Q1 2022 Western Digital Corp Earnings Call

October 28, 2021

Thank you for standing by and welcome to the Western Digital's first quarter fiscal year 2022 conference call. At this time all participants are in a listen only mode. After the.

Speaker presentation, there will be a question and answer today.

Ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your first speaker Mr. Peter Andrew.

Please go ahead.

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 portfolio expectations business plans and performance.

In financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties.

We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially.

We will also make references to non-GAAP financial measures today.

Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.

With that I will now turn the call over to David for his introductory remarks.

Thank you Peter.

Good afternoon, everyone and thanks for joining the call to discuss our first quarter of fiscal year 2022 results.

We reported revenue of $5 1 billion non-GAAP gross margin of 33, 9% and non-GAAP earnings per share of $2.49. All within the guidance ranges. We provided in August this marks the sixth quarter in a row of meeting or exceeding guidance a point that we are.

<unk> proud of as we continue to navigate uncertainty and volatility in the market.

Strong demand across diverse end markets, particularly for our cloud products combined with Western Digital's strong innovation broad routes to market and sharpened execution enabled us to deliver results within our guidance range, despite significant COVID-19 impacts and supply chain disruptions.

While these disruptions are transitory the long term opportunities for western digital remains unchanged as the world's digital transformation continues to accelerate.

During the quarter, we shipped a record level of extra bytes, while also improving non-GAAP gross margins across both flash and HDD and generating profitable growth.

We saw strong demand for our latest generation hard drives and flash products in the cloud end market as well as strong consumer demand for new five G based mobile phones, incorporating our latest pics five flash solutions the.

The strong demand for these products were partially offset by pressure in the commercial channel within the client end market and certain portions of the consumer end market, particularly retail this was attributable to component issues impacting our customers' ability to ship product.

Greater component sourcing constraints within our own operations and uneven geographic demand due to Covid lockdowns.

Our continued focus on innovation and a more agile business unit structure enabled us to quickly adapt to these dynamics when.

When combined with an industry, leading portfolio and a strong go to market operation I'm confident in western Digital's ability to continue to generate improved operational performance for all of our stakeholders.

Before I get into the business trends I wanted to highlight a few changes we made to our end market breakdown, which we believe will help you understand why western digital is well positioned to capitalize on the opportunity presented by the increasing value and importance of data.

We now split our end markets into cloud client and consumer the cloud represents an incredibly large and growing end market for western digital and we are uniquely positioned to address customer storage needs as the only provider of both hard drive and flash products.

During the first quarter cloud represented a record 44% of total revenue led.

Led by record capacity enterprise hard drive revenue and nearly 30% sequential growth in enterprise SSD revenue.

We believe the accelerated digital transformation will continue to drive growth in this end market and continue to shift our business mix towards the cloud.

As we ramp our new innovative products and continue leveraging the benefits of the organization structure, we put into place last September I am confident we will capture opportunities to achieve a more stable and profitable growth profile over the long term.

The client end market represented 37% of revenue in the first quarter.

Here, we are providing a broad array of high performance flash and hard drive solutions to our OEM and channel customers across PC mobile gaming automotive VR headsets at home entertainment devices and industrial spaces.

Lastly, the consumer end market accounted for 19% of revenue in the first quarter.

The highlight of this end market is the strength of our sand this brand of retail products and.

And the WD black brand of storage products for gaming enthusiasts, which is strong and growing the.

The brand recognition and infinity combined with our unmatched reach with nearly 400000 points of presence across the world.

Is a great setup for western digital as we enter our seasonally stronger part of the year.

With that I'll now provide a recap of our HDD and flash businesses as it relates to our first quarter results.

And H D. D continued strong demand for our latest generation energy assisted drives among our cloud and enterprise customers drove record revenue and exabyte shipments and our cloud end market.

In addition, we experienced strong revenue growth in our smart video product line and were unable to meet demand.

During the quarter, we announced the op D NAND, a revolutionary technology that utilizes flash in the H D. D control plane to further increase aerial density.

With this leading architecture, we achieved 20 terabyte capacity using our field proven nine dis mechanical platform and E. P EMR technology.

Next month, we will commence volume shipments of our 20 terabyte <unk> hard drives based on <unk> NAND technology.

In flash revenue grew in the quarter due to continued strong demand within the cloud and client and markets for our latest generation of our enterprise.

S D products and the ramp of new five G phones, incorporating our latest pics five node.

Within the enterprise SSD, we experienced continued success in the cloud with another successful quarter of qualifications. We are now qualified at three cloud Titans and have made excellent progress working our way through the qualification process in the enterprise and distribution channels we.

We expect these qualifications to start to drive accelerated revenue growth in 2022, as our customers begin to deploy these products into their networks.

The ramp of next generation five G phones, incorporating our latest generation of <unk> five products accelerated in the quarter with revenue growing over 20% sequentially.

We expect this migration to five G combined with a continued increase in the amount of storage per phone to drive another strong quarter of revenue growth in the fiscal second quarter.

<unk> was strong in the quarter with a solid lineup of products for game consoles, along with a growing brand recognition of WD black based products in the channel in retail heading into the second fiscal quarter, we are well positioned to take advantage of seasonal strength and grow in a wide variety of gaming channels.

As I noted earlier, the client PC Oems distribution channel and retail were impacted by our customers' ability to ship product.

Later component sourcing constraints within our own operations and uneven geographic demand due to Covid lockdowns demand was solid but these transitory issues impacted our ability to realize this demand and our results.

In total bid bid growth accelerated to 30% year over year in the first quarter as we ramp <unk>, 5% to 17% of flash revenue.

This quarter, we expect year over year bid growth to further accelerate to the mid thirty's range with fixed five bit crossover to happen later in the quarter.

Our long term goal is to grow bits in line with the market taking advantage of our product and end market breadth to shift our beds to optimize profitability.

As we look into calendar year 2022, we are optimistic as our customers continue to indicate strong and demand across cloud client and consumer end markets, we have industry, leading technology, the right product portfolio and investments in the organizational agility.

Fundamentally drive improved profitability, regardless of market condition.

We have a great position in two large and growing markets in flash and HDD and we have proven our ability to drive innovation throughout our portfolio and deliver industry, leading products to a broad and loyal customer base.

We believe that the migration to the cloud and demand for storage solutions throughout the client and consumer markets will drive a huge opportunity for western digital and our customers.

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

Thanks, Dave and good afternoon, everyone as Dave mentioned overall results for the fiscal first quarter were within the guidance range. We provided in August marking the sixth quarter in a row that we've met or exceeded guidance.

Total revenue for the quarter was $5 1 billion up 3% sequentially and up 29% year over year.

Non-GAAP earnings per share was $2 49.

Please note that EPS included $56 million in total COVID-19 related costs.

It was higher than we anticipated entering the quarter.

I'll provide more details on these costs in a minute, but we are pleased to deliver such good results in the face of this unanticipated headwind and other supply chain issues.

From a disclosure perspective in addition to the change in our end market breakdown, but Dave discussed this quarter, we move to segment reporting for our flash and hard drive businesses for more details. Please refer to our earnings deck.

Looking at our end markets cloud represented 44% of revenue at $2 2 billion up 12% sequentially and up 72% from a year ago.

This represented the second quarter in a row of record revenue.

What is encouraging about this cloud revenue growth is the strength and breadth of our revenue streams across product areas.

Growth on a sequential basis in both flash and hard drive business units as well as across every product category within the cloud, including capacity enterprise drives enterprise Ssds smart video and platforms.

As the cloud continues to grow as a percentage of our revenue, we see an opportunity to reduce volatility in revenue and profitability.

Over the last three quarters, we have successfully ramped our 18 terabyte energy assist to drive to our highest volume mainstream product within the cloud end market.

Overall cloud HDD exabyte shipments grew 9% sequentially and over 70% year over year.

And comprised over 80% of total HDD exabyte shipments.

Client represented 37% of revenue at $1 9 billion down.

<unk>, 2% sequentially and up 6% year over year.

A highlight within the client end market was growth within our flash business unit, specifically in mobile gaming automotive Iot and industrial applications.

Our strength here was more than offset by pressure in desktop and notebook hard drives due to supply disruptions at our customers and within our within our own operations.

Finally, consumer represented 19% of revenue at $973 million down 6% sequentially, but up.

10% year over year.

Both our flash and hard drive business units declined on a sequential basis due to similar supply disruptions. In addition to uneven geographic demand due to Covid lockdowns.

Turning now to revenue by segment.

We reported flash revenue of $2 5 billion up 3% sequentially and up 20% year over year on.

On a blended basis flash asps were down 3% sequentially, primarily due to mix and pricing within our transactional markets on a like for like basis Flash Asps were flat.

Flash bit shipments increased 8% sequentially and 30% year over year.

Hard drive revenue was $2 6 billion.

2% sequentially and up 39% year over year on a sequential basis total hard drive exabyte shipments increased 4%, while the average price per hard drive increased 5% to $102.

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 first quarter was 33, 9% up one percentage points sequentially.

As noted earlier this included $56 million in Covid related costs or one one percentage point impact.

It was our highest COVID-19 related costs in over a year.

Our broad routes to market and ability to proactively shift fits to the most attractive end markets enabled us to expand our flash gross margin by one five percentage points sequentially to 37%.

Our hard drive gross margin was 39% up 60 basis points sequentially. This included COVID-19 related impact of $51 million or approximately two percentage points.

Operating expenses were $761 million within our guidance range.

Operating income was $952 million, representing a 15% increase from the prior quarter and tripling year over year, highlighting our profitable growth.

With our improving profitability our tax rate in the fiscal first quarter was 11%.

Earnings per share was $2 49.

Toward the top of our guidance range.

Operating cash flow for the first quarter was $521 million and free cash flow was $224 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 a cash outflow of $297 million.

We continue to expect gross capex for this fiscal year to be approximately $3 billion in cash capex to be around $2 billion.

In the fiscal first quarter, we paid off $213 million in debt, including a discretionary debt repayment of $150 million. Our gross debt outstanding was $8 6 billion at the end of the fiscal quarter.

In addition, as a result of our strong financial results and free cash flow generation last week, we repaid the remaining balance of our term loan b and the amount of $943 million.

Bringing total gross debt outstanding to $7 7 billion.

Our adjusted EBITDA at the end of the first quarter as defined in our credit agreement was $4 2 billion.

Resulting in a gross leverage ratio of 2.0 times down from $2 seven a year ago and was the lowest in three years.

As a reminder, our credit agreement includes $1 billion in depreciation add back associated with the Flash 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 second quarter non-GAAP guidance is as follows we expect revenue to be in the range of $4 seven to $4 $9 billion and we expect flash revenue to increase sequentially in hard drive revenue to decline sequentially.

We expect gross margin to be between 32% and 34%.

We expect operating expenses to be between 760 and $780 million.

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

Our tax rate is expected to be approximately 11% in the second quarter and for the fiscal year.

We expect earnings per share to be between $1 95, and $2 25 in the second quarter, assuming approximately $316 million fully diluted shares outstanding.

I'll now turn the call back over to Dave.

Thanks, Bob.

I want to conclude by thanking the western digital team for their hard work and commitment to our customers throughout a challenging quarter.

Despite the transitory issues, we have been able to successfully navigate this is clearer than ever that western digital's innovative technology portfolio is foundational to the rapid digital transformation and transition to the cloud that the world is experiencing.

With our deep roots in a broad range of end markets and a sharp focus on execution.

Confident in western Digital's ability to capture this massive opportunity and I'm looking forward to the rest of the fiscal year.

Let's now begin the Q&A.

Thank you as a reminder to ask a question.

Star one on your telephone to withdraw.

To your question press the pound please standby, while we compile the Q&A roster. Our first question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Hey, Erin.

Yes, sorry, guys can you hear me, saying no problem.

Hey, sorry about that yes, so I guess I got two quick questions if I can.

I guess first of all it seems like there's a lot of moving parts.

In the quarter and more importantly into the guidance outlook for fiscal Q.

Bob I'm just wondering if you can help quantify for your best estimate of how much impact you're carrying in the revenue expectations relative to some of these quote unquote transitory.

Effect.

Hey, it's difficult to quantify right because there is the impact in terms of our own execution, which I think we worked our way through pretty well during the quarter and then we have customers who have supply chain challenges as well, where they're trying to get match sets and build out there.

Environments, and then of course, we have supplier challenges as well, where we're working like everybody else pretty hard to get components and so it's it's difficult to give you.

Definitive answer in terms of what the impact was in the quarter, we just closed or even.

Obviously in the next quarter, but.

It's certainly somewhere in the couple of hundred million dollars range and potentially a little worse in the December quarter.

Hey, Eric This is Dave first of all thanks for the question.

I guess, the one thing I would say as well is whereas maybe a quarter or two ago, we were seeing it and maybe certain parts of the business. Some of the Oems PC Oems now we're seeing it more broadly even the big data center players.

Having their demand impact are our demand from them as being impacted by their ability to get other components. So it's really become a much more broad based issue across the portfolio.

And then if I can follow up real quickly.

One of the things that stands out to me is that I think you reported a blended ASP decline.

A decline of about 3% sequential in the flash business. So I believe the mix of enterprise actually went up to the positive so.

When I look at that ASP erosion relative to actually some of your peers in the NAND market. It seems to be a bit of a disconnect. I mean can you help me understand the pricing dynamics youre seeing in that right now.

Yeah, I can start and then Dave can fill in.

Yes, I mean, the blended ASP as we started the quarter, we indicated we expected it to be down and it was based on the mix. We were anticipating the mix came in essentially the way we had expected.

And it was I don't want to get into every little detail of the mix, but one of the things. We said at the beginning of the quarter was we expected more mobile volume.

In the September quarter, and that is what we saw we actually think we will see even more in mobile as a percentage of the total in the December quarter. So mix is definitely a bit of a headwind for us, but really asps are not going down that much and we're really pleased with the cost reductions we've been able to achieve both.

In the quarter, we just finished as well as what we're expecting to do this quarter.

Yes, I guess Eric.

Bob right on the money on that I guess, the only thing I would add is.

You know a little bit of softness in some of the transactional and consumer markets.

But we're already seeing that level out a little bit.

And we're really seeing this bifurcation where.

<unk>.

Qualified bits in the market are strong.

And the unqualified or a little bit weaker I guess, that's not surprising giving all of the nodal transitions the industry is going through but the primary issue.

That's the issue with mix as Bob pointed out and we expected that walking into the quarter.

Thank you guys.

Thanks.

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

Yeah. Good afternoon, thanks for taking the question.

If I look at your revenue guide and kind of any commentary on.

It sounds like the implied HDD revenue guide is roughly down 15% sequentially. So I guess.

Is the math right, there and B I guess, what's causing the severity of the decline.

Can you kind of help us understand what's digestion.

Some of the transitory are supply chain issues.

I spoke to.

Yes, I think thats, probably a little I mean, we don't guide each individual business, but I think your number is probably a little little heavy.

You you hit on some of the issues. Some of it is mix, we've actually got one of our very very big customers that has their own supply chain issues, that's pushing out some orders. So that's a bit of an idiosyncratic thing thats happening there.

There's some there's some supply chain issues with especially in kind of mid cap and the ability to build all of that supply. We want we talked about that even in this past quarter and the smart video market, which is strong.

And there are some unmet demand there.

And then we've got we're seeing a little bit of an inventory issue quite frankly in China, where theres a lot of high cap inventory, there and that's kind of pulling the number down a little bit for the next quarter, but we so we expect all of those things are are transitory issues, we're really happy about the portfolio.

I think the fact that AT&T isn't it was now.

The majority of the portfolio, we talked about shipping 'twenty T. On a nine desk platform an opt in NAND is out there and in customers hands. So we.

We feel really good about the innovation that was delivered in the quarter and about where the roadmap is going and to drive business and in the new technology has been very well received.

That's great.

Yes.

Follow up could you speak to.

How we should be thinking about gross margins into the first half of 'twenty. Two obviously, there's certain unknowns in terms of.

Revenues in.

And NAND pricing, but would love to hear perhaps some of the other puts and takes that we should be thinking about as well as the timing of when you think some of the COVID-19 related costs.

Yes.

Yes C J.

Youre right it is difficult to say.

Hey, exactly whats going to happen over over the next few quarters.

And as you know, we only give guidance one quarter at a time now having said that.

We're pretty optimistic on 2022.

We think a lot of the challenges in the quarter, we closed in the quarter. We're in now are really supply chain related we think the underlying demand situation is very positive.

We really believe as I said in our cost reduction plans in and we think we'll be able to deliver solid margins.

Alright.

Don't want to get into giving guidance for next year, but we're definitely optimistic.

Thank you.

Sure.

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

Great. Thank you I Wonder if you could update us on where you are with big five qualification I assume.

You're saying you'll be mobile heavy this quarter I mean, just kind of still getting qualified across the SSD markets I had a follow up.

Yes, I think that's right I mean, it's early in the node we are happy with the ramp this quarter. We ended up I think 17% fixed five and we expect to get crossover before we exit the year, but like any new node you're in more of more of the mobile or components market as the rest of the products get qualified but that's all.

That's all work underway in.

Our customers are definitely pulling us in that direction. They want <unk> five on the on the SSD products and the engineers are hard at work at getting that getting that work done that'll be an evolving story as we worked through 'twenty two.

Great. Thank you and then I think.

You referenced some of the segments into client SSD, maybe being a little weaker can you separate out is there a chia effect there where it was good for a while and then it was less good versus just overall client SSD being oversupplied because of other issues in the supply chain.

How do you sort that out and what do you see happening in the client SSD market.

I don't think we see it as achieve effect I mean, I was just talking to our sales team. This morning, and I think the channel is now kind of normalized and back on seasonality after that she had disruption.

We just see this issue with with people not able to get all the components they need to put together a full kit for what they want to ship and that's causing some softness in the channel. So I think I think it's more related to that than it is anything chia related.

Based on my mind.

Thanks.

Thanks, Joe.

Thank you ladies and gentlemen.

We ask that you. Please limit yourself to one question due to time, we screen. Our next question will come from Karl Ackerman with Cowen. Please go ahead.

Yes. Thank you.

Bob earlier in a responsible question you had indicated some of the.

<unk> impact or challenge in your enterprise.

I believe.

D business in SSD business was a result of pushing out by a customer.

My question there is.

If we isolate that customer how do you see the demand trajectory of cloud in mass capacity markets.

Since the December quarter, but also into the second half of your.

Fiscal year.

Certainly as you begin to ramp.

Some of these 20 terabyte drive in other higher capacity drives.

And harder in hdds as well as some of these new design wins you have in enterprise SSD. Thank you.

So we didn't take that or you can start okay. Yeah. So I think I think as a general statement. We're seeing continued very strong demand from our datacenter customers, especially are very big data center customers.

They're giving us good signals about next year and what they plan to do it's hard to pin that down to a certain quarter right now, but we.

We continue to see very strong demand there like I said, we're starting to see the supply chain impacts show up there as well.

But I'm sure that will all get worked through as we go through the year, but.

As we look into 'twenty, two and we have our customers telling us.

It continues to be a strong demand environment.

Yes, I don't think I have anything to add.

We believe in the cloud demand I think it's strong and then just as a lot of supply chain dislocation right now.

Thank you. Our next question will come from Ramsey Mohammed with Bank of America. Please go ahead.

Hi, Thank you for taking my question. This is actually John on behalf of <unk>.

Just curious there hasnt been a lot of immediate focus on.

And in the past Western digital has expressed interest in the asset.

Do you think that consolidation still makes sense and do you still have an appetite for it.

Thank you.

Well I think I'll speak in general about <unk>, there are tremendous JV partner and we've spoken a lot about the JV and what the what the benefits of that are.

And all the I think one of the highlights of the quarter is <unk>.

<unk>.

Yes.

Production of the flash roadmap in <unk>, five and the cost situation that that's driving I mean, I think it's always been a very big focus of the western digital and <unk> team to very focus on capital efficiency and.

And cost downs in the portfolio.

The seeds for <unk> five performance that we're seeing now where so many years ago that continues to be a great focus on.

The joint teams and I think the fact that we have a joint roadmap with.

With another supplier as big as skilled she gives us a lot of a lot of.

Investment in our roadmap and then of course, we produce we produced together as well and have a lot of synergies there as well so.

It's a great partnership where.

It's been it's been going for over 20 years now it's going to go for we're signed up for at least another decade.

We always look at that as we continue to invest in Fabs and.

Really happy with the partnership and we're going to we're going to continue to get the best out of it.

Yeah.

Thank you. Our next question will come from Mehdi Hosseini. Please go ahead.

Yes. Thank you two questions.

The first one is for the team obviously, there is a long lead time.

Associated with the equipment procurement. So at this point I would think that you have a pretty good year.

For NAND.

Supply growth in calendar year 'twenty. Two is there any color you can share with us and I have a follow up.

Yes, I mean, we do have good visibility and use our bit growth.

Back up again this quarter, we expect it to be a bit higher year over year next quarter. Our long term goal continues to be to grow at the rate. The market is growing and we won't get that perfectly every quarter, but that's our objective and we think that again with <unk>. We've got the right plans in place for next year.

But what is the target for next year calendar year.

Yes, I don't think we put a specific number out there yet some of the industry analysts, suggesting industry demand growth in the low 30% range.

Got it thank you and given the fact that.

Your enterprise and cloud customers.

Yes.

Good solid demand in calendar year 'twenty two have you determined how.

To allocate them, perhaps I'm trying to better understand how you're thinking about the mix.

Between cloud enterprise and client and consumer.

Yes, I think we're certainly having those discussions with them I mean, I think every quarter, we discuss the current quarter and out many many quarters several quarters in advance at least I mean, we don't we don't lock in per se on those numbers exactly but we think about share of their of their particular.

Businesses, and what that's going to look like and what that means to demand for us. So yes, we're having those conversations and we're factoring them into the mix of bits for next year and how we allocate across the portfolio of course Theres a nodal.

Mix equation of that as well as kind of referred to in the previous question Leonard different products available on different nodes out of the fab. So.

We're working through all of that right now.

Okay.

Thank you. Our next question will come from Timothy Arcuri with UBS. Please go ahead.

Hi, Thanks, I wanted to go back to the HDD Guy.

Guidance and just maybe ask around what the normalized base of revenue is I mean, obviously your peer guided flat youre down kind of like low teens. It sounds like something in the range of 2.25 billion.

And that range it sounds like part of that to push out and some of that some company specific issues on the supply side. So can you help US bridge. The gap. There is it is is to six kind of flat like the normalized level. If you adjust for all that or is it something that's slightly down Q on Q, but not down low teens. Thanks.

Yes, I mean again.

It's hard to quantify exactly what the supply chain impacts were and we're actually not giving guidance by segment, but we definitely believe the hard drive business as a growth business and it will continue to grow over the next few quarters. We think 2022 will be a strong year.

Yes. This is a bit of an aberration in the December quarter, but it's.

The business is really solve the underlying demand is very good and youre right I mean, we already commented that.

There are some supply chain issues that are impacting us right now.

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

Hi, guys. Thanks, so much for taking the question.

David I wanted to ask about enterprise Ssds, you talked about.

Now being qualified at three cloud Titans, which is great you also talked about.

Some of these wins translating into revenue growth and potentially driving.

An acceleration in growth in 'twenty two.

Can you help us kind of shape the ramp into 'twenty two could it be more first half weighted second half weighted I know these projects can move around a little bit but any help there would be really really helpful. And then related to that the impact on profitability as you ramp that business initially.

Initially it would be it would it be a headwind and then eventually a tailwind or should it be fairly margin neutral from a desktop. Thank you Sherry.

Right.

So so first of all yeah, we are really happy with the progress of the portfolio I remember sitting here a year ago, and we were just trying to get over the over the hump on the first one and now we're over at three of them and we continue to work at the Oems, which the enterprise Oems, which tend to be longer qual cycles, and we're making good progress there as well.

And Youre right well, we got the call is done we will start to see some a little bit of deployment next quarter, and then start to ramp it throughout 'twenty. Two so I think it's an evolving story as we go throughout the year.

From a from what is it.

I think it's a very attractive Tam I think with good with good margins and that's why we're investing in the products and I think as we mix more into that and have more supply into that it. It's a it's a tailwind for the overall portfolio.

That's definitely a true statement.

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

Hey, Thanks, guys. Good afternoon, thanks for taking the question yes.

I guess my question would be four or whatever it is that you guys.

The revenue impact.

December quarter guide.

Just sort of anecdotally map out for us how much is from the flash business relative to HCV and then inside of <unk>, how much would be from <unk>.

<unk> got the cloud Titans.

Tony.

On their side there and then you had mentioned some candle dynamic and lots of WD dynamic as well.

On the P C.

It'd be helpful. Thanks.

Yes, I mean this is.

I'm trying to think how to answer this question differently I mean, we're actually not giving guidance by segment. However, we did say, we expect revenue to be down a bit on the hard drive side, we expect it to be up sequentially on the flash side.

The there are supply chain challenges with some cloud customers or supply chain challenges with some PC Oems.

We also mentioned that there seems to be a fair amount of inventory in China right. Now. So there is there definitely are some short term challenges with respect to the hard drive business, but again long term the underlying.

Both as really good there.

Uh huh.

Thank you. Our next question will come from Vijay Rakesh with Mizuho. Please go ahead.

Yeah, Hi, guys just a.

Christian on the client SSD side I should look at next year just wondering.

How are you thinking.

Outlook was so it looks pretty strong for next year, but then the client SSD side.

While two how we are looking at next year's demand. Thanks.

Yes, we think the PC Tam as good next year I mean, we're obviously coming off of a blockbuster year with Covid I mean.

We see the pre Covid baseline is around $265 270 million units.

That went up to 340 this year expect it around that number and we see somewhere around 320 to 335 next year. So it's definitely been.

Going to come off this year, a little bit, but we're seeing we see basically the baseline has been reset pre COVID-19 by a significant amount. So so we feel good about that.

Hearing that from our customers, we're where we're talking to those customers now about 2022 plans and what they plan to do and how much supply they're going to need.

And share conversations with each of them and those conversations are going well.

Smartphone market.

We continue to see this past quarter in the quarter and we're seeing really good strength in it.

In that market.

So.

I think this is a larger point here about the flash market is out there. The number of end markets is just more diverse now, especially with enterprise SSD growing and getting to be such a big market.

Theres a much theres, a much better mix of of of demand.

That that we play across in the market and so we see strength in PC, we see strength in smartphones, we see strength in data center.

We said the more transactional markets this past quarter.

As more more nodal transitions going on there was more bits available in those markets and we definitely saw that.

But again, we're heading into a seasonally strong quarter on retail so as we go through the quarter, we'll get a we'll get a very strong idea about how retail is going to play out as well as we go through the.

The holiday season.

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

Thanks for taking the question relates to a hi Fi.

Earlier, you talked about inventory issues in China can.

Can you add a little color to that how much.

Alright, how much excess inventory out there do you think that will get back to normalized level of exiting the year at any other geography, what you got right now thanks.

That's the main geography, we're watching and it's mainly high capacity and we think it will get worked through in the next quarter.

But it's definitely in the channel and at some of the big customers. So.

Is this something thats going to impact the amount of business that goes that flows through that part of the market, which is a pretty big market for all of us.

But we don't see it more than a quarter, maybe a little bit more of impact.

Thank you. Our next question will come from Patrick Ho with Stifel. Please go ahead.

Thank you very much Bob.

Prepared remarks, he talked about the different variables in terms of the supply chain, if you shrink the suppliers.

Are you factoring in.

Well at that.

Customers can use for both.

The September and December give kind of a qualitative.

Commentary on which were the biggest impacts in both September and December.

Yes, I think what I said earlier is we're actually expecting December to be a little more challenging than what we saw in September in the September quarter was not easy.

Starting with our own teams. So I think we did a really good job given.

What was going on with Covid in Southeast Asia, We did mentioned COVID-19 costs were up to $56 million.

This quarter and we've done a really excellent job in terms of working with local governments to try and get as many employees vaccinated as possible and to really do the best we can to assure supply in terms of our own factories now as we mentioned like everyone else, we have challenges in terms of getting components as well.

Particularly obviously the controllers on both the hard drive and flash side and that has an impact on the business.

I don't know quarter to quarter, which.

Which quarter is worse, but it's a challenge in both of them.

And it's a challenge it's not going to go away soon in terms of the semiconductor availability I mean, we're getting some lead times of 50 weeks right now so.

It's definitely a very real issue in terms of getting components.

And then we've already talked a fair amount about the customer challenges and I would say it feels to me and Dave can comment like there are more customers impacted by the supply chain in the December quarter than there were in the September quarter. It seems a little little more.

Broad based yes.

I don't think Theres any doubt about that I think when we talk to our sales teams and we talk to our customers I mean, it's.

Just over the last month or so the number of places where we're hearing.

They're not able to meet their own true demand or are they can't pull the demand from us if they are building their own infrastructure because of supply chain components is definitely broadened.

And it's probably I think it started and some of the PC makers I think thats, where we heard the most about it if you go back a couple of quarters and now like I said, we're hearing more about it.

In other segments, including the Big data center provider. So it's definitely an impact of the business and we just navigate through it I mean I think.

Now when you talk to our customers and we talk to our own.

We talked to our own sales teams and we look at what everybody is telling us. The end demand continues to be very very strong and everybody is just trying to figure out how to meet that and how to get enough components and get the right components to build the right kit.

It's for something they're going to sell or its building their own infrastructure to build what the what they need and as Bob said, we see that ourselves and our ability to get components in our ability to make sure our factories continue to run and.

I will say it will be a little bit selfish here and complement our own teams but.

Their appointment.

The Delta variant in Asia was a very big impact in this quarter was probably one of the most difficult since Covid started there were points, where we had thousands of employees in quarantine and still kept everything going so.

When you see what's happening on the ground and what the impact has been it's not hard to understand how all the discussions around supply chain impacts I think the good news is that we're working very very hard as Bob said with governments to get vaccines distributed and get things back on track and as we we.

Exited the quarter and we sit here today things are in much much better shape than they were a couple of months ago. So it makes us optimistic as we go.

We go through 2022 that this will get worked out.

And.

And that will all be able to meet the true demand thats out there.

Thank you. Our next question will come from Harlan sur with Jpmorgan. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my question. So on your client business you guys talked about the PC market being weak in September due to supply disruptions at customers. We all know about the <unk>.

The challenge is on component shortages, that's been pretty well telegraphed.

But you also mentioned the WD sort of specific supply chain disruption on client HDD as well as the <unk>.

Normally impact the shortage of HDD controllers.

Right.

Primary impact on the COVID-19 related sort of operations.

Options and <unk>.

Given your semiconductor suppliers lead times when do you expect to see your client HDD specific chip supply issues start to ease.

I'll take a crack at it and Bob can add some color as well I mean, it depends on how you look at it I mean.

Certainly our COVID-19 costs are up significantly this quarter, I think nearly 50% or more of 60% on what they were last quarter, where we had been steady state for probably three or four quarters in a row and now we've bumped up significantly so.

Lot of that is cost going into managing our own infrastructure and work that's going on with our own teams of course, a lot of it is logistics as well that's always a big component of it. So so those costs are going up.

Our own supply is mainly around controllers and I think it's fair to say and as Bob said, we're planning a year out on lead times and working with our own suppliers on how we.

Number one make sure we get everything we need to meet our demand, which has been challenging and then get it in a timeframe that we need but we're working through it and.

Like I said I think that.

There's no doubt if you go back a couple of quarters, we've been talking about this about how we were not able to meet.

All the demand that we saw out there I think the thing that we see different walking into this quarter.

We're seeing even a greater impact across all of our customer base and its spreading to places where we hadn't seen it before and thats, both raising the uncertainty and also just depressing the demand because.

Customers can't get all the pieces they need so they don't need everything from us. So we're starting to see some hints in some markets starting to clear up a little bit Super early days, but again.

If you look at what's going on in the ground in Asia things are getting better at least from our perspective, our narrow perspective of whether we have 40 50000 people there things are getting better on the ground and that gives us optimism that the situation will improve from here as we go through 'twenty two.

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

Hey, guys. Thanks for taking my question.

Another one on the HDD business you guys have done a really good job of improving profitability over the last year plus Mike.

My question is is it related to supply issues clearly theres a revenue headwind here could you talk about the impact of gross margins do you expect that you see a greater impact there because of the supply issues or is it more of a revenue issue with gross margins kind of hanging in any help there would be it would be nice.

Yeah, Let me start and then turn it over to Bob I mean, I think there are some there are some headwinds one of them would be a little bit of mix because at least for one quarter impact because we've got such a big customer pushing out some demand and then you've got pricing going up on components. So you've got inflation in the supply chain is.

As a bit of a headwind as well.

All that said we appreciate your comments the team has worked extremely hard.

We've rolled out a lot of innovation and the drive business and driven the gross margins 39. This quarter. We thought it was a great result that on top of that we add couple of points of Covid headwind on top of it so.

It all starts with making sure we deliver.

Great product to our customers. It starts with innovation you guys have heard me say this many many times and I think the innovation engine is alive and well.

Another big step forward this quarter without the NAND and I think as the team continues to drive innovation and we drive great products to our customers will have the opportunity to continue to have.

A better conversation with our customers around profitability.

All that said there are there are some headwinds I would say in the near term.

Yes, there are definitely headwinds, but I like you said the team has done a great job in terms of the product portfolio and.

We think that gross margins will be down a little we are going to have.

Probably COVID-19 costs in the same ballpark because we have this quarter. So that's a couple of points, but I think we've got a really good chance of having gross margins above 30% again on the hard drive business.

Yeah.

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

Thank you.

Just have one question and it sounds like the December outlook is truly an aberration.

So the people will push back and say well why is it truly an aberration and not simply the new norm. So maybe if you can walk us through around why December is so unique because whether it be supply chain of shipping cost. They look quite prolonged so if you could just kind of.

Lay out the reasons about why December so unique for such the aberration. Thank you so much.

Well I mean first of all we're in a very unique time, where.

We're still.

I think as we talked about the supply chain.

Chain disruptions that have been brought by Covid and especially the delta variant that really.

Pushed through Asia over the last quarter or more have been very very significant and very severe.

And to the people that we're managing the situation on the ground there. They did a tremendous job of they had an enormous amount of work just to keep keep everything running.

So I think that just leads to a very unique environment, Jim that we're navigating through.

Like I said, when we look at demand and we look at what our customers are telling us about demand in the market.

We hear very good things, we are very very positive and very bullish.

We just had we just have different customers and different states have their own ability to build what they they need to build or want to build.

And that's.

Thats constantly shifting and when you add it all up in any particular quarter youre going to get a result, and Thats, what we got and that's what we will manage to but we think that as the supply chain issues get worked out.

The demand trends in the business are very very strong and we're on the right side of where the world is going from a technology point of view.

Now I thought it was significant this quarter to 44% a record percent of our quarter was in the cloud and hopefully you guys.

React positively to our.

Simpler decomposition of our revenue across cloud client and consumer.

But we expect to see more and more growth in cloud, 70%, 72% year over year growth in that part of the business and we.

We continue to have the portfolio pivoting in that direction.

And expect it to be a b expect to.

Participate in that growth as it goes forward.

Yeah.

Thank you. Our next question will come from Steven Fox with Fox Advisors. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

So I guess I'm, just trying to understand the idea that none of the demand push outs are perishable. It's because this is the seasonally strongest quarter of the year.

How do we have confidence around that maybe.

Necessarily that it's it's perishable, but maybe.

Spending that would have occurred in December it doesn't occur in March even if there is availability of just because of timing.

Around the usual timing around spending.

Well again, I think it goes back to.

Yes.

We're talking to a very large cloud provider, that's trying to build out their infrastructure I think theyre going to catch up on building it out to what their demand is if they can't do it this quarter they'll get the components in the next quarter. So.

Again, we see a very we see very good demand environment.

And.

I think that.

As as our customers are able to get all the components. They need they will continue to come back to us and adjust their demand to us that's what we see we have very close relationships with them.

And so I don't expect that.

The demand from our customers' point of view is not like kind of a one quarter thing. It's like it's just a it's a demand curve that goes on and I don't see it as being perishable demand I see it as everybody is trying to figure out how they can get as many components as they can to build complete kits for what they need to do and as they do that they come back to us in <unk>.

And change their demand signal and we've seen that.

Maybe a good example is on some of the PC manufacturers were one quarter. They will drop their demand significantly in the next quarter they'll come back and raise it significantly when they've got their own supply chain.

Issues worked out so as I said, we've seen this in other parts of the market and we've dealt with it and we know how to deal with it and now we're just seeing it across a broader cross section of our business.

And quite frankly, some really big customers across that are in that in that mix now and we've been working through this now for the last several quarters and we'll work through it this quarter.

And the most seasonal businesses the consumer business and we are expecting to have a sequential increase in the consumer business, sorry, I think that's probably where there might be perishable demand, but we think that'll be pretty solid this quarter.

Thank you and today's final question will come from Stephanie <unk> with NBC Nikko Securities. Please go ahead.

Thank you for squeezing me in.

Dave I had a question about your pricing strategy going forward, especially given the cost inflation. We are seeing in the supply chain. I guess you know some of the cost increases are temporary and some may be permanent.

I'm just curious as to hear your thoughts on you know in your conversations with your customers.

What kind of feedback you're getting as you kind of look to pass through some of these <unk>.

Cost to your customers and also I want to hear about your what you think your appetite is in terms of passing through some of this incremental cost.

If these costs continue to.

<unk> remained permanent.

I think you hit on the answer in your first part of your question setup, which is these are broad and long relationships with our customers and they don't go up and down quite so fast. So we certainly have conversations with our customers when our cost increase but it's not as simple as just passing it along.

It's got to persist for a while before we would have that conversation and quite frankly, we participate in a market.

And so it's more about the market price I think the overwhelming issue with pricing is around innovation and making sure. We continue to drive innovation across our portfolio and as I look back on last quarter and the two things that two really big things that stand out to me for last quarter is.

One is just the execution of the team and a really really difficult environment, especially the as I've talked a lot about the factories in Asia and two is the innovation roadmap and the fact that we were transitioning aggressively the <unk> five we introduced <unk> NAND.

Those are the things we introduced the 20 terabyte drive and I'm going to be shipping that in volume now here in the next month.

That's with our energy assist technology nine platter nine disk drive to two terabytes per platter. So that's the primary issue where he is going to drive an innovation led discussion with our customers about pricing.

And the cost side of it of course, as if theyre going to be very long term, we're going to have those conversations, but I would say, they're long and substantial relationships and we managed through the quarter to quarter stuff.

With them it really in both directions, but really the focus is on that.

Driving innovation, if you drive innovation youre going to get a better return for it and quite frankly, I think we've seen that over the last three or four quarters as we bought energy assist in our our 18 terabyte drive.

39% gross margin this quarter and.

<unk> is a multi year high so we feel we feel very good about that.

Yeah.

And speakers.

Our final question I'll turn it over to you for any closing remarks.

All right everyone. Thanks for joining us we really appreciate it it's always good to talk to everyone. Thank you for all your questions and we look forward to talking to all of you throughout the quarter take care. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

[music].

Sure.

[music].

Thank you for standing by and welcome to the Western Digital's first quarter fiscal year 2022 conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your first speaker Mr. Peter Andrew.

Thank you. Please go ahead.

Thank you and good afternoon, everyone. Joining me today are David Goggler, 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 portfolio expectations business plans and performance trends.

In financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual.

<unk> to differ materially.

We will also make references to non-GAAP financial measures today.

With that I will now turn the call over to David for his introductory remarks.

Thank you Peter.

Good afternoon, everyone and thanks for joining the call to discuss our first quarter of fiscal year 2022 results.

We are proud of as we continue to navigate uncertainty and volatility in the market.

While these disruptions are transitory so long term opportunities for western digital remain unchanged as the world's digital transformation continues to accelerate.

During the quarter, we shipped a record level of extra bytes, while also improving non-GAAP gross margins across both flash and HDD and generating profitable growth.

<unk> and uneven geographic demand due to Covid lockdowns.

Our continued focus on innovation and a more agile business unit structure enabled us to quickly adapt to these dynamics.

During the first quarter.

<unk> represented a record 44% of total revenue led by record capacity enterprise hard drive revenue and nearly 30% sequential growth in enterprise SSD revenue.

We believe the accelerated digital transformation will continue to drive growth in this end market and continue to shift our business mix towards the cloud.

The client end market represented 37% of revenue in the first quarter.

Lastly, the consumer end market accounted for 19% of revenue in the first quarter.

The highlight of this end market is the strength of our sand this brand of retail products and.

And the WD black brand of storage products for gaming enthusiasts, which is strong and growing the.

The brand recognition and infinity combined with our unmatched reach with nearly 400000 points of presence across the world.

This is a great setup for western digital as we enter our seasonally stronger part of the year.

With that I'll now provide a recap of our HDD and flash businesses as it relates to our first quarter results.

In HDD continued strong demand for our latest generation energy assisted drives among our cloud and enterprise customers drove record revenue and exabyte shipments and our cloud end market.

In addition, we experienced strong revenue growth in our smart video product line and we are unable to meet demand.

During the quarter, we announced opting NAND a revolutionary technology that utilizes flash in the HDD control plane to further increase aerial density.

With this leading architecture, we achieved 20 terabyte capacity using our field proven <unk> mechanical platform and <unk> technology.

Next month, we will commence volume shipments of our 20 terabyte <unk> hard drives based on <unk> NAND technology.

In flash revenue grew in the quarter due to continued strong demand within the cloud and client end markets for our latest generation of our enterprise SSD products and the ramp of new <unk> phones, incorporating our latest fixed five node.

We expect these qualifications to start to drive accelerated revenue growth in 2022, as our customers begin to deploy these products into their networks.

The ramp of next generation <unk> phones, incorporating our latest generation of <unk> five products accelerated in the quarter with revenue growing over 20% sequentially.

We expect this migration to five G combined with a continued increase in the amount of storage per phone to drive another strong quarter of revenue growth in the fiscal second quarter gain.

Gaming was strong in the quarter with a solid lineup of products for game consoles, along with a growing brand recognition of WD black based products in the channel in retail heading into the second fiscal quarter, we are well positioned to take advantage of seasonal strength and grow in a wide variety of gaming channels.

As I noted earlier, the client PC Oems distribution channel and retail were impacted by our customers' ability to ship product.

Greater component sourcing constraints within our own operations and uneven geographic demand due to Covid lockdowns demand was solid but these transitory issues impacted our ability to realize this demand and our results.

In total.

Bid growth accelerated to 30% year over year in the first quarter as we ramp <unk>, 5% to 17% of flash revenue.

This quarter, we expect year over year bit growth to further accelerate to the mid <unk> range with <unk> five bit crossover to happen later in the quarter.

Our long term goal is to grow bits in line with the market taking advantage of our product and end market breadth to shift our beds to optimize profitability.

Fundamentally drive improved profitability, regardless of market condition.

We believe that the migration to the cloud and demand for storage solutions throughout the client and consumer markets will drive a huge opportunity for western digital and our customers.

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

Total revenue for the quarter was $5 1 billion up 3% sequentially and up 29% year over year.

Non-GAAP earnings per share was $2 49.

Please note that EPS included $56 million in total COVID-19 related costs, which was higher than we anticipated entering the quarter.

I'll provide more details on these costs in a minute, but we are pleased to deliver such good results in the face of this unanticipated headwind and other supply chain issues.

From a disclosure perspective in addition to the change in our end market breakdown that Dave discussed this quarter, we move to segment reporting for our flash and hard drive businesses for more details. Please refer to our earnings deck.

Looking at our end markets cloud represented 44% of revenue at $2 2 billion up 12.

Percent sequentially and up 72% from a year ago.

Represented the second quarter in a row of record revenue.

What is encouraging about this cloud revenue growth is the strength and breadth of our revenue streams across product areas.

There was growth on a sequential basis in both flash and hard drive business units as well as across every product category within the cloud, including capacity enterprise drives enterprise Ssds smart video and platforms.

As the cloud continues to grow as a percentage of our revenue, we see an opportunity to reduce volatility in revenue and profitability.

Over the last three quarters, we have successfully ramped our 18 terabyte energy assist to drive to our highest volume mainstream product within the cloud end market overall.

Overall cloud HDD exabyte shipments grew 9% sequentially and over 70% year over year.

And comprised over 80% of total HDD exabyte shipments.

Client represented 37% of revenue at $1 9 billion down.

Down, 2% sequentially and up 6% year over year.

A highlight within our client and market was growth within our flash business unit, specifically in mobile gaming automotive Iot and industrial applications.

Our strengths here it was more than offset by pressure in desktop and notebook hard drives due to supply disruptions at our customers and with our within our own operations.

Finally, consumer represented 19% of revenue at $973 million.

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

Both our flash and hard drive business units declined on a sequential basis due to similar supply disruptions. In addition to uneven geographic demand due to Covid lockdowns.

Turning now to revenue by segment, we reported flash revenue of $2 5 billion up 3% sequentially and up 20% year over year on.

On a blended basis flash asps were down 3% sequentially, primarily due to mix and pricing within our transactional markets on a like for like basis Flash Asps were flat.

Flash bit shipments increased 8% sequentially and 30% year over year.

Hard drive revenue was $2 6 billion.

2% sequentially and up 39% year over year on a sequential basis total hard drive exabyte shipments increased 4%, while the average price per hard drive increased 5% to $102.

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 first quarter was 33, 9% up one percentage points sequentially.

As noted earlier this included $56 million in Covid related costs or one one percentage point impact.

These are the highest COVID-19 related costs in over a year.

Our broad routes to market and ability to proactively shift fits to the most attractive end markets enabled us to expand our flash gross margin by one five percentage points sequentially to 37%.

Our hard drive gross margin was 39% 60 basis points sequentially. This included COVID-19 related impact of $51 million or approximately two percentage points.

Operating expenses were $761 million within our guidance range.

Operating income was $952 million, representing a 15% increase from the prior quarter and tripling year over year, highlighting our profitable growth.

With our improving profitability our tax rate in the fiscal first quarter was 11%.

Earnings per share was $2 49.

Toward the top of our guidance range.

Operating cash flow for the first quarter was $521 million and free cash flow was $224 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 a cash outflow of $297 million.

We continue to expect gross capex for this fiscal year to be approximately $3 billion.

And cash capex to be around $2 billion.

In the fiscal first quarter, we paid off $213 million in debt, including a discretionary debt repayment of $150 million or.

Our gross debt outstanding was $8 6 billion at the end of the fiscal quarter.

In addition, as a result of our strong financial results and free cash flow generation last week, we repaid the remaining balance of our term loan b and the amount of $943 million.

Bringing total gross debt outstanding to $7 7 billion.

Our adjusted EBITDA at the end of the first quarter as defined in our credit agreement was $4 2 billion.

Resulting in a gross leverage ratio of 2.0 times down from $2 seven a year ago and was the lowest in three years.

As a reminder, our credit agreement includes $1 billion in depreciation add back associated with the Flash 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 onto our outlook, our fiscal second quarter non-GAAP guidance is as follows.

We expect revenue to be in the range of $4 7 million to $4 9 billion.

And we expect flash revenue to increase sequentially in hard drive revenue to decline sequentially.

We expect gross margin to be between 32% and 34%.

We expect operating expenses to be between 760 and $780 million.

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

Our tax rate is expected to be approximately 11% in the second quarter and for the fiscal year.

We expect earnings per share to be between $1 95, and $2 25 in the second quarter, assuming approximately 316 million fully diluted shares outstanding.

I'll now turn the call back over to Dave.

Thanks, Bob.

I want to conclude by thanking the western digital team for their hard work and commitment to our customers throughout a challenging quarter. Despite.

With our deep roots in a broad range of end markets and a sharp focus on execution.

Confident in western Digital's ability to capture this massive opportunity and im looking forward to the rest of the fiscal year.

Let's now begin the Q&A.

Thank you as a reminder to ask a question.

Star one on your telephone to withdraw your question press the pound please.

Please standby, while we compile the Q&A roster. Our first question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Hey, Aaron.

Hey, sorry, guys can you hear me, Okay no problem.

Hey, sorry about that yes, so I guess I got two quick questions if I can.

I guess first of all it.

It seems like Theres, a lot of moving parts.

In the quarter and more importantly into the guidance outlook for fiscal Q.

Bob I'm just wondering if you can help quantify for your best estimate of how much impact you're carrying in the revenue expectations relative to some of these quote unquote transitory effect.

Perfect.

Yes, it's difficult to quantify right because there is an impact in terms of our own execution, which I think we worked our way through pretty well during the quarter and then we have customers who have supply chain challenges as well, where they are trying to get match sets and build out there.

Environments, and then of course, we have supplier challenges as well or were working like everybody else, it's pretty hard to get components and so it's it's difficult to give you.

Definitive answer in terms of what the impact was in the quarter, we just closed or even.

Obviously in the next quarter, but.

It's certainly somewhere in the couple of hundred million dollars range and potentially a little worse in the December quarter.

Hey, Eric This is Dave first of all thanks for the question.

Having their demand impact are our demand from them as being impacted by their ability to get other components. So it's really become a much more broad based issue across the portfolio.

And then if I can follow up real quickly.

One of the things that stands out to me is that I think you reported a blended ASP decline.

A decline of about 3% sequential in the flash business, though I believe the mix of enterprise actually went up to the positive so.

Yeah, I can start and then Dave can fill in.

Yes, I mean, the blended asps as we started the quarter, we indicated we expected it to be down and it was based on the mix. We were anticipating the mix came in essentially the way we had expected.

And it was I don't want to get into every little detail of the mix, but one of the things. We said at the beginning of the quarter was we expected more mobile volume.

In the September quarter, and that is what we saw we actually think we will see even more in mobile.

As a percentage of the total in the December quarter. So mix is definitely a bit of a headwind for us, but really asps are not going down that much and we're really pleased with the cost reductions we've been able to.

<unk> both in the quarter, we just finished as well as what we're expecting to do this quarter.

Yes, I guess Eric.

Sure.

Right on the money on that I guess, the only thing I would add is.

Yeah, a little bit of softness in some of the transactional and consumer markets.

We're already seeing that level out a little bit.

And we're really seeing this bifurcation where.

No.

The qualified bids in the market are strong.

Unqualified or a little bit weaker I guess, that's not surprising giving all of the nodal transition the industry is going through but.

The primary issue I would say that's the issue at mix as Bob pointed out and we expected that walking into the quarter.

Okay. Thank you guys.

Thanks.

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

Yes, good afternoon, and thanks for taking the question.

I guess, if I look at your revenue guide and kind of any commentary on <unk>. It sounds like the implied HDD revenue guide is roughly down 15% sequentially. So I guess.

Is the math right, there and I guess, what's causing the severity of the decline.

Can you kind of help us understand what's digestion versus some of the transitory supply chain issues.

I spoke to.

Yes, I think thats, probably a little I mean, we don't guide each individual business, but I think your number is probably a little little heavy.

You hit on some of the issues. Some of it is mix, we've actually got one of our very very big customers that has their own supply chain issues thats pushing out some orders. So that's a bit of an idiosyncratic thing thats happening there.

There's some there's some supply chain issues with especially in kind of mid cap and the ability to build all of that supply. We want we've talked about that even in this past quarter and the smart video market, which is strong.

And there are some unmet demand there.

So we expect all of those things are are transitory issues, we're really happy about the portfolio.

The fact that <unk>.

AT&T.

Now.

The majority of the portfolio, we talked about shipping 'twenty T. On a nine desk platform an opt in NAND is out there and in customers hands. So we.

We feel really good about the innovation that was delivered in the quarter and about where the roadmap is going and to drive business and the new technology has been very well received.

That's great.

Yes.

Follow up Bob could you speak to.

How we should be thinking about gross margins into the first half of 'twenty. Two obviously there is certain names in terms of.

Revenues.

And NAND pricing, but would love to hear perhaps some of the other puts and takes that we should be thinking about as well as the timing of when you think some of the COVID-19 related costs may abate.

Yes C J.

You are right it is difficult.

To say exactly whats going to happen over over the next few quarters.

And as you know, we only give guidance one quarter at a time now having said that.

We're pretty optimistic on 2022.

We think a lot of the challenges in the quarter, we closed in the quarter. We're in now are really supply chain related we think the underlying demand situation is very positive.

We really believe as I said in our cost reduction plans and we think we'll be able to deliver solid margins.

Okay.

Don't want to get into giving guidance for next year, but we're definitely optimistic.

Thank you.

Sure.

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

Great. Thank you I Wonder if you could update us on where you are with big five qualification I assume.

You're saying you'll be mobile heavy this quarter I mean, just youre kind of still getting qualified across the SSD markets had a follow up.

Yes, I think Thats right I mean, it's early in the node we are happy with the ramp this quarter. We ended up I think 17% fix five and we expect to get crossover before we exit the year, but like.

Any new node, you're in more of more of the mobile or components market as the rest of the products get qualified but that's all that's all work underway in.

Our customers are definitely pulling us in that direction. They want <unk> five on the on the SSD products and the engineers are hard at work in getting that getting that work done there'll be an evolving story as we worked through 'twenty two.

Great. Thank you and then.

You referenced some of the segments and client SSD, maybe being a little weaker can you separate out is there a chia effect there where it was good for a while and then it was less good versus just overall client SSD being oversupplied because of other issues in the supply chain like.

How do you sort that out and what do you see happening in the client SSD market.

I don't think we see it has achieved a fact I mean I was just talking to our sales team. This morning, and I think the channel is now kind of normalized and back on seasonality after that she had disruption.

I think we just see this issue with with people not able to get all the components they need to put together a full kit for what they want to ship and thats, causing some softness in the channel. So I think I think it's more related to that than it is anything cheer related.

At least in my mind.

Yes.

Thanks.

Thanks, Joe.

Thank you, ladies and gentlemen, as a reminder.

We ask that you. Please limit yourself to one question due to time restrain. Our next question will come from Karl Ackerman with Cowen. Please go ahead.

Yes. Thank you.

Bob earlier in a responsible question you had indicated some of the.

Impact our challenge in your enterprise.

Leaf.

<unk> business in SSD business was a result of pushed out by a customer.

My question there is.

If we isolate that customer how do you see the demand trajectory of cloud in mass capacity markets.

Not just since the December quarter, but also into the second half of your.

Fiscal year.

Certainly as you begin to ramp.

Some of these 20 terabyte drive in other higher capacity drives.

And harder in hdds as well as some of these new design wins do you have an enterprise SSD. Thank you.

So we didn't take that or you can start okay. Yes. So I think I think as a general statement. We're seeing continued very strong demand from our datacenter customers, especially are very big data center customers.

They're giving us good signals about next year and what they plan to do.

<unk> hard to pin that down to a certain quarter right now but.

We continue to see very strong demand there like I said, we're starting to see the supply chain impact show up there as well.

But I'm sure that will all get worked through as we go through the year, but.

We look into 'twenty, two and we have our customers telling us.

It continues to be a strong demand environment.

Yes, I don't think I have anything to add.

We believe in the cloud demand I think it's strong and just as a lot of supply chain dislocation right now.

Thank you. Our next question will come from Ramsey Mohan with Bank of America. Please go ahead.

Hi, Thank you for taking my question. This is actually John on behalf of <unk>.

Just curious there hasn't been a lot of immediate focus on.

And in the past Western digital has expressed interest in the asset.

Do you think that consolidation still makes sense and can you still have an appetite for it.

Thank you.

Well I mean, I think I'll speak in general about <unk>. They are a tremendous JV partner and we've spoken a lot about the JV and what the what the benefits of that are.

And all the I think one of the highlights of the quarter is that.

Continued.

Yes.

Production of the flash roadmap in <unk>, five and the cost situation that thats driving I mean, I think it's always been a very big focus of the western digital and <unk> team to very focus on capital efficiency and.

And cost downs in the portfolio.

The seeds for <unk> five performance that we're seeing now where so many years ago that continues to be a great focus of the joint teams and I think the fact that we have a joint roadmap with.

With another supplier as big as skilled should gives us a lot of a lot of.

Investment in our roadmap and then of course, we produce we produced together as well and have a lot of synergies there as well so.

It's a great partnership.

It's been it's been going for over 20 years now it's going to go for we're signed up for at least another decade, and we're always look at that as we continue to invest in Fabs and <unk>.

We're really happy with the partnership and we're going to we're going to continue to get the best out of it.

Thank you. Our next question will come from Mehdi Hosseini.

Please go ahead.

Yes. Thank you two questions.

The first one is for the team obviously, there is a long lead time.

Associated with the equipment procurement. So at this point I would think that you have a pretty good year.

For NAND.

<unk> bit supply growth in calendar year 'twenty. Two is there any color you can share with us and I have a follow up.

I mean, we do have good visibility and you saw a big growth K.

Back up again this quarter, we expect it to be a bit higher year over year next quarter. Our long term goal continues to be to grow at the rate the market's growing and we won't get that perfectly every quarter, but that's our objective and we think that again with <unk>. We've got the right plans in place for next year.

But what is the target for next year current year.

Yes, I don't think we put a specific number out there yet some of the industry analysts, suggesting industry demand growth in the low 30% range.

Got it thank you and given the fact that.

Your enterprise and cloud customers.

Yes.

Good solid demand in calendar 'twenty two have you determined how.

To allocate them, perhaps I'm trying to better understand how you're thinking about the mix.

<unk> cloud enterprise and client and consumer.

Yes, I think we're certainly having those discussions with them I mean, I think every quarter, we discuss the current quarter in many many quarters several quarters in advance at least I mean, we don't we don't lock in per se on those numbers exactly but we think about share of their of their particular.

Mix equation of that as well as kind of referred to in the previous question lennar different products available on different nodes out of the fab. So.

We're working through all that right now.

Okay.

Thank you. Our next question will come from Timothy Arcuri with UBS. Please go ahead.

Hi, Thanks, I wanted to go back to the HDD Guy.

Guidance and just maybe ask around what the normalized base of revenue is.

Obviously, your peer guided flat youre down kind of like low teens, it sounds like something in the range of $2 5 billion.

Yes, I mean again, it's hard to quantify exactly what the supply chain impacts were and we're actually not giving guidance by segment, but.

We definitely believe the hard drive business as a growth business and it will continue to grow over the next few quarters. We think 2022 will be a strong year.

And this is a bit of an aberration in the December quarter, but.

The business is really solve the underlying demand is very good and youre right. I mean, we already commented that there are some supply chain issues that are impacting us right now.

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

Hi, guys. Thanks, so much for taking the question.

Dave I wanted to ask about enterprise Ssds, you talked about now being qualified.

Five three cloud Titans, which is great.

Also talked about some.

Some of these wins translating into revenue growth and potentially driving an acceleration in growth in 'twenty two.

Initially it would it be would it be a headwind and then eventually a tailwind or should it be fairly margin neutral preferably gotcha. Thank you.

Sorry.

So so first of all yes, we are really happy with the progress of the portfolio I remember sitting here a year ago, and we were just trying to get over the over the hump on the first one and now we're over at three of them and we continue to work at the Oems, which the enterprise Oems, which tend to be longer qual cycles, and we're making good progress there as well.

And Youre right well, we got the call is done we'll start to see some a little bit of deployment next quarter, and then start to ramp it throughout 'twenty. Two so I think it's an evolving story as we go throughout the year.

From a from what is it.

That's definitely a true statement.

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

Hey, Thanks, guys. Good afternoon, thanks for taking the question.

Just my question would be four or whatever it is that you guys are considering.

The revenue impact.

December quarter guide.

Just sort of anecdotally map out for us how much is the flash business relative to HCV and then inside of ACD hamlets would be from <unk>.

<unk> got the cloud Titan sounds like there's some components.

On their side there and then you had mentioned some candle dynamic and lots of WD dynamic as well.

The PC business.

Would be helpful. Thanks.

Yes, I mean this is.

Okay.

The there are supply chain challenges with some cloud customers or supply chain challenges with some PC Oems.

Uh huh.

Thank you. Our next question will come from Vijay Rakesh with Mizuho. Please go ahead.

Yes, hi, guys.

My question's on the client SSD side I should look at next year just wondering.

How are you thinking.

So it looks pretty strong for next year, but on the client SSD side and on mobile to how you are looking at next year's demand. Thanks.

Yes, we think the PC Tam as good next year I mean, we're obviously coming off of a blockbuster year with Covid and then.

We see the pre Covid baseline is around $265 270 million units.

That went up to 340 this year expect it around that number and we see somewhere around 320 to 335 next year. So it's definitely been.

Going to come off this year, a little bit, but we're see we see basically the baseline has been reset pre COVID-19 by a significant amount. So so we feel good about that.

Hearing that from our customers, we're where we're talking to those customers now about 2022 plans and what they plan to do and how much supply they're going to need.

And share conversations with each of them and those conversations are going well.

The smartphone market.

We continue to see this past quarter in the quarter and we're seeing really good strength.

In that market.

So I think this is a larger point here about the flash market is out there. The number of end markets is just more diverse now, especially with enterprise SSD growing and getting to be such a big market.

Theres a much theres, a much better mix of of of demand.

That that we play across in the market and so we see strength in PC, we see strength in smartphones, we see strength in data center.

Like we said the more transactional markets this past quarter.

As more more nodal transitions going on there was more bits available in those markets and we definitely saw that.

The holiday season.

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

Thanks for taking the question relates to a hi Fi.

Earlier, you talked about inventory issues in China.

Can you add a little color to that how much.

Alright, how much excess inventory out there do you think that will get back to normalized level of exiting the year at any other geography watching out right now.

That's the main geography, we're watching and it's mainly high capacity and we think it will get worked through in the next quarter.

But.

Definitely in the channel and at some of the big customers. So.

Is this something that's going to impact the amount of business that goes that flows through that part of the market, which is pretty big market for all of us.

But we don't see it more than a quarter, maybe a little bit of more of impact.

Thank you. Our next question will come from Patrick Ho with Stifel. Please go ahead.

Thank you very much Bob.

Prepared remarks, you talked about the different variables in terms of the supply chain in the commission rate the suppliers your own manufacturing efficiencies as well.

The customers can you for both.

Sure.

Timber in December.

Kind of a qualitative.

Commentary on which were the biggest impacts in both September and December.

Yes.

What I said earlier is we're actually expecting December to be a little more challenging than what we saw in September in the September quarter was not easy.

Starting with our own teams. So I think we did a really good job given.

What was going on with Covid in Southeast Asia. We did mentioned Covid costs were up to $56 million this quarter and we've done a really excellent job in terms of working with local governments to try and get as many employees vaccinated as possible and to really do the best we can.

Sure supply in terms of our own factories now as we mentioned like everyone else, we have challenges in terms of getting components as well.

Particularly obviously the controllers on both the hard drive and flash side and that has an impact on the business.

I don't know quarter to quarter, which.

Which quarter is worse, but it's a challenge in both of them.

It's a challenge it's not going to go away soon in terms of the semiconductor availability I mean, we're getting some lead times of 50 weeks right now so it's a.

It's definitely a very real issue in terms of getting components in and then we've already talked a fair amount about the customer challenges and I would say it feels to me and Dave can comment like there are more customers impacted by the supply chain in the December quarter than there were in the September quarter seems a little little more broad base.

Yes, I don't think Theres any doubt about that I think when we talk to our sales teams and we talk to our customers I mean, it's.

I think just over the last month or so the number of places where we're hearing they're not able to meet their own true demand or are they can't pull the demand from us if they are building their own infrastructure because of the supply chain components is definitely broadened.

And it's Brian I think it started in some of the PC makers I think thats, where we heard the most about it if you go back a couple of quarters and now like I said, we are hearing more about it.

In other segments, including the Big data center provider so is.

Definitely an impact of the business and we just navigate through it I mean I think.

Now when you talk to our customers and we talk to our own.

We talked to our own sales teams that we look at what everybody is telling us. The end demand continues to be very very strong and everybody is just trying to figure out how to meet that and how to get enough components and get the right components to build the right kit.

Whether it's for something they're going to sell or its building their own infrastructure to build what the what they need and as Bob said, we see that ourselves and our ability to get components in our ability to make sure our factories continue to run in <unk>.

I'll say I'll be a little bit selfish here and complement our own teams but.

The Delta variant in Asia was a very big impact and this quarter was probably one of the most difficult since Covid started there were points, where we had thousands of employees in quarantine and still kept everything going so.

When you see what's happening on the ground and what the impact has been it's not hard to understand how all the discussions around supply chain impacts.

I think the good news is that we're working very very hard as Bob said with governments to get vaccines distributed and get things back on track and as we exited the quarter and we sit here today things are in much much better shape than they were a couple of months ago. So it makes us optimistic as we go as we go through 2022 that this will get worked out.

And.

And that will all be able to meet the true demand thats out there.

Thank you. Our next question will come from Harlan sur with Jpmorgan. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. So on your client business you guys talked about the PC market being weak in September due to supply disruptions at customers. We all know about the.

Challenges on components shortages, that's been pretty well telegraphed.

Also mentioned that WD sort of specific supply chain disruption on client HDD as well.

The primary impact the shortage of HDD controllers, and <unk> I'm sorry.

The primary impact on the COVID-19 related sort of operations.

Disruptions and given.

Given your semiconductor suppliers lead times when do you expect to see your client HDD specific chip supply issues start to ease.

I'll take a crack and then Bob can add some color as well I mean, it depends on how you look at it I mean.

Our own supply is mainly around controllers I think it's fair to say and as Bob said, we're planning a year out on lead times and working with our own suppliers on how we.

Number one make sure we get everything we need to meet our demand, which has been challenging and then get it in a timeframe that we need but we're working through it and.

Like I said I think that.

There's no doubt if you go back a couple of quarters, we've been talking about this about how we were not able to meet.

All the demand that we saw out there I think the thing that we see different walking into this quarter.

Customers can't get all the pieces they need so they don't need everything from us. So we're starting to see some hence in some markets starting to clear up a little bit Super early days, but again.

Look at what's going on in the ground in Asia things are getting better at least from our perspective, our narrow perspective, although we have 40 50000 people there things are getting better on the ground.

That gives us optimism that the situation will improve from here as we go through 'twenty two.

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

Hey, guys. Thanks for taking my question I had another one on the ACD business you guys have done a really good job of improving profitability over the last year.

Year plus.

My question is is it related to supply issues clearly theres a revenue headwind here could you talk about the impact of gross margins do you expect that youll see a greater impact there because of the supply issues or is this more of a revenue issue with gross margins kind of hanging in any help there would be would be nice.

Let me start and then turn it over to Bob I mean, I think there are some there are some headwinds one of them would be a little bit of mix because at least for one quarter impact because we've got such a big customer pushing out some demand and then you've got pricing going up on components. So you have got inflation in the supply chain is.

As a bit of a headwind as well.

All that said we appreciate your comments the team has worked extremely hard.

We've rolled out a lot of innovation and the drive business and driven the gross margins 39. This quarter. We thought was a great result that on top of that we had a couple of points of COVID-19 headwind on top of it so.

It all starts with making sure we deliver.

Great product to our customers. It starts with innovation you guys have heard me say this many many times and I think the innovation engine is alive and well.

They're big step forward this quarter with opt in NAND and I think as the team continues to drive innovation and we drive great products to our customers will have the opportunity to continue to have.

A better conversation with our customers around profitability.

All that said there are there are some headwinds I would say in the near term.

Yes, there are definitely headwinds, but like you said the team has done a great job in terms of the product portfolio.

We think that gross margins will be down a little we are going to have.

Covid costs in the same ballpark as we have this quarter. So that's a couple of points, but I think we've got a really good chance of having gross margins above 30% again on the hard drive business.

Yeah.

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

Thank you I just have one question and it sounds like the December outlook is truly an aberration.

As such the aberration. Thank you so much.

Well I mean first of all we're in a very unique time.

We're still.

I think as we talked about the supply chain change.

Chain disruptions that have been brought by Covid and especially the delta variant that really.

Pushed through Asia over the last quarter or more have been very very significant and very severe.

And to the people that we're managing the situation on the ground there. They did a tremendous job of they had an enormous amount of work just to keep keep everything running.

So I think that just leads to a very unique environment, Jim that we're navigating through.

Like I said, when we look at demand and we look at what our customers are telling us about demand in the market.

We hear very good things, we are very very positive and very bullish.

We just had we just have different customers and different states have their own ability to build what they they need to build or want to build.

And that's.

Thats constantly shifting and when you add it all up in any particular quarter youre going to get a result, and Thats, what we got and that's what we'll manage too, but we think that as the supply chain issues get worked out.

The demand trends in the business are very very strong and we're on the right side of where the world is going from a technology point of view.

Now I thought it was significant this quarter to 44% a record percent of our quarter was in the cloud and hopefully you guys.

React positively to our.

Simpler decomposition of our revenue across cloud client and consumer.

But we expect to see more and more growth in cloud, 772% year over year growth in that part of the business and we.

We continue to have the portfolio pivoting in that direction.

And expect it to be.

We expect to participate in that growth as it goes forward.

Yeah.

Thank you. Our next question will come from Steven Fox with Fox Advisors. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

So I guess I'm, just trying to understand the idea that none of the demand push outs are perishable. It's because this is the seasonally strongest quarter of the year.

How do we have confidence around that maybe not necessarily that it's it's perishable, but maybe <unk>.

Spending that would have occurred in December it doesn't occur in March even if there is availability just because of timing.

Around the usual timing around spending.

Well again I think it goes back to you.

Yes.

If you are talking to a very large cloud provider, that's trying to build out their infrastructure I think theyre going to catch up on building it out to what their demand is if they can't do it this quarter they'll get the components in the next quarter or so.

Again, we see a very we see very good demand environment.

And.

I think that.

As as our customers are able to get all the components. They need they will continue to come back to us and adjust their demand to us. That's what we see we have very close relationships with them and so I don't expect that.

As the demand from our customers' point of view is not like kind of a one quarter thing. It's like it's just a it's a demand curve that goes on and I don't see it as being perishable demand I see it as everybody is trying to figure out how they can get as many components as they can to build complete kits for what they need to do and as they do that they come back to us and <unk>.

Changed their demand signal and we've seen that.

Maybe a good example is on some of the PC manufacturers, where one quarter they'll dropped their demand significantly in the next quarter they'll come back and raise a significantly when they've got their own supply chain issues worked out so as I said, we've seen this in other parts of the market and we've dealt with it and we know how to deal with it and now we're just seeing it across a broader cross section of our <unk>.

Business.

And quite frankly, some really big customers across that are in that in that mix now.

Well, we've been working through this now for the last several quarters and we'll work through it this quarter.

And the most seasonal businesses the consumer business and we are expecting to have a sequential increase in the consumer business I think that's probably where there might be perishable demand, but we think that it'll be pretty solid this quarter.

Yeah.

Thank you and today's final question will come from Stephanie <unk> with <unk> Nikko Securities. Please go ahead.

Thank you for squeezing me in Dave I had a question about your pricing strategy going forward, especially given the cost inflation, we're seeing in the supply chain.

Some of the cost increases are temporary and some may be permanent.

I'm just curious as to hear your thoughts on it.

In your conversations with your customers.

What kind of feedback you're getting as you kind of look to pass through some of these.

Cost to your customers and also I want to hear about your what you think your ability to ease in terms of passing through some of this incremental cost.

If these costs continue to.

<unk> remained permanent.

I think you hit on the answer in your first part of your question set up which is these are broad and long relationships with our customers and they don't go up and down quite so fast. So we certainly have conversations with our customers when our cost increase but it's not as simple as just passing it along.

It's got to persist for a while before we would have that conversation and quite frankly, we participate in a market.

Those are the things we introduced the 20 terabyte drive it are going to be shipping that in volume now here in the next month.

That's with our energy assist technology nine platter nine disk.

<unk> 2.2 terabytes per platter. So that's the primary issue where he is going to drive an innovation led discussion with our customers about pricing.

With them it really in both directions, but really the focus is on that.

39% gross margin this quarter.

And <unk> is a multi year high so we feel we feel very good about that.

And speakers.

Our final question I'll turn it over to you for any closing remarks.

Alright, everyone. Thanks for joining us we really appreciate it it's always good to talk to everyone. Thank you for all your questions and we look forward to talking to all of you throughout the quarter take care. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q1 2022 Western Digital Corp Earnings Call

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