Q4 2021 Western Digital Corp Earnings Call
[music].
Good afternoon, and thank you for standing by.
Personally all participants are in a listen only mode. We will open the lines up for questions. Shortly.
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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 before we begin let me remind everyone that today's discussion contains forward looking statements, including product and product portfolio expectations business plans trends and financial outlook.
On management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially.
We will also make references to non-GAAP financial measures today reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website with that I'll now turn the call over to David for his introductory comment.
Yes.
Thank you Peter.
Good afternoon, everyone and thanks for joining the call to discuss our fourth quarter and fiscal year 2021 results.
We reported solid fourth quarter results with revenue of $4.9 billion non-GAAP gross margin of 33%.
Non-GAAP earnings per share of $2.16.
All above the guidance ranges we provided in April.
The upside was primarily driven by record demand for our capacity enterprise hard drives.
Fiscal year 2021 revenue totaled $16.9 billion.
And we reported non-GAAP earnings per share of $4.55.
Last March I joined Western digital with a strong conviction in the digital transformation that is reshaping every industry every company and every person's day to day life.
That time, we were in the early stages of the pandemic.
Today, the accelerated digital transformation that has occurred during this period has created a world that is more technology enabled and technology dependent than ever before.
The increasing value and importance of data is undeniable and western digital will continue to capitalize on this opportunity as the only provider of both flash and hard drive solutions.
Our ability to provide this diverse range of technologies enables us to drive innovation from endpoints to the edge to the cloud.
And combined with our commitment to delivering the highest quality products is ultimately what sets us apart and allows us to deliver strong results.
As we reflect on this fiscal year I'm very proud of what western digital has accomplished particularly in light of the fact that the pandemic impacted various aspects of our company and the supply chain.
As a team we made the changes throughout the year necessary to improve our focus sharpen execution and lay out the right strategic goals to place western digital in a position of greater strength.
To achieve these goals, we created separate business units for our flash and HDD technologies led by 2 widely respected technology leaders.
As a result of this renewed focus we accelerated our innovation roadmap built momentum in our energy assisted hard drives and continue to successfully ramp our second generation Nvme enterprise SSD is while working hard to complete additional customer qualifications.
We were also able to successfully navigate through the pandemic capitalize on opportunities and continue providing dependable industry, leading products that are the cornerstones of the data economy.
We continue to believe that we have the right foundation for success, the right market, leading products, the right customer base and a unique ability to address 2 large and growing markets.
That foundation continues to underpin the strength of our results and is propelling the business forward today, even as we manage through some of the lingering impacts from Covid.
And while we saw incremental demand due to the emergence of chia our standout performance. This quarter was primarily attributable to increasing demand from our cloud customers in the beginning of a recovery in enterprise demand the breadth and quality of our product line and our many routes to market.
We feel we are well positioned to capitalize on the large and growing opportunities in front of us.
With that I'll now provide a recap of our flash and HDD businesses as it relates to our fourth quarter results.
In the fourth quarter demand for our flash products was greater than we could supply in a number of end markets in the face of both component and NAND shortages, we continue to strategically shift pits to meet customer needs, while driving growth in both revenue and gross margin.
Within data center devices and solutions demand for our Nvme enterprise SSD <unk> came in above our expectations, achieving strong quarter over quarter revenue growth.
We are pleased with our progress in enterprise Ssds as we completed the qualification is another cloud Titan and are ramping the product more broadly.
Within client SSD, we experienced revenue growth as demand remained strong for notebooks and chromebooks. This remains a large growing and an important end market for western digital across our OEM channel and retail routes to market.
Within gaming demand from the latest generation of game consoles and our WD Black product line was robust as gamers continue to prefer our expanding lineup of customized solutions.
Within embedded flash, we also experienced growth in smart home devices, VR automotive and industrial.
As the biggest 5 ramp picks up and we achieved bit crossover late this year, we expect to see increased bit growth to date fixed 5 is our most capital efficient node in the <unk> era, and the ramp across our product lines will contribute to profitable growth.
We have had incredible success with fixed for from across cost and bit growth perspective, and look forward to experience those same benefits with fixed 5 highlighting once again the successful and important partnership we have with Coke show.
In HDD, we had our highest organic sequential revenue growth in the last decade, driven by the successful ramp of our 18 terabyte energy assisted hard drive.
Growing cloud demand recovery in enterprise spending and to a lesser extent crypto currency driven by chia.
This impressive performance is a reflection of our data center customers confidence in our innovation engine for capacity enterprise hard drives.
Shipments for our 18 terabyte hard drive nearly tripled sequentially highlighting our leadership in the latest capacity point and the leading edge energy assist technology underpinning it.
These drives are fully commercialized and we expect the 18 terabyte hard drive to be the workhorse for the fiscal year I am excited to announce a record shipment of over 104, exabyte and capacity enterprise hard drives are 49% increase sequentially. This is a significant achievement for the business as we.
Have all of our largest customers qualified and are well into ramping our energy assisted hard drives.
In addition client demand for desktop and smart video has been strong throughout the quarter due to improving OEM demand.
While we are actively managing supply constraints, we expect strength in OEM to continue in the fiscal first quarter.
Within retail HDD demand was above expectations as we saw consumer interest grow for both at home HDD storage and for smart video applications.
There was also increased demand for hard drives due to proof of space crypto currencies, such as chia, which.
<unk> emerged as a new vertical market at the beginning of the quarter. We believe proof of space Crypto currency present presents a great opportunity for us in the industry, but we are closely monitoring the sustainability of demand.
Looking ahead, we strongly believe the fundamental technology shift that I referenced earlier is a sustainable trend at.
At the center of this innovation are ever increasing intelligent devices, which are fueling exponential industry wide growth in demand all powered by the cloud.
The ability to harness the data in both the device.
And in the datacenter is critical highlighting the importance of our full range of storage solutions.
Moreover, we believe we have the right portfolio to enable us to capture these opportunities in particular and as Dr. Steve <unk> President of technology and strategy discussed in a webcast on July 15th Western Digital's unique ability to deliver both HDD and flash solutions drives meaningful synergies.
<unk> the business in 4 key areas market manufacturing technology and customer.
And our new operating structure gives us the focus we need to capture our full potential.
While we remain optimistic there are several factors we are closely monitoring.
Importantly, we are actively managing the continued impact of the pandemic the.
The disruptions to the supply chain have presented a challenge across the industry and we continue to see shortages of certain components.
Additionally, logistics remain a challenge as different geographies are in various stages of reopening.
This has been a major contributor to increased lead times in may pose challenges in the future.
As a result of the supply disruptions logistics challenges and increase lead times, we continue to face additional cost pressures. Despite these obstacles. We are working diligent to continue delivering to our customers, while maintaining a disciplined approach to pricing.
I'll now turn the call over to Bob to share details on our financial results.
Thank you and good afternoon, everyone as Dave mentioned overall results for the fiscal fourth quarter were above the upper end of the guidance ranges provided in April.
Total revenue for the quarter was $4.9 billion up 19% sequentially and up 15% year over year non-GAAP earnings per share was $2.16.
For the full fiscal year revenue was $16.9 billion.
Up 1% from fiscal 2020 and.
And non-GAAP EPS was $4.55.
Up 50% from last year.
Looking at our end markets client devices revenue was $2.2 billion.
Up 8% sequentially and up 13% year over year.
On a sequential basis, we experienced revenue growth in both hard drive and flash and across every major product category client HDD client Ssds automotive gaming smart video and industrial <unk>.
Mobile revenue was essentially flat on a sequential basis.
Moving on to data center devices and solutions revenue was $1.8 billion.
44% sequentially and up 6% from a year ago, new product ramps in this end market drove more than double the revenue growth from just 2 quarters ago.
Revenue generated from our latest generation energy assisted hard drives and enterprise SSD has contributed to the growth.
Our capacity enterprise hard drives grew 49% sequentially and our enterprise Ssds grew 39% sequentially.
Demand for our 18 terabyte energy assisted hard drives was particularly strong comprising nearly half of our capacity enterprise exabyte shipments.
Finally client solutions revenue was $977 million up.
10% sequentially and up 42% from a year ago.
Once again revenue growth was broad based across both HDD and flash and all major product categories.
Turning to revenue by technology Flash revenue was $2.4 billion up 11% sequentially and up 8% year over year.
Flash Asps were up 7% sequentially on a blended basis and up 4% on a like for like basis.
Flash bit shipments increased 4% sequentially.
Hard drive revenue was $2.5 billion.
Up 28% sequentially and up 22% year over year.
On a sequential basis total hard drive exabyte shipments increased 34%, while the average price per hard drive increased 18% to $97.
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 fourth quarter was 32, 9%.
5.2 percentage points sequentially. This was above the upper end of the guidance range provided in April.
Our broad routes to market and ability to proactively shift fits to the most attractive end markets enabled us to expand our gross margin by 5.5 percentage points sequentially to 35, 5%.
Our hard drive gross margin was 33% up.
5.3 percentage points sequentially.
This also includes a COVID-19 related impact of $32 million or approximately 1.3 percentage points.
Operating expenses were $790 million within our guidance range opt.
Operating income was $828 million.
Representing a 101% increase from the prior quarter and a 57% increase year over year.
With our improving profitability our tax rate in the fiscal fourth quarter was 9.2% and the tax rate was 13, 4% for fiscal year 2021.
Earnings per share was $2.16.
<unk>.
Operating cash flow for the fourth quarter was $994 million and free cash flow was $792 million.
Capital expenditures, which include the purchase of property plant and equipment and activity related to our flash joint ventures on our cash flow statement was an outflow of $202 million.
We expect gross Capex for the next fiscal year to be approximately $3 billion and.
And cash capex to be around $2 billion.
In the fiscal fourth quarter, we paid off $212 million in debt, including a discretionary debt payment of $150 million.
For the full fiscal year, we paid down a total of $886 million.
Our gross debt outstanding was $8.8 billion at the end of the fiscal quarter.
Additionally, we have already made a discretionary debt payment of $150 million in the fiscal first quarter.
Our adjusted EBITDA as defined in our credit agreement was $3.6 billion.
Resulting in a growth leverage ratio of 2.4 times compared to $2.8 a year ago.
As a reminder, our credit agreement includes.
Includes $1 billion in depreciation add back associated with the joint ventures. This is not reflected in our cash flow statement. Please.
Please refer to the earnings presentation on the Investor Relations website for further details.
Our liquidity position continues to be strong at the end of the quarter, we had $3.4 billion in cash and cash equivalents. In addition, we have unused revolver capacity of 2.25 billion.
Moving onto our outlook, our fiscal first quarter non-GAAP guidance is as follows we.
We expect revenue to be in the range of $4.9 to $5.1 billion.
We expect gross margin to be between 33% and 35%.
We expect hard drive gross margin to be relatively flat and we expect flash gross margin to improve sequentially.
We expect operating expenses to be between $755 million and $785 million.
Interest and other expense is expected to be approximately $70 million.
The tax rate is expected to be between 11 and 12% in the fiscal first quarter and the fiscal year.
We expect earnings per share to be between $2.25, and $2.55 in the first quarter.
Assuming approximately 317 million fully diluted shares outstanding.
I'll now turn the call back over to Dave.
Thanks, Bob as.
As we close out fiscal year, 2021, and I am very pleased with how the western digital team successfully navigated dynamic market conditions brought on by the pandemic.
It has been a challenging time for all and we will continue to focus on driving innovation.
When you combine the ramp of new innovative products into 2 very large and growing markets with our newly adopted organization structure I am confident that our increased focus on execution will continue to propel us forward as the market leaders.
Our diverse technology portfolio as the foundation of the data economy, and our unique ability to see the entire storage market enables us to move across the technology landscape to meet customers' needs and be the solution for their evolving storage challenges.
With careful consideration of the health and safety of our employees. We're also keeping a close eye on the status of COVID-19. In particular, there are certain parts of Asia seeing a spike in cases, and we are working diligently to support our employees through this time, while it is a difficult situation will continue to navigate.
Again, the complexities presented by the pandemic, while we drive innovation for customers and value for shareholders.
Let's begin the Q&A session.
Ladies and gentlemen, as a reminder.
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1 moment please for the first question.
Okay.
We have a question from Joe Moore from Morgan Stanley. Please go ahead.
Great. Thank you.
We could talk about the tightness in NAND that you referenced.
To what degree is that a NAND issue versus controllers and kind of other components that go into NAND products.
Hey, Joe good to hear from you.
It's both.
No doubt there is shortage in controllers and I think.
What we're doing is is mixing the portfolio to get the most out of the controllers we have.
It's also a shortage in NAND as well so I mean, we're mixing to get the best result, we can.
There's more demand that we're able to satisfy on the NAND side. So.
It's really.
<unk>.
Juggling bolt and balancing them they get the best result, we can.
Okay and as you guide for the September quarter is the assumption that you are still kind of supply constrained for the whole quarter. Yes, we're still we're still juggling both of those things right. We have customers looking for upside we're juggling that mix is a little different from quarter to quarter as well.
So yes, when you roll all that together is how we get to get to where we're at in Q1.
Great. Thank you very much sure thing.
Okay.
Thank you we have a question from Aaron Rakers from Wells Fargo.
Yes, thanks for taking the question and congratulations on the solid results.
I wanted to ask about the hard disk drive 49% sequential growth in your near line capacity shifts I'm curious.
How are you thinking about the sustainability of that demand I think last quarter, you talked a little bit about longer term purchase agreement and then if you can underneath it at all so any thoughts of how how significant.
As far as the contribution of the past quarter. Thank you.
Thanks, Aaron So yeah, we do.
Did see very very strong demand from the cloud and I think the the <unk>.
Product has been very well received as we've talked about energy assistance fully commercialized now we saw very strong sequential growth of the AT&T product, we continue to see strong growth in the second half.
With our customers.
We expect continued growth in the business.
The long term agreements I think we're I think probably.
Probably the best way to think about that as we're working through the first cohort of those and we expect to talk about the second cohort in the second half and then they're becoming more and more important because getting visibility into demand is.
It is very important, especially going forward is where we're thinking about how to invest in additional head capacity for to support the growth of the business just the exabyte growth.
<unk> was.
Maybe 1 way to think about that it was.
It was it was hitting us kind of right, where we were on the call was I think the first week of it last quarter.
A couple of hundred million dollars of upside there.
In the quarter due to cheer.
Thank you.
Thank you.
The next question comes from C J Muse from Evercore.
Yes. Good afternoon. Thank you for taking the question.
I guess I'm, having a hard time reconciling the strong demand trends outlined here on the call with revenues only guided up 2% sequentially. So can you walk through I guess, where youre seeing supply.
Supply constraints.
Both both HDD and NAND and our U.
<unk> seen 1 more so than the other Andrew.
Perhaps to help us understand your I presume improving visibility.
Did your backlog grow sequentially into the June quarter, and do you expect it to grow again.
<unk> September thank you.
Yes, so it was an exceptional quarter on growth in there there is tightness across both portfolios.
There's no doubt about that we were we were pushing the factory is very very hard to get every every drive we could out of it because there was demand for it. So when you look at it sequentially.
We had it.
<unk> quarter end.
We were basically able to define find sales for everything that we could produce.
And so going from so when you look at sequential growth I guess, it's not surprising that there's not a huge amount of top line growth there but throughout throughout the markets. We continue so hard drives we.
We see we see strength from the cloud, we're seeing really good strength in kind of mid cap as well, it's not just at the top of the market, but on the flash side again, we've got.
We've got more customers looking for upside than we do the opposite so the.
The demand environment is good and where we're doing the best we can to satisfy satisfy as much as they can with the with the components, we have and with the with the NAND available.
Yeah.
Our next question comes from Toshi Hari from Goldman Sachs.
Hi, good afternoon. Thanks, so much for taking the question and congrats on the very strong results.
I had a question on NAND.
<unk> costs in the quarter.
We're up a little bit on a sequential basis I realize cost downs on a quarterly basis can be very lumpy and you are coming off a multi quarter stretch a very strong cost downs, but curious what you saw in the quarter from a from a cost perspective, and NAND and I think in your prepared remarks, Dave you talked about your expectations for <unk>.
For our big 5 I'm, sorry, being similar to the VIX for as you ramp <unk> 5 over the next 12 months.
If you can kind of set expectations and how we should think about cost downs as you make that transition that would be super helpful. Thank you.
Hey, Josh it's Bob So in terms of the cost take downs, we actually look at them mostly year over year.
We're a little bit ahead of that 15% goal, we have for year over year cost declines and continue to feel good about 15% is long.
A long term goal we are starting the nodal transition how we did this past quarter to our big 5.
We will continue to ramp that a hard through the second half as Dave mentioned, we expect to get to crossover in the fourth or in the fourth calendar quarter.
So I think in terms of costs I think we're in a good place.
Thank you.
Thank you. The next question comes from Karl Ackerman from Cowen.
Yes, good afternoon gentlemen.
I know forecasting asps is difficult.
But your implied outlook seems to suggest a decline in hard drive pricing similar with what you saw last year.
And I was wondering should we assume that your assumption for our hard drive gross margins is driven by less favorable mix of retail drives and as you address that question could you discuss the mix of long term agreements you have in place a day for near line drives and whether those are negotiated both on price and volume or just volume. Thank you.
Hi, Carl it's Bob I'll start and then Dave can can add in but.
In terms of the.
Guide out of hard drives we arent actually guiding specifically by segment. We added really good gross margins on hard drives this quarter above 30% and we're expecting our gross.
Gross margins to be above 30% again in Q1, so we feel good about that and as we said.
Really want to continue to improve from here, we're going to be very judicious in terms of how we add capacity because we want to continue to improve our margins over time.
Yes, Karl and the long term agreements, we kind of think about those as.
Setting a baseline for volume and price it doesn't mean, it's going to be everything that goes into a certain customer but it.
So thats, a baseline and gives us some visibility over multiple quarters like I said, where we're kind of working our way through the first cohort of those and we'll be looking at the second ones in the second half of the year.
And as I said I do think they are becoming more important to give us the visibility we need.
On demand too to make sure we make the right investments.
To support the exabyte growth.
Thank you.
Yeah.
But can we get to next question. Please.
Thank you. The next question comes from Mehdi Hosseini from S. I D.
Yes, thanks for taking my question.
First 1 is for David.
Over the past few.
A few quarters you have exceeded your guide by 40% to 50% and I understand there's the supply chain disruption and you wanted to be prudent but there is perhaps there is also some level of conservatism that goes into your guide and then on the flip for Bob.
I understand.
Exabyte shipment is is improving to September quarter, but I don't understand is why is gross margin guide is flattish.
Yeah.
Yes, there is.
Some natural conservatism I think in anything we do but we also know there's a fair amount of leverage in the model line. This quarter. We saw when we over achieved on the top line and the time, we get the benefit from the tax rate. So.
And we also had a better pricing environment on drives than we expected, which is which was great. We took advantage of it I think we had a market situation that was very very dynamic.
And the team.
You did a good job of managing through that and getting the most out of it we possibly could so it was a very dynamic quarter.
And also we're still we're still managing through Covid, which as you know there's still a lot of supply chain issues were working through I mean, we've been working through these for a long time now.
And I said it.
We're very good at managing that but there is still some risk out there because of that and so we want to be prudent around.
The whole business, but we feel good about where we're at we're very very happy with the quarter like I said I think we got the most out of it.
A good situation.
Really really driven by very strong demand on the cloud and bringing innovation to market I mean, I think that's the way I think about this.
We brought energy assist to market, we've been talking about it for many quarters now we've been giving a lot of visibility into the to the qualification process. Because it is new technology. That's been worked on for a very very long time.
And I think our customers are responding very strongly to that and we saw that in the results in.
The sequential capacity enterprise exabyte shipments up 40, 49%.
2.2 really a record level. So we feel we feel really good about where the portfolio is out and customers are really responding to it.
So Matt on gross margin I mean first of all we're really pleased with the 5.2 percentage point increase we had in gross margin going from Q3 to Q4, and if you look at the guidance for Q1, it's a range of 33% to 35%. So at the at the midpoint, we're still expecting to see improving gross.
And as I mentioned, a few minutes ago, we're expecting hard drive from gross margin to be above 30% again.
And in terms of the flash side, it will obviously improve but the mix is different each quarter and we're going to improve our gross margins and probably don't have quite as healthy a mix as we had in Q4, but again still feel really good about that.
The guidance range, and and I think will deliver very good margin and very very good profitability.
Yeah.
Okay.
Thank you. Our next question comes from <unk> Mohan from Bank of America.
Yes, Thank you and congrats on the really strong results.
I was hoping maybe I'm sorry, if I missed this but can you help handicap the magnitude of impact to top line other margins from from the ongoing supply chain issues other than the best way.
Possible and and also for the guide.
Is there a way to handicap that and Dave you mentioned the couple of hundred million benefit in the quarter from <unk> I was wondering do you think that that sustains.
At some level as you look into your guide do you have any any expectation baked in the guide as well. Thank you.
If that sustains from chia.
She has had a big impact on the channel inventory.
It's going to take a little while for that all to normalize. So I think you have a lingering impact there were certainly watching overall demand, but it's it's tapered off from where it was let's say mid quarter, but clearly a space. We're watching we're watching very closely.
Bob to comment as well, it's a little hard to handicap, what you're I think you're asking which is how much upside is there. If we had all the components, we could possibly get.
I do think what we do is with what we have we we change the mix in the portfolio to get the best we can.
And put the product at the best route to market, whether it's in the channel or somewhere or into retail or somewhere else, where we can get the best return for that.
That particular component, but I don't know Bob do you have any way not to put your other spot.
Handicap them from a numbers perspective.
It's really hard to say I mean, we.
Dave said, I mean, particularly on the channel side, we shipped a lot during the quarter. So our inventory levels are low there.
If you really forced us to guess on the fourth quarter, maybe we missed out on $50 billion to $100 billion in revenue, but it's very hard to quantify what we would've been able to do had we had all the other controllers that we wanted and as we look at Q1 I mean, we're expecting.
To to be able to manage through the supply chain challenges like we have for the last few quarters and.
I don't really know, it's hard to quantify before we even get into the quarter, what the supply issues may be but we're going to we're going to work and it'll be a very dynamic environment and we feel good about the revenue guidance we gave.
Thanks, Scott if I could just quickly follow up I was wondering just on the on the margin impact on the guide right. So clearly there are a lot of moving pieces over here, but if you were to think about what impact Covid Delta area and some other things that are happening and in Asia like how are you handicapping that line and your margin impact.
The other guy thank you.
Certainly on the hard drive side I'm expecting we're going to have the same logistics challenges, we've had from last year or so.
So youre going to have something in the neighborhood of 1 point to 1.3 percentage points of headwind on the hard drive side.
And we have to continue to work through the Covid situation from a.
Factory perspective, and supply chain perspective, and as Dave said, we've been doing it for a lot of quarters now, but the situation is not good in Asia, and we need day really really make sure. We're careful in terms of how we work through that.
Thank you.
Thank you.
The next question comes from Jim Suva from Citigroup.
Thank you very much with NAND pricing going higher spot and contract and such can.
Can you talk to us a little bit about your leverage or flow through to operating margins because I believe your costs should keep coming lower shipping costs why high it's hard to see them getting worse in the next few months ahead. So maybe if you can walk us through the model on normally you have annual price declines and with Asps going higher is there more investment needs.
Or more fix it things or talk to us about the flow through what we consider operating margin leverage.
We have a lot of operating leverage in our model and I think you saw that come into play this quarter I mean, I think it was a really impressive improvement in terms of gross margin sequentially.
And a lot of what we saw on the pricing side did flow through as we said we saw a lot of demand on the channel driven by Chia and in most cases, but across the board. We saw a good environment and I think the team did a good job of reacting dynamically and trying to properly priced products.
As we went through the quarter.
We're going to continue to do that same.
Thing as we move forward.
And we are going to see cost takedowns.
We had very good cost take downs in Q4 on both the hard drive side and on the flash side.
We keep.
Price flat or even increased price then that's obviously can only help in terms of operating leverage.
Yeah.
Thank you.
Okay.
Thank you. Our next question comes from Patrick Ho from Stifel.
Thank you very much.
Oh net gain in terms of the all the activity you're doing with cloud and Hyperscale and pick up Youre seeing there and can you talk about any qualitatively new customer wins.
Whether it's cloud Hyperscale data centers.
The new 18 terabyte drives can at least qualitatively talk about the adoption rate and whether you're seeing.
Doctors from existing customers, who are transitioning or even new customers that werent previously on your mass capacity storage drives.
Yes. So at this point I think it's where they're at in the architectural evolution of their datacenter of how they are adopting the technology as far as qualification. So first of all I mean, if you're building a cloud you're most likely our customer.
Hard drives are the lion's share of storage in the cloud.
But we're seeing yes, we're seeing wide adoption I guess is the only way I can say that I mean, it's our customers different customers really it would be a different different stages of their architectural evolution. Some are going into 18 as fast as they can some are working through a 14 transition, let's say in the second half of the.
A year and then we'll move to 18 some are going through 2016 so.
At this point, it's just a question of how they are all transitioning.
Their data centers again, we saw we saw really strong growth.
Throughout the quarter as Bob said, it's nearly half of our exabyte chip capacity enterprise Exabyte shipments were 118, so we feel really good about where the product is and like I said the innovation of energy assist has been fully commercialized and has been well received by our customers.
Great. Thank you very much sure thing.
Thank you. Our next question comes from Harlan sur from Jpmorgan.
Good afternoon. Thanks for taking my question. In addition to the SSD controller shortages, we've heard of tight HDD controller and preamp.
Chip supply.
Semiconductor partners.
A pretty constrained and lead times are pretty stretched and so if the team had more HDD controller and preamp supply would you be able to ship more HDD, Sir in the September quarter or is more of the HDD shipment constraints and September being driven by other component constraints or media and head manufacturing or just preparing for prime day.
<unk> related operations disruptions.
Harlan this is Bob.
Basically running at full capacity in the September quarter on the hard drive side, So it's not easy to get the parts.
It's definitely true, but in the September quarter, I don't see it as a big factor.
We'll see how that plays out as we get to the December quarter and beyond.
Yes, Harlan I was going to say the same thing.
Got.
Folks in the factories working overtime.
To get every drive we can I mean, the team is obviously balancing the supply chain issues to get all the components, we need but but we've got a we've got that covered in September.
And so keeping again.
These are in places where COVID-19 is a is a big deal and we've been really good about managing through that but suddenly got a got our eye on but.
We're really pushing very hard to get all the all the components we can.
All the drive as we can.
No I appreciate the insights. Thank you sure thing.
Q.
The next question comes from Tom O'malley from Barclays.
Hey, guys. Thanks for taking my question I just wanted to circle about October that you made earlier you said that she had a big impact from the channel I'm looking at inventory inventory days are flat on a dollars basis down on a days basis can you kind of comment on the mix of inventory I would assume with with some other HDD activity you saw during the quarter. The channel has kind of been wound down a bit is there any.
As you can give on the mix of businesses within the inventory that you have this quarter.
Yes.
In terms of our inventory.
Turns are up quite a bit on the hard drive side.
And I'd say relatively flat, maybe even slightly worse on the flash side.
And that's how we're going to have nodal transition, it's not a big surprise there.
So and the flow through as you saw was up significantly during the quarter.
Yeah.
Thanks, guys sure. Thank you.
Thank you.
The next question comes from Sidney Ho from Deutsche Bank.
Oh, great. Thanks for taking my question. My question is on capital intensity, you talk about gross capex for fiscal 'twenty, 2 being $3.1 billion and that would be roughly 15% of fiscal first quarter revenue run rate is that the right capacity capital intensity, we should be think.
About maybe you can comment on both HDD and NAND that will be great and what kind of assumptions are you expecting in terms of bit growth coming out of the NAND side of things.
Yeah. So a few questions in there so first of all in terms of Capex, we exited FY 'twenty, 1 around $3 billion in growth Capex and that's what we're expecting again in FY 'twenty 2.
We are well on our way in terms of the ramp on VIX 5 in terms of that capital investment.
We'll you know we'll have to obviously continue to invest in both businesses, we've got 2 growing businesses.
They are going to require capital going forward on the hard drive side, we're at the point, where we can no longer transition assets from the client side of the business to the capacity enterprise business and so that means we have to be pretty cautious in terms of investments. We make that's part of why we've done some of these long term agreements and.
We're going to continue to be very careful in terms of the capacity we put in place.
On the flash side the goal as we've been saying is to really grow pits at day rates at the market is growing and we think over the long term, we'll be able to do that.
Yeah.
Okay. Thanks sure. Thank you.
Yeah.
Thank you. The next question comes from Shannon Cross from Cross research.
Thank you very much I have maybe a bigger picture question I'm. Just wondering how are you thinking about the inflationary environment are you are you hearing from any customers that there is some pushback because of elasticity of demand given you know price increases and then just internally how are you thinking about managing higher cost and not necessarily you know next quarter.
Just in general is as they face more inflation. Thank you.
Yeah. It's a good question Shannon and we're definitely facing inflationary pressures across the board, but we've talked about the semiconductor components already on this call and we're seeing lead times extend out we're seeing.
Challenges on the cost side, as well and I and we're gonna what do you think we're going to face that across a number of different commodities and that's the discussion we need to have with our customers as well and I think most of them are also facing an inflationary pressures. So it's a it's not something that you can work out in a single quarter, but.
I think over time, we've got to make sure we're getting obviously the adequate return on the.
The investments, we're making from a capex standpoint, and the costs that we have in each of the products.
Okay. Thank you.
Sure.
Yeah.
Thank you. Our next question comes from Nick Todorov from Longbow Research.
Okay.
Yeah. Good afternoon, guys and congrats on great results from me as well.
Dave I think you can you hear me Oh, Yeah. Please go ahead, yeah, Yeah, Yeah, you talked about more customers looking for upside Dalton and side.
In the September quarter, and it sounds like Youre pretty constrained, but if I look at your guide it implies the best day modest low single digit NAND ASP increase.
I Wonder why you are not able to get better pricing leverage on demand I think you've talked about the mix changing in the September quarter. If that's the big driver can you. Please give us more detail how do you see the mix shifting on there Matt is there any lumpiness in the enterprise sales mix in the September quarter.
Yeah, No I think you got it.
Again, we were running a portfolio across.
5.4 to 5 major pillars enterprise SSD mobile consumer and the anchor the portfolio client SSD and then of course positions in gaming Iot automotive, but every quarter the mix is going to be different across that.
And obviously the pricing.
Is changing as different rates across those markets. We're clearly trying to shift as much as we can into the higher <unk>.
Margin markets.
But every quarter that mix is going to be a little bit different.
And depending on what our commitments are we have we have commitments to customers as to how much we're going to supply.
In any given quarter so.
When you put that altogether.
As a little little different in Q1, and I think that's where you've got a that's where you've got some of the difference coming from them the way youre thinking about it.
Got it. Thanks, Good luck guys. Thank you.
Thank you. The next question comes from Ananda Baruah from loop capital.
Hey, Thanks for taking the question guys and congrats on the congrats on the strong results.
I guess, that's really the question really is around the margin structural margin on.
On the sides of the business.
Do you think over time structurally the margins can can move higher from here.
And what would be sort of the pushes and pulls you know or the sort of other dynamics like what would things have to look like what would have to get done for on both sides of the business right for that to happen and kind of structurally higher meaningfully nice nice and structurally thanks a lot.
So I think the answer is I don't think the answer to that is yes, let's go through each business on the on the drive side, we saw a big step up this quarter.
Driven by a number of things we've been talking about the 18 terabyte.
Capacity point as bad as much better for us for a number of quarters now and we saw that play out we obviously got some benefit from chi as well, but.
Predominantly innovation led story from my perspective, but we believe this this business inside our company needs to be more profitable.
We've talked about it several times on this call. We're now looking at this this transition from client to client capacity too.
<unk> enterprise near line or enterprise.
<unk> drives that is a that era is coming to an end it's been a long line. That's been it's taken a decade to go through that transition, but when we look at the exabyte growth going forward.
That's gonna take investment and we want we want that investment to be fully justified so and again, it's no surprise to me that now we're talking about these more longer term agreements and again, we're early days in those but those are the conversations with customers I remember when I came in this business whatever 5.
Quarters ago.
Everything was transacted on a quarterly or even within the quarter basis and now we're moving to.
In parts of the business multi quarter basis, and I think that will continue because we need more visibility into demand to make sure. We can continue to fuel the growth of the cloud I think the.
The cloud is an incredible technology.
The seminal technology of our era as I talked about as I like to say and continuing to fuel the growth that is very important and 35% exabyte growth is going to take investment and I think that's gonna take yeah, we're going to want to see.
The internals of our business be able to support that so that on the flash side, we're going to.
Just 1 final comment on that we were also continuing to innovate in hard drives and drive costs down as well I think we talked when you think about cost downs more in the in the flash business, but we also continue to drive and to drive business.
So we have that dynamic working as well on flash.
<unk>.
You know, we all know about how dynamic the pricing environment is we feel very good about our technology roadmap, we've talked about that.
We're at the we're at the transition point to <unk> 5 we feel good about that node as we transitioned to that over the next couple of quarters.
We will see our bit growth accelerate in that that foundational investment with key OKE share I think puts us in a very good position to have the technology roadmap just structurally support margins in the business.
Yes, clearly a better pricing environment as we're seeing helps margins in that business, we expect it to be better next quarter. That's the way we're guiding.
And as we look even beyond the second half and we look into next year, we continue to see a strong demand environment, that's getting out there pretty far but you know from what our customers are telling us telling us of what they think the demand is going to be for their their products like I said, we're all more technology dependent than ever.
We continue to hear good things about what theyre going to be asking for next year. So structurally we think with the technology.
With the innovation, we're driving in both portfolios.
That puts us in a in a good position to continue to drive profitability in these businesses.
That's helpful. Yeah. Thanks, a lot I appreciate that.
Okay.
Thank you. Our next question comes from shiny has jewelry from F N B C Nikko securities.
Thank you David on the enterprise SSD front. Thank you said it grew 39% quarter on quarter, obviously very strong quarter just curious if.
It's driven primarily by.
And demand and if there if there were any new customer ramps as well and also if you could talk about if there was any contribution from cheer on the SSD side as well I think that would be helpful. Thank you.
Yeah. The first 1 just quickly very minimal contribution from chia.
Enterprise SSD market.
Yes, we are happy with the sequential growth of the product and we did complete a qualification other at another cloud Titan, which is something we've had our eyes on for a while and we've talked about we haven't started ramping there yet, but we'll see that in the second half of the year. We also saw good demand in the channel on the enterprise SSD.
So yeah, we qualified with 1 of the very big players and we see continued growth there we're seeing a good.
Good acceptance in the channel and growth there and now we're layering in additional.
Major customers as we go into the second half of the year. So.
We feel good about how the product is being accepted again lot of innovation in our product we've been talking about that for many quarters again, giving visibility into the to the.
Qualification process and now we're we're well into the ramp and feel good about where we're at and where it's going and how it's being accepted by our customers.
Thanks, Dave.
Thank you. Our next question comes from Mark Miller from the benchmark company.
Just was wondering the assay SSD space do you feel you're picking up share.
I suspect we're picking up share yes, we grow so quite I don't think the market grew sequentially 39%.
Again, we're focused on profitable share gains, but this has been a focus for us.
To get that product introduce its a very attractive market and get it qualified in as many places as we can but.
Yes, we're going to continue driving for growth quarter over quarter.
Thank you.
Yeah.
Thank you and the last question comes from Tristan <unk> from Baird.
Hi, good afternoon.
Given some of the puts and takes about the gross margin.
Criteria for this line.
How should we look at the potential for quit smoking and longer term you've mentioned you're already at capacity.
Can you go higher given U S.
Customer mix and given the purchasing power that some of your large data center customers have.
Without COVID-19 expenses is a long time, 35%.
I took a possible if you could just provide any.
More color on what you think the tenant is going forward.
Yeah, I mean, it's we I think as we've talked about where we're in this period in the hard drive business, where it's been transitioning for a long time from the business. There was client dominated to a business that is cloud.
Cloud dominated as I guess, 1 way to think about it and if we look at the utilization of our.
Of our factories, you can see that very clearly year over year. The percentage of drives there were headed for the the cloud versus the ones that are headed for client has been steadily shifting over over a decade.
And now we're at the point where.
We're looking at investments in.
Both in heads and also when you build a bigger drive it takes longer to test all those kinds of things testing capacity.
In the factories. So so yeah as we go through those conversations it's really important to understand from our customers what their growth is going to be we see 30% to 35 per cent exabyte growth in the cloud for the foreseeable future we want to make sure that they see that same amount in.
And as we are as.
As we align on that growth and we invest in our business is supported I think that's where this idea of long term agreements come in place and to help US helped drive the profit profitability for the business. We think the innovation is delivering I mean, it starts with delivering a pre.
That is very.
Solves a customer's problem and we're delivering a very strong T. C. O model with every generation of those products that we build we're driving a lot of innovation, we talked about it here with energy assist which is something that we've been working on for for quite some time and then quite frankly, it's a it's a it's a good accomplishment for the team of <unk>.
Great accomplishment it feels good to take something that was a N.
Many many years ago and now turning into turn it into something where the largest customers in the world are betting their their business and their data center.
On that innovation and so to continue to fuel that innovation engine and we've got we've got many many innovations lined up to continue to drive the portfolio.
And making sure we can invest in that and meet the growth of our customers getting the economics of that right is very important.
Yeah.
Great. Thanks for the additional quota share thing. Thank you.
Alright, everybody. Thanks for your time today, we really appreciate it.
We'll be we'll be seeing it throughout the quarter, thanks, very much and thanks everybody.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.
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