy with the cost downs, hopefully you're tuned into Dr. Steve as Ive around discussion of NAND technology and kind of what's driving all of this we do believe very strongly in our technology roadmap with key Osha <unk>.

Between us we're the biggest investor in NAND and so we have a lot of confidence on our roadmap and to be able to sustain that.

As we look into the next quarter, we talked about it we continue to see a good pricing environment. So.

We expect to continue to get the cost downs in the portfolio and in a.

On a rising price environment that puts us on a good spot to drive gross margin.

Yeah.

So how can we already get it from the beginning to ramp our fixed 512 layer technology, as well, which will continue to help bring the costs down.

Great. Thank you and then I guess.

Can you speak a bit to the <unk>.

Bound you saw on the enterprise HDD.

The HDD side pretty strong up 16% sequential units can you share with us on how to think about 16 and 18 terabyte ramp in.

The prospects for <unk>.

Faster growth as we go through the year. Thank you.

Yeah, we expect sequential growth in that market I think this quarter, we had a good we had basically a balance shipment of our capacity enterprise across 14, 16 and 18.

And we see that shifting strongly to 18 sequentially.

And we expect that to drive we see sequential exabyte growth and also sequential gross margin improvement.

In the portfolio as we move forward as well.

Great. Thanks.

Yes.

Thank you. Our next question will come from Joe Moore with Morgan Stanley. Please go ahead.

Great. Thank you also on the enterprise side, if you could talk about the <unk>.

Enterprise Nvme progress that you've had you've sighting.

Our cloud Titan customer there are there.

Prospects for more and where would you say I know you had a late start with enterprise Nvme, where would you say your share is and can you kind of get to where.

Your share on the enterprise is similar to your share on overall NAND.

So we're working on calls with the Big Enterprise Oems. So that's still in process as I talked about last time, that's a that's a multi quarter process.

Its going along fine.

We're seeing good demand in the channel.

For that product. So that's a good indication as far as where we're going to land on share I mean, I think one other things.

We're really running a balanced portfolio across a whole bunch of different markets. We're in from client SSD to mobility I think the big thing for US is to get the enterprise SSD qualified and now start to ship at scale.

But we're still going to run a balanced portfolio across the.

The big markets, we have which is client SSD mobility enterprise SSD and of course retail and then with things like gaming coming up quickly as well so yes.

We feel good about where the product is we think it was a major milestone for us last quarter. When we got the Pall done at a cloud.

Cloud Titans and we saw the benefits of that this past quarter.

Great. Thank you and then my follow up on three.

330 basis points of gross margin improvement is pretty significant.

Can you give us a qualitative sense of how much of that is coming from from NAND versus stripes.

But on gross margins were up in both on site gross margins were up on the flash side, they are actually down sequentially on yes.

And then more on the June quarter guidance from the June quarter.

Sequentially will be up in both businesses, probably driven a little bit more on the flash side.

Okay, Alright, great. Thank you.

Thank you.

Thank you. Our next question will come from <unk> Hari with Goldman.

Please go ahead.

Hi, guys. Thanks for taking the question and congrats on the strong results and outlook day.

You talked about shortages and youre on.

NAND business as it relates to the controllers and perhaps raw NAND as well can you can you talk a little bit about the actual impact you saw on the quarter, what's embedded in your June quarter guidance on when you'd expect some of these issues to be resolved.

Yeah. So we're working on I mean, obviously, we're working to get as much supply as we can I mean this past quarter. We did we did see shortages and controllers, let's say in places like Chromebooks where are we.

Couldn't get as many as many <unk>.

<unk> as we would've liked and could have shipped a little more into that but in general what we're able to do is with the supply. We have is shift the portfolio around to where we get the biggest return for that whether it's.

Moving those controllers to products in the channel or in retail from retail into the channel and vice versa, where we're going to get the highest return so.

The agility I think that the team is implementing on all of our different go to market.

On routes has been very beneficial over the last couple of quarters and I expect it to be.

Moving forward as well so we are able to mitigate a little bit we're not able to completely escape it but we're going to continue working to get all the supply we can and.

Well, we definitely know what.

The forecasted.

It's matched to the supply we have so we don't expect any any surprises from that regard.

Got it and then as a quick follow up just wanted to get your thoughts on on NAND supply demand going forward.

Clearly the near term is looking really good and then you spoke to that in your prepared remarks, but as you start to plan for fiscal 'twenty two.

What are your thoughts on on on the overall market supply demand and your intentions from a from a capex perspective, you obviously want to make.

The transitions and maintain share but at the same time, you don't want to flood the market with too much supply so what sort of a debate internally. Thank you.

Yeah. So you got it right I mean, we went on we're going on we're going to invest to maintain share we feel good about the demand situation I mean, 'twenty twos pretty far out as you know of course, we guide one quarter at a time I have to say that but we continue to see demand is strong into the second half of this year, certainly I mean, where we are.

Whether it's in the PC market or in the cloud infrastructure market.

We're.

We're pretty bullish so.

We'll manage it through the end of the year and be disciplined with our Capex investments and go on quarter time.

Thank you.

Thank you. Our next question will come from Ramsey El <unk> with Bank of America. Please go ahead.

Yes. Thank you Dave I wanted to go back to the two long term agreements on AT&T B is there any share basis for those agreements and if not how much share are you are you targeting at these customers.

Yes, we don't go into that we don't go into that much detail on a customer by customer basis.

It's fair to say with these customers, we have long standing and very deep relationships.

Given our position in their data centers and given that 90% of the storage and the cloud is on on hard drives.

It's just about getting more visibility on what their plans are and get any other line with with where we're going on and making sure that our business is aligned with where their business is headed.

And it's kind of as simple as that to give us more visibility and try and move the market as I said from this transactional quarter at a time to allow us both to to plan for what the next several quarters look like.

Okay. Thank you and as a follow up on the on the HDD gross margins improving in the June quarter is that more mix related or lower cost headwinds can you just help us think through.

What do you think are more cash.

On the Torrey.

Maybe on the cost headwinds tied.

Horses why on them.

Growing mix here. Thank you.

A big part of it is mix I think we've been talking for a long time that the 18 capacity point as a better other point for us and as I said this quarter, we shipped pretty balanced number of 2014, sixteens and eighteens or most of you will see that tilt strongly 2000 eighteen's net.

Quarter.

And I think the castle, well get better quarter to quarter as well, we slowed down production a little bit in the March quarter, and we're back at full production here in the June quarter.

Thank you.

Thank you. Our next question will come from Mehdi Hosseini from <unk>.

Please go ahead.

Yes, Thanks for taking my question David.

It's been about a year or so since you joined the company.

Remember when you first John you.

You were doing somewhere around $2 50 of annualized earning on fast forward 12 months, you almost $6 annualized, earning great improvement, but it's still well below.

2017, 2018, when the company was doing north of 10, Domino, Ernie and I'm not asking you to give me.

Forecast sort of guide for one or two years out, but I think it would be very helpful. If you could articulate your your views as to how.

Earnings are going to improve here, assuming that you just continue to execute on I have a follow up.

Yeah, I mean, I think it's what I think youre, starting to see better execution and built on the flash side build out the portfolio.

Cross a number of end markets, which I think the enterprise SSD was a big piece of getting that established with the cloud Titans and we clearly have a very strong client SSD portfolio. We have I think a very strong retail portfolio.

Mobility, we've talked about we stay qualified with all the top vendors, we're very much participate in that market, maybe less than definitely less than some others and then we have a lot of.

New products coming around gaming and smart home devices, where because of our strong relationships with those big cloud customers that also drive that portfolio gives us kind of a front row seat as those are developed so.

<unk> build out the portfolio and then use our routes to market.

Liver the best return, we can given the pricing environment in the market I think we were able to do that and flash this quarter and balance the portfolio across all the markets and put the agility in the system to make sure that we're doing that and I would say from a year ago to where we are now in the way we executed last quarter. There's just.

Much more agility in the system and to be able to react and get the best outcome. We can.

The hard drive side its drive to continue to drive areal density and leadership returned to a leadership position as we did with <unk>.

And then continue that forward.

It's a good market I think we've had a long standing position there and then I think there is we've seen this synergy between the two portfolios in the client space on.

We have a great client SSD portfolio, where these technologies are substitutes for each other we had long standing relationships with those customers, where we can manage that transition in the data center, they're more complementary technologies and I think the ability.

To execute that synergy is in front of us.

Okay. Thank you and just a quick follow up on HDD.

I believe you're still on restricted with shipments to certain customers, but your primary competitor has continued to shift how do you see the geography specific customers, they're playing to your eye.

Adventure disadvantage and I'm, assuming that you are still restricted.

Yes, we've been since the Commerce rules came out I think back in September we stopped shipping.

Per the rules, we talked commerce frequently we have our own attorneys and outside firms. We know that that's the right position and that's the position we continue to be in.

The licenses are pending with.

With commerce, and we'll see how that plays out.

If theres been any there hasnt been any movement, there recently as far as what our competitors do and I can't I can't speak to what they're doing so on island I only have insight into to our position and you know clearly clearly not shipping to places where we are we're not supposed to for Commerce Department regulation.

Thank you.

Okay.

Thank you. Our next question will come from Sidney Ho from Deutsche Bank. Please go ahead.

Thanks for taking my question.

My first question is on the 18 terabyte drives first of all congrats on all the all the qualification but in terms of the ramp do you expect to go 18 terabyte drives to crossover the 14 terabyte drives exiting this calendar year and will 18 terabyte b be margin accretive margin accretive right off the bat.

Maybe follow up to that is how are you thinking about strategy in terms of ramping 16 versus 18.

Yes, so we expect <unk> to be the primary.

On the highest volume we shipped this quarter. So yes for the first question and yes, we expect it to be margin accretive we expect sequential improvement in an HDD gross margin.

For the second question again.

The second pillar.

16 versus 18 non U.

Putting all your eggs them two to 18 terabyte basket and 16 as Ian just whatever the customers are asking for.

Well I mean, I think it's always whenever the customer is asking for it. So every customer is at a different point in the evolution of their data center on what they are deploying.

Some are still deploying 2014 at scale some went to <unk> as quickly as possible and others are at different points of deploying 16 or 18.

So we meet the customers where they are.

In that process, so, but we expect <unk> to be the predominant points going forward. It's just a better tcl equation. So it's.

You would expect the customers to go there when they can given their own internal architectural evolution.

Got it maybe a follow up to the <unk> side of things given the improvement in the enterprise side that you're seeing and obviously the cloud has been strong what is your expectation for the industry wide exabyte growth forward Neil Lane drag this year and how do you think you'll stack up against debt.

Yes sure.

Yeah.

Yeah, we see we see a we see a quarter of strong growth coming up I think we're still on that around 35% exabyte growth for the year.

So and as the market shifts to 18, I think that we're in a.

We're on incrementally stronger position. So that's how I expect the rest of the year to play out.

Yeah.

Okay. Thank you.

Thank you. Our next question will come from Tom O'malley with Barclays. Please go ahead.

Hey, good evening, guys and congrats on a really nice results. My first question was around the end markets. You guys gave some helpful cover a color on the HDD and flash side could you talk to what you guys see client devices data center devices and client solutions kind of do it into the June quarter, just any general color would be helpful. There.

I mean, I think in data center.

We expect improvement I mean, I'm trying to think here of around a modular seasonality I mean look I mean devices are very strong I mean, we saw a lot of strength in PC and client and I think we continue to see we saw on.

This past quarter, we saw decline, but but way better than seasonal decline. So we expect that to continue we think that market is strong our customers are telling us that market is strong.

The number of units shipped is up so that continues to be a good market I think data center with.

With 18 ramping stronger youre going to see going to see growth there.

And I think in the in the retail space, we will see sequential growth, but probably a little smaller than the others.

But still feel very good performance.

That's helpful. My follow up was really around the cadence of gross margins you guys indicated that you should see some HDD gross margins that are improving sequentially, but can you talk to the cadence for the year I think that the target longer term is 30, and even above that but obviously with near line drives becoming a bigger part of the mix on some of this COVID-19.

One is coming off can you talk to the progression that you guys are expecting internally.

And just kind of the progression from here to the <unk>.

Yes, I mean, I think we're going to forecast it one quarter at a time, but we're working you know the teams are working very hard to do it but they're going to do on any storage market, which has continued to bring down the cost and as you scale the products will bring down the cost.

So I think the whole industry is driving back to 30% gross margins I think we're going to get there one step at a time, but we're going to work on both sides of it is.

Make sure we've got good supply demand matching on kind of what the demand is in the market and then.

We've talked about multi quarter supply agreements I think which helps give some certainty and then work on the cost side of it. So every quarter. We're focused on on all of those elements and we will continue to drive it.

The other starts with delivering a great value proposition for our customers from continuing to drive a better <unk>.

Equation, as we drive higher and higher aerial density and we've got a long roadmap on aerial density improvement a big piece of that was us.

On implementing our introducing energy assist and that's that's the big thing with our <unk> as we're now just starting to ramp to 18, we've got energy assist in the market that others.

There's there's well over a decade of research behind behind that and we've now commercialized it and so that gives us more.

Many generations on that technology to continue to improve aerial density, which is going to improve the tcl equation for our customers.

Great. Thanks again guys.

Thank you. Our next question will come from Shannon Cross with Cross Research. Please go ahead.

Thank you very much for taking my question I'm, just curious with regard to your cloud customers. If you believe theyre pretty much through that digestion period of the excess capacity I know we've seen from on a couple of we cover that.

Theyre starting to ramp up Capex again, but I'm curious what you're hearing from them and then I have a follow up thanks.

Yeah, I think the word I used last time was cloud digestion abating, when we talked about this but they are all on a slightly different spot but.

We're into an ingestion phase for the most part.

Okay, and then I was curious in terms of the tightness in components and overall market what kind of impact is that having on your working capital.

Looking at some of the movements in AP and inventory.

Yeah, No. That's a great question and we definitely are carrying a little more inventory than we normally would particularly on the hard drive side.

Because of the tightness on controllers and.

And also frankly because of the logistics costs associated with COVID-19, we're putting more product on the ocean and not in the air So it's definitely having an impact in terms of working capital in that respect and our cash.

On the table did go down this quarter I mean that really was a result of a slowing down on the production in the March quarter, and I think it'll it'll come back up again this quarter.

Thank you. Our next question will come from Tristan <unk> with Baird. Please go ahead.

Hi, Good afternoon, just following up on the earlier question about supply demand. We've had some peers talk about their concern around to keep.

Some excess capacity coming in NAND.

It's too early to provide an outlook for the next fiscal year, but.

It is capacity of NAND industry wide a concern in your view or do you see a passed on the ultimate he could get you back to the type of peak gross margin that you reported in 90 day back to Nate.

2018 timeframe.

Yes, it's not something we're overly worried about it at this point I think the industry has been pretty disciplined for the last several years.

And I think there is now a pretty strong demand in the market. So I mean, we feel pretty good about the balance of supply and demand in the market.

Going forward I mean again there's.

Even the.

Well, let me just leave it at that we're pretty happy with where supply demand balances I mean, I think everybody is trying to figure out what's the long term.

Demand for technology coming out of a pandemic, it's kind of a unique situation.

But we're staying very close to it and our view is the industry has been pretty balanced on the whole topic.

Thank you our next question will come from John.

Citigroup investment. Please go ahead.

Thank you and I'll ask Scott both my questions at the same time and you can or answer them in any order you want it but the data center softness is the visibility there getting better the digestion phase and you know are we a long ways to go or kind of mostly through the worst part or is demand coming back for that kind of on the data Center and then <unk>.

And longer term relationships and contracts with our cloud Titans and Hyperscale.

Or do they allow for flexibility in pricing. The reason why I ask is recent NAND pricing came out and it was quite positive, but we're trying to make sure that youre not missing the opportunity for you.

You know better economics from pricing and so we're just kind of wondering without giving specifics on of your relationships quantity and volume and pricing is are there some abilities to adjusted or do you get locked in and maybe pricing will or won't help you. Thank you.

I think your second issue is without going into all the details is not a concern for us on.

On the first issue I mean, I think we saw.

First of all very strong sequential growth in data center for US this quarter of 53%, although it was down I get your point on core year over year.

Very strong compare a year ago on exabyte shipment, but we expect sequential growth there in exabyte shipments on the on the drive side.

And I think up on on flash as well, maybe not as strong as exabyte growth. We expected hard drives is 18 really starts to be the major point in the industry, but we see we see sequential sequential improvement there Jim.

Yeah.

Thank you. Our next question will come from Ananda Baruah with loop capital. Please go ahead.

Hey, Thanks, guys for taking the question and congrats on the strong results.

I guess, just going back to close to flat gross margin on.

Uh huh.

The balance that you guys are seeing right now.

Do you feel like Youre sort of to 30% sooner than expected.

It is a positive thing.

And if so how.

How would you like us to think about supply and demand remain balanced on the flash side.

How do you think about margins going through the second half of the calendar year, and then I have a quick follow up thanks.

I guess, one way to think about that as we we delivered above what we guided so I think we're ahead of where we thought the market would be when we walked into it and you know a lot of that is the we have really strong exposure to a lot of transactional markets in the channel and in retail.

And as price tightens it allows us to move pricing.

In those big markets much faster than other.

Other other markets OEM markets, which are on quarter by quarter.

I'm gonna from that phenomena on that quarter by quarter negotiation.

So.

Yeah, I mean, I think the market was good for us from within as I said the go to market teams and the teams, we're very agile as far as shifting our supply around on where we can get the best return for it in the quarter.

As far as going forward I mean, we were guiding for sequential improvement in flash gross margin.

We're seeing that we saw the pricing strength.

Strength that we are firmness that we saw in the transactional markets Tran.

Translated into the negotiated markets I think last quarter, we were waiting to see if that was going to happen, we see that going into Q4.

So.

We're definitely forecasting incrementally stronger flash margins in the current quarter.

Okay.

And it sounds like it sounds like just structurally it feels like maybe that could actually followed through.

So it feels like the dynamics of more at the beginning.

As well.

I guess my follow up is it seems like on on your Capex. It seems like you've lowered the capex expectation just slightly.

Fiscal year 'twenty, one if I'm seeing that accurately and I was just wondering.

If there is any if there's any.

Directory for that and what would be other opinion bad withdrawals.

And that's it for me.

Yeah, no that's a good observation.

We expected Capex day around $3 billion this year pretty much all year. The main delta as we exit told from real estate this past quarter to the tune of about $100 million.

Thank you. Our next question will come from Nik Todorov with Longbow Research. Please go ahead Bob.

Thanks, and good afternoon, everyone. David if I heard correctly, you talked about seeing cloud Titans also starting to use your client SSD products with their consumer base business I think that's the first time you hear about that so can you maybe unpack that a little bit how should we think about the opportunity and are you addressing dose that opportunity with your existing portico.

Yes.

No not not are not are not necessarily our client product. So there is some of that because I think I think the easiest way to think about it as a lot of these big cloud Titans has also have big consumer portfolios, whether it's gaming tablets VR headsets, that's what I'm talking about us participating.

And those builds in those parts of the market as well that.

It's part of that go to market synergy we've talked about I think we tend to only think of it as HDD and enterprise ssds, but it's much broader than that given the relationship we have from the HDD business with these customers and the depth of the relationship and they all or most of them also have big consumer.

Portfolio as well, whether it's home automation or other kinds of things I talked about so our ability to participate in those parts of the market for flash is just what we're talking about.

Got it.

Jay.

Okay.

Yeah.

And thank you. Our next question will come from Stephanie Prince Ray with SMB channel.

Please go ahead.

On the NAND gross margins as well.

I didn't hear you talk about K, one cost so I'm guessing that came down pretty meaningfully.

I guess my question is as we look through the next few quarters you do have.

Additional fabs coming online, whether it's Q2 or one seven I'm just wondering how we should think about any potential incremental costs from those new factories.

Yeah. So I don't think weighted quite all at the beginning of your comment but you are correct.

<unk> expenses are immaterial now.

Ramp there to normal volume level, so those costs are gaining inventory.

I think we're kind of in a normal state.

New Fabs come on it's not going to have as big an impact on us.

POS standpoint, if the greenfield that we did with K one so.

Definitely youre, bringing on some fixed possible lawsuit.

Volume is up.

Amortizing those costs over a bigger base, because we have multiple fabs on a given campus.

Thank you.

Sure.

Yeah.

Thank you. Our next question will come from Stephen furlong.

With Boston Partners. Please go ahead.

Hi, Good afternoon, two questions real quick first of all on the taxes, Bob is the 17% tax rate kind of here to stay do you think it can go a little bit lower and then secondly, I apologize if I missed this but have you talked about sort of.

Recent trends on in high capacity video Hdds, and what Youre expecting going forward.

I'll do taxation on data and talked about video.

So yes. This has come up in prior calls I mean, we've been in a situation over the last couple of years, where our operating profit.

And below what we expected and we have minimum taxes that we have to pay around the world and so our rate was higher than what we would consider normal over the last couple of years now as we're forecasting the rest of this fiscal year with the profitability or expecting.

We're very confident in the rate of 17% and it'll be you know as we look to future years, it'll be a function of how profitable we are in those years, but.

Right now I think a good planning number is 17%.

Yes, Steve we haven't talked about high <unk>.

High definition video or.

In particular, but I mean, I mean, one way to think about it is just driving more demand for storage I think all the devices, we carry have more and more capability to store higher definition video, which is just driving the need for more and more storage for device. So.

If you have something more specific on that happy to happy to follow up on it yeah yeah.

If you could just maybe expand on what youre seeing in the June quarter like is it I think there was some seasonality last quarter.

How you have availability to ship to that market. Thanks.

Smart video the smart video market I am sorry, I misinterpreted sorry about that.

Smart video partner of the HDD market and now we see.

Mark has been pretty stable I think we see some some improvement in it but I mean, I don't think there's anything that's particularly noteworthy except that it's a good market for us and continues to move forward to growing market.

Great. Thank you.

Thank you.

Alright, everyone look we really appreciate you spending time with us a little follow up with you throughout the quarter and again. Thanks for thanks for joining us take care. Thanks, everyone.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect and have a wonderful day.

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Good afternoon, and thank you for standing by welcome from Western Digital fiscal third quarter 2000 on 'twenty One conference call presently all participants are in a listen only one out.

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 telephone as a reminder, this call is being recorded now I will turn the call over to Mr. Peter Andrew you may begin.

Yeah.

Thank you and good afternoon, everyone. Joining me today are David Kessler, Chief Executive Officer, and Bob <unk>, Our Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking statements include.

<unk> product portfolio expectations business plans trends and financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent report on form 10-K filed with the SEC for more.

Formation 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.

Thank you Peter good afternoon, everyone and thanks for joining the call today.

We reported solid third quarter results above the guidance range provided in January with revenue of $4 1 billion non-GAAP gross margin of 27, 7% and non-GAAP earnings per share of $1 <unk>.

Sequential revenue growth was driven by increasing momentum of our high capacity energy assisted drives and our second generation Nvme enterprise SSD is improving NAND flash pricing trends along with the continued accelerated digital transformation across end markets.

As we continue to manage the impact of the pandemic, we know that the world is not only more technology enabled but also more technology dependent than ever before from.

From the intelligent edge to the cloud data storage is a fundamental component underpinning the global technology architecture.

Western digital strength in technology, and cost leadership expansive product portfolio and broad routes to market are providing a foundation upon which we are solidifying our position as an essential building block of the digital economy.

The strength combined with our increased operational and strategic focus enabled by our new business units structure are driving results as we continue to face a dynamic environment. We are seeing the benefits of the synergistic value in the breadth of western digital's portfolio and our unique ability to deliver both hard drive.

<unk> and flash solutions to our diverse end markets and customer base.

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

Within flash the depth and breadth of our product line distribution channels cost leadership and customer base are significant differentiators, our ability to act swiftly and shift beds to meet customer demand in various end markets ranging from data centers to retail enabled us to grow.

Both revenue and gross margin in the third quarter.

Within data center devices and solutions, we experienced significant growth in the quarter with our second generation Nvme enterprise SSD at a cloud Titan. In addition, we are seeing many cloud customers also utilized NAND flash for their consumer product lines. This creates many opportunities for.

For us as a strategic partner as we continue to diversify and balance the end markets we serve.

We are already achieving significant progress in VR headsets game consoles and other at home Entertainment devices, where we have experienced over 10 times bit growth last calendar year and expect to double again this calendar year.

In client devices continued strength in PC demand along with a new game console ramps drove sequential revenue growth above typical seasonal trends.

Retail remains of high performing end market as our brand recognition broad product portfolio and extensive distribution channels continued to distinguish western digital from our competitors in particular, it was a solid quarter for gaming with our WD Black product line, having maintained strong levels of inter.

Just as gamers have gravitated towards more customized solutions.

By delivering reliable performance expansive storage capabilities and a hyper realistic gaming experience our industry, leading WD back black portfolio is trusted by gamers to perform their best.

We are also excited about the future as western digital technology roadmap and cost leadership will continue to drive our ability to meet customers' needs fixed five is in the midst of a significant ramp exceeding customer expectations and delivering the reliability and performance our customers depend upon.

Moreover, the technology advancements, we made with fixed five have allowed us to achieve the scale efficiency and fifth growth needed, while using a lower number of layers, resulting in lower cost and lower capital intensity. We continue to expect fixed five bit crossover later in 2020.

One <unk>.

Finally in February we revealed 56, our next generation Flash device based on 162 layer in <unk> technology day.

Developed in partnership with key Osha as part of our long standing successful joint venture <unk>. Six features numerous architectural advanced advancements, including improved lateral scaling which allows us to deliver this high performing product at an optimal cost. This marks another major milestone.

In our 20 year relationship with <unk> and together, we will continue to drive innovative innovation to meet the needs of our respective customers and their diverse applications.

In HDD revenue growth was led by capacity enterprise drives a trend that helps the overall HDD market to growth as demand for capacity enterprise drives will more than offset the decline in client drives.

Meanwhile, retail HDD demand was better than expected supported by continued work from home distance learning and at home Entertainment trends, we continue to see enterprise demand stabilizing and expect to pick up his employees returned to work.

We have completed qualifications for our energy assisted drives with nearly all our cloud and enterprise customers, including all of the cloud Titans and expect an aggressive ramp of our 18 terabyte hard drives.

Building on this success, we have entered into long term agreements with a number of our cloud Titans for 18 terabyte drives these commitments underscore our product leadership and the importance of capacity enterprise drives to our data center customers.

As we continue to navigate challenges brought on by COVID-19, we know that the world is not only more technology enabled but also more technology dependent. We believe this is a fundamental and sustainable trend highlighting the importance of western digital's broad portfolio of storage solution solutions.

And we're encouraged by what's ahead.

And flash improving pricing trends in the retail and transactional portions of the market are translating into better pricing is negotiated portions of the market and we expect this trend to continue in the fiscal fourth quarter are.

Our unique ability to provide high volumes of flash and hard drive solutions through extensive distribution channels and two diversified end markets provides us with broad demand visibility, enabling our team to optimize product mix and profitability.

In the cloud we remain uniquely positioned to benefit from the strong growth in this sector, where NAND flash and hard drives are complementary solutions.

We expect this strength to build as we progress through the calendar year led by the ramp of our 18 terabyte hard drives as well as broad based growth in flash.

And while we are excited about these drivers we are also keeping close watch on some headwinds.

To date, we have been able to largely mitigate the impact of the industry wide semiconductor component shortages through proactive supply chain management. We are however, experiencing tightness and controllers as well as flash, which could limit potential upside in the future.

We also recognize that while the pandemic effects are lessening in some regions. Other ours are unfortunately experiencing another wave of cases, we are actively managing through this environment, which continues to have ongoing impacts to our business.

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 third fiscal quarter were above the upper end of the guidance ranges provided in January <unk>.

Flash revenue and gross margin improvement were the primary contributors to the upside versus guidance.

Total revenue was $4 1 billion up 5% sequentially and down 1% year over year.

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

Down, 6% sequentially and up 10% year over year.

On a sequential basis client SSD revenue was flat and notebook and desktop PC hard drive revenue was down.

So a decrease of less than what we're used to seeing based on typical seasonality.

Gaming revenue grew while mobile revenue was down on a sequential basis.

Moving on to data center devices and solutions revenue was $1 $2 billion.

Up 53% sequentially, but down 19% from a year ago.

Revenue from both capacity enterprise hard drives and enterprise Ssds grew sequentially.

We were encouraged to see the sequential growth driven by our new energy assisted hard drives at the 16, and 18 terabyte capacity points and our second generation Nvme enterprise SSD products, both targeted for the cloud and large scale enterprise Oems.

Lastly, client solutions revenue was $888 million down, 12% sequentially and up 8% from a year ago.

Turning to revenue by technology Flash revenue was $2 2 billion.

Up 7% sequentially and up 6% year over year.

Flash Asps were down 2% sequentially on a blended basis and flat on a like for like basis.

Flash bit shipments increased 8% sequentially.

Hard drive revenue was $2 billion.

Up 3% sequentially and down 7% year over year.

On a sequential basis total hard drive exabyte shipments increased by 7%, while the average price per hard drive increased 14% to $82.

As we move to costs and expenses. Please note that my comments will be related to non-GAAP results unless stated otherwise.

Gross margin for the third quarter was 27, 7%.

One three percentage points sequentially.

This was above the upper end of the guidance range provided in January.

Continued success in driving down costs, coupled with an improving pricing environment and our ability to shift to more attractive end markets drove our flash gross margin up two nine percentage points sequentially to 30.0%.

Our hard drive gross margin was 25% down <unk> five percentage points sequentially as noted last quarter production ramp costs of our new energy assisted drives and a planned reduction in overall units shipped pressured gross margin.

This also includes COVID-19 related impact of $31 million or approximately one six percentage points.

Operating expenses of $732 million were higher than guidance due to a larger than expected variable compensation accrual tied to our improved profitability.

With our improving profitability our tax rate in the fiscal third quarter was 8%, which was well below our prior expectations and directly resulted in a <unk> 17 benefit to our earnings per share.

We now expect our tax rate to be 17% for fiscal year 2021.

Earnings per share was $1 <unk>.

Excluding the tax benefit earnings per share was still well above guidance.

Operating cash flow for the third quarter was $116 million and free cash flow was negative $11 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 $127 million.

In the fiscal third quarter, we paid off $212 million in debt, including an optional debt pay down over $150 million.

We will also be making an additional optional debt payment of $150 million. This friday, highlighting the confidence we have in our cash flow generation for the fourth quarter.

Our liquidity position continues to be strong at the end of the quarter, we had $2 7 billion in cash and cash equivalents and our gross debt outstanding was $9 billion.

Our adjusted.

<unk> EBITDA as defined in our credit agreement was $3 5 billion, resulting in a gross leverage of two six times.

As a reminder, our credit agreement includes a $1 billion add back of depreciation 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 fourth quarter non-GAAP guidance is as follows.

We expect revenue to be in the range of four 4% to $4 $6 billion and we expect both hard drive and flash revenue to be up sequentially.

We expect gross margin to be between 30, and 32%, we expect both flash and hard drive gross margin to improve sequentially as well.

We expect operating expenses to be between $760 million and $790 million.

Interest and other expense is expected to be between 68% and $73 million.

The tax rate is expected to be approximately 17% in the fourth quarter and the fiscal year.

We expect earnings per share to be between $1 30, and $1 60 in the fourth quarter, assuming approximately 317 million fully diluted shares outstanding.

Now I'll turn it back over to data.

Thanks, Bob.

As technology continues to advance our powerful portfolio will remain centered on developing solutions to our customers' evolving storage needs.

Western Digital's unique ability to offer complementary flash and hard drive products benefits the industry, our customers and our company as a whole.

While market conditions continue improving I believe the organization and leadership changes made over the last year are now delivering more agility better execution and a stronger portfolio and collectively are driving results in unlocking the underlying strengths of western digital.

We are in a unique leadership position and feel confident that we can continue to drive innovation, while delivering value for all of our stakeholders.

We will now begin the Q&A session.

Thank you, ladies and gentlemen, as a reminder to ask a question a little bit Quest star one on your telephone we ask that you. Please limit yourself to one question on one follow up question.

Withdraw your question. Please press the pound key.

Please standby, while we compile the Q&A roster.

Our first question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yes, thanks for letting me ask the questions and congratulations on the on the execution in the quarter.

The first question I have is.

You mentioned in your prepared remarks about establishing long term purchase agreements with some of the cloud customers are cloud Titans can you help us appreciate that a little bit more can you give us any context on how those agreements are structured are they volume related or are they taken page if any kind of clarity on that and how that would compare.

Fair to kind of prior engagements with those customers on product cycles.

Hey, Erin thank you.

It's something we've been working on.

For a while I guess I mean, when I got here a year ago. It kind of struck me that it was a big business and it was very transactional.

And the more certainty we can put around it would be better for all of us.

Especially going into a world, where we're going to be investing capital in this business, we're trying to judge supply and demand.

And get that right as the market shifts to capacity enterprise so.

There are multi quarter agreements as you would imagine and we talk about the amount of demand, they're going to it's going to have and we set a price for that period. So as opposed to just going quarter by quarter. We're we're extending that out to multi quarter agreements to give us both more visibility around the business.

Okay.

Maybe somewhat related to that.

Just thinking about the hard disk drive business as my follow up is.

I guess the simple question is how do we go from a 25% gross margin back to what I think is still probably the target of at least 30% if not higher gross margin and hard disk drive how do we think about the variables to bring us back to that 30% plus level.

Well I think.

So the first part is getting out of COVID-19 I think we had a 161, 6% impact on gross margin due to COVID-19. So that continues.

To be an issue and we're all hoping things continue to get better there.

Obviously mix is a question on issue as we get more more client and the work from home that's not necessarily a bad thing, but it's definitely a different margin profile.

And then getting to the getting to scale on the capacity points, where we can continue to drive the cost down and we can't control the pricing in the in the in the market but.

Continuing to deliver a strong <unk>.

Proposition for our customers and that's what we're continuing to do we believe we have a long roadmap of continued density in areal density improvements on HDD is there the foundational storage elements in the cloud, which I think is a very good place to be and so we're working on it from from all of those angles.

Okay. Thank you. Thank you.

Alright. Thanks. Thank you. Our next question will come from C. J Muse with Evercore. Please go ahead.

Yeah. Good afternoon. Thank you for taking the question I guess first question was hoping to discuss just overall gross margins so very nice uplift there.

And in particular your cost of sales on the NAND side Mark.

March quarter were fairly strict calculating and clearly better than what we saw across most other NAND players. So.

Can that 20% improvement year on year continue as we go through the year and what other kind of drivers should we be thinking about impacting gross margins into June.

Yes, So we're happy where the technology is I mean, I think we're going to work.

Phil.

We target, 15% some quarters, we do better some quarters.

Maybe we do a little worse from that we're in we're in a good spot and you know a lot of the a lot of the portfolio is on fixed floor, which is a very high performing node for us. So.

We're very happy with the cost downs, hopefully you're tuned into Dr. Steve as Steve around discussion of NAND technology and kind of what's driving all of this we do believe very strongly in our technology roadmap with key Osha <unk>.

Between us we're the biggest investor in NAND and so we have a lot of confidence on our roadmap and to be able to sustain that.

As we look into the next quarter, we talked about it we continue to see a good pricing environment. So.

We expect to continue to get the cost downs in the portfolio.

A rising price environment that puts us in a good spot to drive gross margin.

Okay very helpful and we already get it we're beginning to ramp our <unk> 512 layer technology, as well, which will continue to help bring the costs down.

Great. Thank you and then I guess.

Can you speak a bit to the <unk>.

Bound you saw on the enterprise HDD.

HDD side pretty strong up 16% sequential units can you share with us on how to think about 16 to 18 terabyte ramp in.

The prospects for.

Faster growth as we go through the year. Thank you.

Yeah, we expect sequential growth in that market I think this quarter, we had a good we had basically a balance shipment of our capacity enterprise across 14, 16, and 18, and we see that shifting strongly to 18 sequentially.

And we expect that to drive we see sequential exabyte growth and also sequential gross margin improvement.

In the portfolio as we move forward as well.

Great. Thanks.

Yes.

Thank you. Our next question will come from Joe Moore with Morgan Stanley. Please go ahead.

Great. Thank you.

Also on the enterprise side, if you could talk about the.

Enterprise Nvme progress that you've had you've sighting.

Our cloud Titan customer there are there.

Prospects for more and where would you say I know you had a late start with enterprise Nvme, where would you say your share is and can you kind of get to where.

Sure on the enterprise is similar to your share on overall NAND.

So we're working on calls with the Big Enterprise Oems. So that's still in process as I talked about last time, that's a that's a multi quarter process.

Its going along fine.

We're seeing good demand in the channel.

For that product. So that's a good indication as far as where we're going to land on share I mean, I think one other things.

We're really running a balanced portfolio across a whole bunch of different markets. We're in from client SSD to mobility I think the big thing for US is to get the enterprise SSD qualified and now start to ship at scale.

But we're still going to run a balanced portfolio across.

The big markets, we have which is client SSD mobility enterprise SSD and of course retail and then with things like gaming coming up quickly as well so yes.

We feel good about where the product is we think it was a major milestone for us last quarter. When we got the quality on a day cloud tightened and we saw the benefits of that this past quarter.

Great. Thank you and then my follow up.

330 basis points of gross margin improvement is pretty significant.

Can you give us a qualitative sense of how much of that is coming from from NAND versus strides.

But on gross margins were up in both on site gross loans were up on the flash side, they actually down sequentially on.

Yes, I mean more in the June quarter guidance from the June quarter sequentially.

Sequentially will be up in both businesses, probably driven a little bit more on the flash side.

Okay, Alright, great. Thank you.

Sure. Thank you.

Thank you. Our next question will come from <unk> Hari with Goldman Sachs. Please go ahead.

Hi, guys. Thanks for taking the question.

Congrats on the strong results on outlook, David you talked about shortages in your NAND business as it relates to the controllers and perhaps raw NAND as well can you can you talk a little bit about the actual impact you saw on the quarter, what's embedded in your June quarter guidance on when you'd expect some of these issues to be.

A result.

Yeah. So we're working on I mean, obviously, we're working to get as much supply as we can I mean this past quarter. We did we did see shortages and controllers, let's say in places like Chromebooks, where we.

Probably couldn't get as many as many controllers as we would've liked and could have shipped a little more into that but in general what we're able to do is with the supply. We have is shift to the portfolio around to where we get the biggest return for that whether it's.

Moving those controllers to products in the channel or in retail from retail into the channel and vice versa, where we're going to get the highest return so.

The agility I think that the team is implementing on all of our different go to market.

Routes has been very beneficial over the last couple of quarters and I expect it to be.

Going forward as well so we are able to mitigate a little bit we're not able to completely escape it but we're going to continue working to get all of the supply we can.

Well, we definitely know what.

The forecasted.

It's matched to the supply we have so we don't expect any any surprises from that regard.

Got it and then as a quick follow up just wanted to get your thoughts on on NAND supply demand going forward.

Clearly the near term is looking really good and then you spoke to that in your prepared remarks, but as you start to plan for fiscal 'twenty two.

What are your thoughts on on on the overall market supply demand and your intentions from a from a capex perspective.

You, obviously want to make the transitions and maintain share but at the same time, you don't want to flood the market with too much supply so what sort of a debate internally. Thank you.

Yeah. So you got it right I mean, we want to we're going on we're going to invest to maintain share we feel good about the demand situation I mean, 'twenty twos pretty far out as you know of course, we guide one quarter at a time I'd have to say that but we continue to see demand is strong into the second half of this year, certainly I mean, where we are.

Whether it's in the PC market or in the cloud infrastructure market.

We're on.

We're pretty bullish so.

We'll manage it through the end of the year and be disciplined with our Capex investments.

And go on quarter time.

Thank you.

Thank you. Our next question will come from Ramsey El <unk> with Bank of America. Please go ahead.

Yes. Thank you Dave I wanted to go back to the two long term agreements on AT&T B is there any share basis for those agreements and if not how much share are you are you targeting at these customers.

Yes, we don't go into that we don't go into that much detail on a customer by customer basis.

It's fair to say with these customers, we have long standing and very deep relationships.

Given our position in their data centers and given that 90% of the storage and the cloud is on on hard drives.

It's just about getting more visibility on what their plans on our and get anything out of line with with where we're going on and making sure that our business is aligned with where their business was headed.

It's kind of as simple as that to give us more visibility and try and move the market as I said from this <unk>.

Transactional quarter at a time to allow us both to to plan for what the next several quarters look like.

Okay. Thank you and as a follow up on the on the HDD gross margins improving in the June quarter is that more mix related or lower cost headwinds can you just help us think through what.

What do you think are more.

Transitory.

Maybe in the cost headwinds side.

Horses why on them.

Growing mix here. Thank you.

A big part of it is mix I think we've been talking for a long time that the 18.

<unk> point is a better other point for us and as I said this quarter, we shipped pretty balanced number of 2014 16 to 18 months, we will see that tilt strongly to.

To eighteens next quarter.

I think the castle, well get better quarter to quarter as well, we slowed down production a little bit in the March quarter, and we're back at full production here in the June quarter.

Thank you.

Thank you. Our next question will come from Mehdi Hosseini from <unk>.

Please go ahead.

Yes, Thanks for taking my question David.

It's been about a year or so since you joined the company and I remember when you first John you.

You were doing somewhere around $2 50 of annualized earning and fast forward 12 months, you almost $6 annualized, earning great improvement, but it's still well below.

2017, 2018, when the company was doing north of 10, Domino, if Ernie and I'm not asking you to give me.

Forecast sort of guide for one or two years out, but I think it would be very helpful. If you could articulate your your views as to how.

Earnings are going to improve here, assuming that you just continue to execute on I have a follow up.

Yes, I mean, I think it's what I think youre starting to see the better execution and builds on the flash side build out the portfolio across a number of end markets, which I think the enterprise SSD.

Was a big piece of getting that established with the cloud Titans, we clearly have a very strong client SSD portfolio, we have.

Very strong retail portfolio.

Mobility, we've talked about we stay qualified with all the top vendors, we're very much participate in that market, maybe less than definitely less than some others and then we have a lot of.

New products coming around gaming and smart home devices, where because of our strong relationships with those big cloud customers that also drive that portfolio gives us kind of a front row seat as those are developed so.

<unk> build out the portfolio and then use our routes to market.

Liver the best return, we can given the pricing environment in the market and I think we were able to do that and flash this quarter and balance the portfolio across all the markets and put the agility in the system to make sure that we're doing that and I would say from a year ago to where we are now in the way we executed last quarter. There is just.

Much more agility in the system and to be able to react and get the best outcome. We can.

<unk> side.

Drive continue to drive areal density and leadership returned to a leadership position as we did with <unk> 18.

And then continue that forward.

It's a good market I think we've had a long standing position there and then I think there is we've seen this synergy between the two portfolios in the client space on.

We have a great client SSD portfolio, where these technologies where substitutes for each other.

Long standing relationships with those customers, where we can manage that transition in the data center, they're more complementary technologies and I think the ability to execute that synergy is in front of us.

Okay. Thank you and just a quick follow up on HDD.

I believe you're still on.

Stricter with shipments to certain customers, but your primary competitor has continued to shift how do you see the geography specific customers, they're playing to your disadvantage disadvantage and I'm assuming that you are still restricted.

Yes, we've been since ecommerce rules came out I think back in September we stopped shipping.

Further rules, we talked commerce frequently we have our own attorneys and outside firms. We know that that's the right position and that's the position we continue to be in.

The licenses are pending with.

With commerce, and we'll see how that plays out.

If theres been any there hasnt been any movement, there recently as far as what our competitors do and I can't I can't speak to what they're doing so I only have insight into to our position and you know clearly clearly not shipping to places where we're we're not supposed to for Commerce Department regulation.

Thank you.

Thank you. Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.

Thanks for taking my question.

My first question is on the 18 terabyte drive first of all congrats on all the all the qualification but in terms of the ramp do you expect to go 18 terabyte drives to crossover the 14 terabyte drives exiting this calendar year.

And we'll 18 terabyte b be margin accretive margin accretive right off the bat.

Maybe follow up to that is how are you thinking about strategy in terms of ramping 16 versus 18.

Yes, so we expect <unk> to be the primary.

On the.

The highest volume we shipped this quarter. So yes for the first question and yes, we expect it to be margin accretive we expect sequential improvement in an HDD gross margin.

And the second question again.

The second pillar is <unk>.

16 versus 18 on putting all your eggs them two to 18 terabyte basket in 16 as Ian just whatever the customers are asking for.

Well I mean, I think it's always whenever the customer is asking for it. So every customer is at a different point in the evolution of their data center on what they are deploying <unk>.

Some are still deploying 2014 at scale some went to <unk> as quickly as possible and others are at different points of deploying 16 or 18.

So we meet the customers where they are in.

In that process, so, but we expect <unk> to be the predominant point going forward, it's just a better tcl equation. So.

You would expect the customers to go there when they can given their own internal architectural evolution.

Okay.

Got it maybe a follow up to the.

Neil on side of things given the improvement in the enterprise side that you're seeing and obviously the cloud has been strong what is your expectation for the industry wide exabyte growth forward, Neil and drive this year and how do you think you'll stack up against that debt.

Yes sure. Thanks.

Yes, we see we see it.

We see a quarter of strong growth coming up I think we're still on that around 35% exabyte growth for the year.

So and as the market shifts to 18, I think that we're in a.

We're in it we're an incrementally stronger position. So that's how I expect the rest of the year to play out.

Okay. Thank you.

Thank you. Our next question will come from Tom O'malley with Barclays. Please go ahead.

Hey, good evening, guys and congrats on a really nice results. My first question was around end markets. You guys gave some helpful cover color on the HDD and flash side could you talk to what you guys see client devices data center devices and client solutions kind of do it into the June quarter, just any general color would be helpful. There.

I mean, I think in data center lease.

We expect improvement I mean, I'm trying to think here of.

Mark.

Modulo seasonality I mean look I mean devices are very strong I mean, we saw a lot of strength in PC and client and I think we continue to see we saw.

This past quarter, we saw decline, but but way better than seasonal decline. So and we expect that to continue we think that market is strong our customers are telling us that market is strong.

The number of units shipped is up so that continues to be a good market I think data center with <unk>.

With 18 ramping stronger youre going to see going to see growth there.

And I think in the in the retail space, we will see sequential growth, but probably a little smaller than the others.

But still still very good performance.

That's helpful. My follow up was really around the cadence of gross margins you guys indicated that you should see some HDD gross margins that are improving sequentially, but can you talk to the cadence for the year I think that the target longer term is 30.

Even above that but obviously with near line drives becoming a bigger part of the mix on some of this COVID-19 headwinds coming off can you talk to the progression that you guys are expecting internally and.

And just kind of the progression from here to the thirties.

Yes, I mean, I think we're going to forecast it one quarter at a time, but we're working on the teams are working very hard to do it but they're going to do on any storage market, which has continued to bring down the cost and as you scale the products will bring down the cost.

So I think the whole industry is driving back to 30% gross margins I think we're going to get there one step at a time, but we're going to work on both sides of it is.

Make sure we've got good supply and demand matching on kind of what the demand is in the market and then.

We've talked about multi quarter supply agreements I think which helps give some certainty and then work on the cost side of it. So every quarter. We're focused on on all of those elements and we will continue to drive it.

Net starts with delivering a great value proposition for our customers and continuing to drive a better <unk>.

Equation, as we drive higher and higher aerial density and we've got a long roadmap on aerial density improvement a big piece of that was us.

Implementing our introducing energy assist in that so that's the big thing with our <unk> as we're now just starting to ramp to 18, we've got energy assist in the market that's there.

Others are as well over a decade of research behind behind that and we've now commercialized it and so that gives us.

Many generations on that technology to continue to improve aerial density, which is going to improve the tcl equation for our customers.

Great. Thanks again guys.

Thank you. Our next question will come from Shannon Cross with Cross Research. Please go ahead.

Alright. Thank you very much for taking my question I'm, just curious with regard to your your cloud customers. If you believe theyre pretty much through that digestion period of the excess capacity I know we've seen from on a couple of we cover that.

We're starting to ramp up Capex again, but I'm curious what you're hearing from them and then I have a follow up thanks.

Yes, I think the word I used last time was cloud digestion abating, when we talked about this but they are all on a slightly different spot, but we're into an ingestion phase for the most part.

Okay, and then I was curious in terms of the tightness in components and overall market what kind of impact is that having on your working capital.

We're looking at some of the amendments in AP and inventory. Thank you.

Yes.

Question, and <unk> and we definitely are carrying a little more inventory than we normally would particularly on the hard drive side.

Because of the tightness on controllers and.

And also frankly because of the logistics costs associated with COVID-19, we're putting more product on the ocean and not in the air. So it's definitely having an impact in terms of working capital in that respect and our accounts payable did go down this quarter I mean that really was a result of a slowing down on the production in the March quarter and I think.

It will come back up again this quarter.

Thank you. Our next question will come from Tristan <unk> with Baird. Please go ahead.

Hi, Good afternoon, just following up on the earlier question about supply demand. We've had some peers talk about their concern around to keep.

Some excess capacity coming in NAND.

It's too early to provide an outlook for the next fiscal year, but.

Capacity of NAND industry wide a concern in your view or do you see a path that ultimately gets you back to the type of peak gross margin that you reported in 90 day back in May 2018 timeframe.

Yes, it's not something we're overly worried about at this point I think the industry has been pretty disciplined for the last several years.

And I think there is now.

Pretty strong demand in the market.

So I mean, we feel pretty good about the balance of supply and demand in the market.

Going forward I mean again there's.

Even the.

Well, let me just leave it at that we're pretty happy with where supply demand balances I mean, I think everybody is trying to figure out what's the long term debt.

<unk> four technology coming out of pandemic, it's kind of a unique situation. So, but we're staying very close to it and our view is the industry has been pretty balanced on the whole topic.

Thank you. Our next question will come from Jim Suva with Citigroup investments. Please go ahead.

Thank you and I'll ask Scott both my questions at the same time and you can answer them in any order you want it but the data center softness because of.

Visibility there getting better the digestion phase and are we a long ways to go or kind of mostly through the worst part or is demand coming back for that kind of on the data Center and then you mentioned longer term relationships and contracts with our cloud Titans and Hyperscale.

Do they allow for flexibility in pricing. The reason why I ask is recent NAND pricing came out and it was quite positive and we try to make sure that youre not missing the opportunity for.

Better economics from pricing and so just kind of wondering without specifics on of your relationships quantity and volume and pricing are there some abilities to adjusted or do you get locked in and maybe pricing will or won't help you. Thank you.

I think your second issue is without going into other details is not a concern for us.

On the first issue I mean, I think we saw first of all very strong sequential growth in data center for US this quarter of 53%, although it was down I get your point over Corp.

Year over year.

Very strong compare a year ago on exabyte shipment.

But we expect sequential growth there in exabyte shipments on the on the drive side.

And I think up on on flash as well, maybe not as strong as exabyte growth. We expected hard drives is 18th really starts to be the major point in the industry, but we see we see sequential sequential improvement there Jim.

Yeah.

Thank you. Our next question will come from Ananda Baruah with loop capital. Please go ahead.

Hey, Thanks, guys for taking the question on land.

Congrats on the strong results.

I guess just going back to Christopher.

The flash gross margin on.

And.

The balance that you guys are seeing right now.

Do you feel like Youre sort of to 30% sooner than expected.

He is a positive thing.

If so how.

How would you like us to think about supply and demand remain balanced on the flat side.

How do you think about margins going through the second half of the calendar year, and then I have a.

Quick follow up thanks.

Yes, I guess, one way to think about that as we we delivered above what we guided so I think we're ahead of where the Mark we thought the market would be when we walked into it in a lot of that is we have really strong exposure to a lot of transactional markets in the channel and in retail.

And as price tightens it allows us to move pricing.

In those big markets much faster than other.

Are there other markets OEM markets, which are a quarter by quarter.

Damanaki from that phenomenon on a quarter by quarter negotiation.

So.

Yes, I mean, I think the market was good for us and as I said the go to market teams and the teams were very agile as far as shifting our supply around on where we can get the best return for it in the quarter.

As far as going forward I mean, we were guiding for sequential improvement in flash gross margin.

We're seeing that we saw the pricing.

Strength that we are firmness that we saw in the transactional markets track.

<unk> translate into negotiated markets I think last quarter, we were waiting to see if that was going to happen, we see that going into Q4.

So.

We're definitely forecasting incrementally stronger flash margins in this current quarter.

Okay.

And it sounds like.

Sounds like just structurally it feels like maybe that could actually followed through.

It seems like the dynamics of more at the beginning.

As well.

I guess my follow up is it seems like on on your Capex. It seems like you've lowered the capex expectation just slightly for fiscal year 'twenty, one if I'm seeing that accurately and I was just wondering.

If there's any if there's any day.

Directory for that and what would be other opinions Atlas cereals.

That's it for me.

Yes it.

It did observation.

We expected Capex day around $3 billion this year pretty much all year. The main Delta is we actually sold some real estate this past quarter to the tune of about $100 million.

Thank you. Our next question will come from Nik Todorov with Longbow Research. Please go ahead.

Thanks, and good afternoon, everyone. David if I heard correctly, you talked about seem cloud Titans also starting to use your client SSD products for their consumer base business.

I think that's the first time you hear about that so can you maybe unpack that a little bit how should we think about the opportunity and are you addressing dose that opportunity with your existing portfolio.

No non not are not are not necessarily our client product. So there is some of that because I think I think the easiest way to think about it as a lot of these big cloud Titans has also have big consumer portfolios, whether it's gaming tablets VR headsets, that's what I'm talking about us participating.

And those builds in those parts of the market as well.

As part of that go to market synergy we've talked about I think.

Tend to only think of it as HDD as an enterprise SSD is but it's much broader than that given the relationship we have from the HDD business with these customers and the depth of the relationship and they all or most of them also have big consumer.

Portfolio as well, whether it's home automation or other kind of things I talked about so our ability to participate in those parts of the market for flash is just what we're talking about.

Got it.

Okay.

Yeah.

Yeah.

Luke.

Thank you. Our next question will come from <unk> <unk> with SMB.

Go ahead.

On the NAND gross margins as well.

I didn't hear you talk about K, one cost so I'm guessing that came down pretty meaningfully.

But I guess my question is as we look through the next few quarters you do have.

Additional fabs coming online either Q2 or why seven I'm just wondering how we should think about any potential incremental costs from those new factories.

Yes, so I don't think weighted quite all at the beginning of your comment, but you are correct that <unk>.

<unk> expenses are immaterial now ramp there to normal volume levels. So those costs are gain inventory.

I think we're kind of in a normal state.

Our new Fabs come on it's not going to have as big an impact from that product.

POS standpoint, as a greenfield that we did with K one so.

Definitely youre, bringing on some fixed costs, but we are also moving in the production volumes up and amortizing those costs over a bigger base because we have multiple fabs on a given campus.

Thank you John.

Thank you. Our next question will come from Stephen furlong.

With Boston Partners. Please go ahead.

Hi, Good afternoon, two questions real quick first of all on the taxes, Bob is the 17% tax rate kind of here to stay do you think it can go a little bit lower and then secondly, I might add.

Apologize if I missed this but you talked about sort of the.

Recent trends in high capacity video hdds, and what Youre expecting going forward.

On the taxation on data and talk about video.

So yes.

Come up in prior calls we've been in a situation on the last couple of years, where our operating profit.

Below what we expected and we have minimum taxes that we have to pay around the world and so our rate was higher than what we would consider normal. The last couple of years now as were forecasting the rest of this fiscal year the profitability or expecting.

We're very confident in the rate of 17% and it'll be you know as we look to future years, it'll be a function of how profitable we are in those years, but.

Right now I think a good planning number is 17%.

Yes, Steve we haven't talked about high high.

High definition video or.

In particular, but I.

I mean, one way to think about it is just driving more demand for storage I think all the devices, we carry have more and more capability to store higher definition video, which is just driving the need for more and more storage for device. So.

We have something more specific on that happy to happy to follow up on it.

I just wonder if you could just maybe expand on what youre seeing in the June quarter like is I think there was some seasonality last quarter.

How you have availability to ship to that market. Thanks.

Smart video Smart video market I am sorry, I misinterpreted sorry about that.

Mark any of our data the HDD market and now we see.

Mark has been pretty stable I think we see some some improvement in it but I mean, I don't think theres anything thats, particularly noteworthy except that it's a good market for us from continuing to move forward to growing market.

Great. Thank you.

Thank you.

Alright, everyone look we really appreciate you spending time with us.

We'll follow up with you throughout the quarter and again, thanks for thanks for joining us take care and thanks to everyone.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect and have a wonderful day.