Q4 2022 Western Digital Corp Earnings Call
Good day, and thank you for standing by.
Welcome to Western Digital's fiscal fourth quarter 2022 conference call.
Presently all participants are in listen only mode.
Later, we will conduct a question and answer session.
At that time, if you would like to ask a question you may.
Press Star one on your phone.
As a reminder, this call is being recorded.
I'll now turn the call over to Mr. Peter Andrew Vice President S. P. N. A N investor Relations you may begin. Thank you and good morning, everyone. Joining me today are David <unk>, Chief Executive Officer, and Lisa I'm job Ray Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking.
<unk>, including product portfolio expectations business plans and performance.
And market trends.
And financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause a.
Actual results to differ materially.
We will also make references to non-GAAP financial measures today reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.
With that I'll now turn the call over to David for introductory remarks.
Thank you Peter good.
Good morning, everyone and thanks for joining the call to discuss our fourth quarter and fiscal 2022 results.
I am pleased that the western digital team executed well and delivered solid results in light of the ongoing macro and geopolitical dynamics.
We reported fourth quarter revenue of $4 5 billion non-GAAP gross margin of 32% and non-GAAP earnings per share of $1.78.
All within the guidance ranges, we provided in April .
Fiscal year 2022 revenue totaled $18 8 billion and we reported non-GAAP earnings per share of $8.22. This.
This compares to revenue of $16 9 billion and non-GAAP earnings per share of $4.55 in fiscal year 2021 week.
We grew revenue, 11% and then EPS increased 81% demonstrating progress in unlocking the earnings potential of our business.
In addition to strong financial performance fiscal year 2022 was a hallmark year for western digital from an innovation product development and execution perspective.
In particular, we regained innovation leadership with the introduction of multiple products and technologies for the cloud.
In May we announced a 26 terabyte drive leveraging our <unk> NAND in ultra <unk> technologies as well as <unk> and.
Impressively. This means we've nearly double drive capacity relative to when I joined Western digital just over two years ago.
In flash, we expanded adoption of our Nvme enterprise SSD from one cloud Titan to three as well as qualification at several enterprise OEM suppliers.
From an organization perspective, we have bolstered the company's executive management team further strengthening our ability to derive to drive operational excellence innovation and disciplined financial management.
On top of all of these achievements, we reduced debt by $1 $7 billion and obtained an investment grade corporate rating, placing western digital on a solid financial foundation.
Before I jump into it.
Into additional detail on the quarter I wanted to provide an update on our strategic review as.
As you know two months ago, we announced that we are reviewing potential strategic alternatives aimed at further optimizing long term value for our shareholders.
The Executive Committee of the Board, which I lead continues to oversee the review and Elliott management is participating alongside us under a nondisclosure agreement along with other interested parties.
We're evaluating a range of alternatives, including options for separating our market, leading flash and HDD franchises. We are moving expeditiously, but this work will take time, we will not be answering any questions about the strategic review today, giving the given the ongoing nature and confidentiality of the <unk>.
Assess we will provide updates in the future as appropriate.
Now I'll provide updates on our HDD and flash businesses.
During the fiscal fourth quarter strong demand from our cloud customers for our latest generation energy assisted drives drove near record near line shipments of 111 extra bytes.
Total HDD revenue declined declined sequentially, due primarily to consumer and client HDD demand.
We commenced commercial shipments of a number of products incorporating our <unk> NAND technology.
In addition to shipments of our 2020 two terabyte <unk> drives qualifications of our 26 terabyte <unk> drive are underway.
As we noted our product launch event in May.
This <unk> enabled drive enables 20% higher capacity than our CMO variance offering significantly better tcl for our cloud customers and further highlighting the performance driven benefits of the innovation that western digital is packing into a hard drive.
Finally, we are ramping our second cloud customer with SMIC technology this quarter and remain on track to lead the industry's transition to <unk> base drives for the cloud.
We are very confident in our multi year product roadmap for capacity enterprise drives, which combined <unk> Nan ultra <unk> and triple stage accurately actuators to deliver a cutting edge portfolio of dries in commercial volumes at a wide variety of capacity points we.
So continue to invest in hammer and the commercialization of this technology alongside our other HDD technologies, they are leading the industry.
The breadth and depth of this portfolio strongly positions us to be the provider of choice for the largest and most complex data centers in the world.
Building on the expertise cultivated over decades of bringing to market industry, leading technologies. We are committed to leveraging our innovations to continue driving business results and capacity enterprise into the future.
Turning to flash.
Revenue grew sequentially on an improving product mix and increased flash supply.
Growth in flash during the quarter came primarily from enterprise SSD with revenue more than doubling sequentially.
Gaming is another key growth market for us, where we continue to demonstrate the strength of our client SSD franchise with exabyte shipment growing nearly 70% year over year.
We have a leading position in gaming with our WD Black brand being recognized globally for innovation performance and quality.
The latest example of this is our WD Black Sn 850, Nvme SSD product certified for Sony P. S. Five game consoles, which enables players to expand the high speed storage capacity of their PSA P. S. Five console and allows them to store and <unk>.
Both <unk> five and PS four games directly from the drive.
On the technology front.
Five represented about half of our flash revenue in the June quarter.
Up from 46% in the previous quarter.
We are preparing to ramp <unk> six late this calendar year and into 2023 based on circuit under array architecture fixed six enables many exciting high performance products for <unk> phones.
<unk> and <unk> flash.
Let me now offer a few observations on the demand environment.
In the cloud end market, we experienced strength in the fiscal fourth quarter as supply constraints at western digital and our and our end customers started to ease.
Overall demand from our cloud customers has been consistently strong and we expect this strength in cloud to carry into the second half of calendar year 2022.
We believe the accelerated digital transformation will continue to drive cloud growth and believe we are on track to generate about a half of our revenue from this market by fiscal year 'twenty five.
Outside of cloud our expectations for calendar year 2022 demand growth have moderated since our last earnings call.
As the fiscal fourth quarter progressed, we saw consumer spending softened impacting both retail flash and HDD demand.
This weakness has migrated to the consumer PC end market as we enter the second half of the calendar year.
In client.
The market generally expect PC PC shipments to decline approximately 10% in calendar year 2022.
We are seeing our PC OEM customers aggressively right size their inventory to reflect current demand conditions, which will impact our business in this market in the second half of the calendar year.
After going through that correction, we expect a more normal flow of business going forward as we believe <unk> will continue to fulfill a broader use cases as the foundation of the increasingly comrade common hybrid enterprise driving unit demand above pre pandemic levels in <unk>.
Richer SSD content.
All of these PC market dynamics are accelerating the final phase of the shift of client devices from HDD to flash technology.
Consequently, the client HDD market is now declining at an accelerated rate relative to the period before the onset of the pandemic.
To reflect this reality, we are now taking aggressive action to restructure our HDD manufacturing footprint to reflect this market dynamic.
And mobile expectations for smartphone units have come down in recent months led primarily by reduced demand in China.
Industry analysts expect the smartphone industry unit volume to decrease by a mid single digit percentage year over year in calendar 2022.
While we are well positioned and supplying flash memory for <unk> smartphones. We are also seeing our largest customers aggressively resetting their inventories for these products.
We expect the inventory correction to be primarily impact our fiscal first quarter and returned to market demand for the remainder of the fiscal year.
In consumer we have a premium brand and a great franchise in the marketplace. In particular, we have developed an enviable position and excellent relationships with major brick and mortar retailers and online retailers across the globe.
Including best buy and target in the U S. MSH group in Europe , J D Dot com in China and office works in Australia. As a result of these strong relationships are impressive scale product breadth and trusted brand, we lead most consumer storage product categories.
While macroeconomic factors and Covid measures have impacted consumer demand in the near term, our customers' loyalty and preference for the performance and quality of our solutions are key differentiators, which will position western western digital well for the upcoming back to school and holiday season.
<unk>.
Before turning the call over to Sam I.
I want to leave you with few takeaways.
First at the Investor Day, we laid out the case, where the world of ever increasing intelligent devices powered by the cloud is creating an astonishing amount of data of which only a small percentage of stored.
Our conviction remains strong and our view on near double digit revenue growth remains intact.
Over the past several years the storage market has entered an era of accelerated growth.
Led by the strength of the cloud market, which drove <unk> revenue growth for western digital and the industry.
And flash capital investments for incremental NAND bit growth are becoming more expensive, resulting in a more disciplined investment across the industry.
At Western digital our long standing and growing relationships with Hyperscale and OEM customers across the world coupled with our leadership in commercializing innovations for capacity enterprise hard drives and momentum with Nvme enterprise SSD for data Center has made us a trusted partner.
Yeah.
This combination of rapid demand growth in storage technology leadership and product momentum offer western digital opportunities for financial outperformance.
With that let me now turn the call over to Sam who will discuss our fiscal fourth quarter results and provide an outlook for the fiscal first quarter.
Thanks, David and good morning, everyone.
As David mentioned overall results for the fiscal fourth quarter were in line with our expectations, reflecting their resilience and agility of our business model against such a dynamic macro environment.
Total revenue for the quarter was $4 5 billion up 3% sequentially and down 8% year over year.
non-GAAP earnings per share was $1 78.
Within the guidance range, we provided in April .
For the full fiscal year 2022 revenue was $18 8 billion.
Up 11% from fiscal 2021.
non-GAAP gross margin expanded four three percentage points.
non-GAAP operating margin increased five seven percentage points as we proactively manage our expenses.
<unk> non-GAAP EPS of $8 22.
Up 81% from last year.
Turning to our end markets for the fiscal fourth quarter cloud represented 46% of total revenue at $2 1 billion.
Up 18% sequentially.
And 5% from a year ago.
Within cloud Western Digital's continued success in leading the industry transition to energy assisted hard drives.
Drove the growth.
The continued ramp of our 18 terabyte and 20 terabyte drives drove a 7% year over year increase in near line HDD revenue.
Sequentially near line bit shipments increased 9% to 111 exited bites.
In flash.
Enterprise SSD revenue more than doubled sequentially and was up 38% year over year.
The client end market represented 36% of total revenue at $1 6 billion.
Down, 5% sequentially and 14% year over year.
On both a sequential and year over year basis.
Client HDD led the revenue decline, while flash revenue was roughly flat.
Consumer represented 18% of revenue at 0.8 billion.
Down, 9% sequentially and 23% year over year.
On a sequential basis.
The revenue decline was primarily due to lower HDD retail shipments.
The year over year decrease was due to broad based decline in retail products across HDD and flash.
For the full fiscal year 2022.
Revenue increased 40% year over year led by a 38% increase in near line HDD.
Flash product revenue for enterprise SSD applications more than doubled year over year.
Client revenue decreased 3% year over year as growth in flash was offset by a 30% decrease in client HDD.
Client HDD for Pcs and notebooks represents just mid single digit percentage of thoughts on HDD revenue exiting the fiscal year.
Lastly.
Consumer revenue decreased 6% for the year.
All attributed to a decline in retail HDD.
Turning now to revenue by segment.
In the fiscal fourth quarter, we reported flash revenue of $2 4 billion up 7% sequentially and down 1% year over year.
Sequentially Flash Asps were up 2% on a blended basis and up slightly on a like for like basis.
Bit shipments increased 6% sequentially and 11% year over year.
HDD revenue of $2 1 billion was flat sequentially and down 15% year over year.
Sequentially.
Total HDD exabyte shipments increased 1%.
While the average price per HDD increased by 19% to $120 <unk>.
As our mix continues to transition towards the cloud.
On a year over year basis.
HDD exabyte shipments decreased by 10% and average price per unit increased by 24%.
As we move to costs and expenses my comments will be related to non-GAAP results unless stated otherwise.
We continue to exert disciplined financial management to drive better results.
Gross margin for the fourth quarter was 32, 3%.
Up 60 basis points sequentially, and down 60 basis points year over year.
Our flash gross margin was 35, 9% up 30 basis points sequentially.
And 40 basis points year over year.
On both a sequential and year over year basis.
Growth in enterprise SSD for data center applications led the improvement in gross margin.
Our HDD gross margin was 28, 2%.
Up 50 basis points sequentially and.
And down 210 basis points year over year.
Operating expenses of $760 million were below our guidance range.
As we continue to prudently manage our expenses.
Operating income was $702 million, representing an 8% increase from the prior quarter and a 15% decrease year over year.
Our tax rate was 11% for both the fiscal fourth quarter and fiscal year 2022.
Earnings per share was $1 78.
Compared to $1 65 and.
In the prior quarter and $2 16 in the year ago quarter.
Operating cash flow for the fourth quarter was $295 million and free cash flow was an outflow of $97 million.
Operating cash flow was impacted by revenue linearity.
The ramp back to normal production output at the flash joint venture.
Timing of component deliveries to our factories.
And Covid related control measures in China contributed to a backend loaded quarter.
Cash capital expenditures, which include the purchase of property plant and equipment and activity related to our flash joint ventures on our cash flow statement.
Represented a cash outflow of $392 million in the fiscal fourth quarter.
We remain disciplined in investing in manufacturing capacity.
Gross capex and cash Capex for the fiscal year 2022.
We're $2 7 billion and $1 $2 billion respectively.
Below our expectation as we actively managed our capital investments.
We made a $150 million scheduled and discretionary debt repayment.
Gross debt outstanding was $7 1 billion at the end of the fiscal fourth quarter.
We ended the quarter with $2 3 billion of total cash and cash equivalents.
Yeah.
Our trailing 12 months adjusted EBITDA at the end of the fourth quarter as defined in our credit agreement was $4 $8 billion.
Resulting in a gross leverage ratio of one five times compared to two four times a year ago.
As a reminder.
Credit agreement includes zero point $9 billion in depreciation add back associated with the Flash ventures.
This amount is not reflected in the cash flow statement.
Please refer to our earnings presentation on the Investor Relations website for further details.
I'll now provide our view of both HDD and flash businesses for the fiscal first quarter as well as comments on several key items for fiscal year 2023.
For the fiscal first quarter.
We expect flash to lead the sequential revenue decline as our customers right size their inventory.
We expect and Thats simply a modest decline in overall HDD revenue.
Mainly driven by client and consumer with.
With gross margin relatively flat.
As we look towards fiscal year 2023, we expect cash capital expenditures to be in line with our target model.
Within the range of 8% to 10% of total revenue.
Total gross capital expenditures are expected to be approximately $3 2 billion.
Regarding flash Capex, we remain excited about our technology roadmap. Despite what is clearly a volatile period in the memory industry.
As we have discussed on prior calls <unk> six is a more capital intensive technology node that will require an increase in capital expenditures.
Our capex outlook for fiscal year 2023 reflects our commitment to technology leadership and will accelerate our path to leapfrog from big six two weeks plus plus in the next several years.
I am also pleased to share that the flash JV fab seven manufacturing facility at <unk> plant.
Has been approved to receive a subsidy of up to $92 9 billion yen from the Japanese government further demonstrating the strategic importance of what is the world's largest manufacturing facility.
Given the macro environment, we continue to actively manage our capital expenditures and supply.
We are in discussion with our joint venture partner to adjust capital investments and align our production growth with demand.
In HDD.
We will continue to focus our capital spending primarily in heads and media in order to meet the future growth in cloud demand.
Offsetting these investments we are taking aggressive actions to restructure our client HDD manufacturing footprint.
We strive to optimize free cash flow generation in response to the macroeconomic dynamics.
For our fiscal first quarter, our non-GAAP guidance is as follows.
We.
Specced revenue to be in the range of three six to $3 8 billion we.
We expect gross margin to be between 27, 5% and 29, 5%.
We expect operating expenses to be between $760 million and $780 million.
Interest and other expenses are expected to be approximately $70 million.
Our tax rate is expected to be between 28 and 30% in the first quarter and for fiscal year 2023.
This increase is due to the tax law changes that became effective for our fiscal year 2023.
Requiring the capitalization of certain R&D expenses that were previously eligible for immediate deduction from taxable income.
These changes are expected to result in an immediate increase in our tax rate of approximately 12 percentage points, which will then decrease gradually overtime.
We expect earnings per share to be between 35, and <unk> 65 in the first quarter.
Assuming approximately 319 million fully diluted shares outstanding.
I'll now turn the call back over to David.
Thanks Sam.
Let me just wrap up and then we'll open up for questions. In summary, we continue to believe that we have built the right foundation for long term growth.
We have reignited our innovation.
Tablets discipline in spending and investment.
And remained consistent and deleveraging our balance sheet.
The innovation engine that drives tcl benefits and value to our customers the multiple channels to deliver our products to market and the large and growing storage markets put us in a great position to capitalize on the opportunity presented by the proliferation of intelligent devices and rapidly accelerating data creation.
<unk>.
While segments of our end markets are now going through an aggressive inventory adjustment as supply chain impacts of the pandemic start to ease.
And the macro economy softens secular demand for storage continues to be strong and underpins the digital transformation that continues across all industries.
I also want to thank our employees for their hard work during the fiscal year.
Spite ongoing geopolitical and macro challenges our team worked together to deliver strong financial performance for Western digital.
I'm proud of what this team has accomplished and excited to see what we can do together in the next fiscal year.
Peter with that let's open it up for Q&A.
Thank you.
Ladies and gentlemen, we will now begin the question and interest portion of today's call.
You have a question. Please press star one on your phone if.
If you would like to withdraw your question. Please press star two.
Please for the first question.
And today's first question comes from C. J Muse with Evercore ISI. Please go ahead.
Yes. Good morning. Thank you for taking the question I guess first off just wanted to.
Clarify here in terms of what's driving the weakness is it safe to say that it's entirely a consumer client.
On the Hyperscale and enterprise side Youre not seeing.
Any changes in as part of that as you think about inventory correction on the consumer clients.
How long do you think the duration will last year.
One quarter phenomenon too early to tell we love to hear your thoughts there.
Hey, C J good morning.
Yes, I would say you've pretty much got it right. The one thing I would add to that on the cloud side as we are seeing some inventory digestion in China cloud.
U S hyperscale or continue to chug along.
But.
Especially in the PC Oems is where we saw it first very sharp inventory correction.
Really in.
In the current quarter, taking down their demand significantly to reset their inventory for.
What is the reality for the number of unit sales.
So right now we think that is a relatively short period of time is it one quarter to quarter, we will see that as we go through the quarter, but it's definitely very very sharp.
In the quarter, we're in and then in the smartphone market, we are seeing it as well as a matter of fact, it's even developing within the quarter. Just a couple of weeks ago, We had one of our biggest customers.
Take down their take down their forecast in the quarter by over $150 million. So.
And it's all like.
The message very strong message, we're getting directly from our customers. This is just resetting inventory.
So.
That one we expect to be a one quarter phenomenon I think in the larger market will see over the next couple of quarters.
I will say that in the consumer and channel space, given our broad reach and where we operate around the world in the consumer business we.
We are starting to see some stabilization of those markets. Our channel business. If you look at sell through for the first four weeks of the quarter has been on plan and even some regions like Europe , we're starting to see some strength and I would say consumer is pretty much in the same place starting to stabilize.
Not not great growth yet but.
But that part of the market.
It looks better than it did let's say two months ago, and it's really the Oems that are really in a rapid and significant.
<unk> correction of inventory as well as I said some of the some of the cloud business in China.
Very helpful and just a.
Follow up question on the NAND side of the house.
You talked about rising capital intensity.
What's next but at the same time it sounds like Youre talking about temporary investments at the JV. So could you kind of walk through how youre thinking about forward capex given the changes you're seeing in the air.
Yes ill make a few comments and we can comment as well, but we've always known that <unk> was going to be a more capital intensive node I mean again, we're coming off of <unk>, five which is the most capital efficient node in the history of the our roadmap. So that's not not surprising.
And we're driving through that transition we feel very good about the node is just it's a more capital intensive known I will note as we talked extensively about at our Investor day, our capital intensity in general per bit is the best in the industry and that's something we really strive for in our Roadmaps. So when we're talking about.
More capital intensive node remember that's a relative issue.
We're still in the best position as far as capital per additional bit and Thats, a very very big focus of ours.
And on the more macro question is we're obviously, having conversations across the JV about resetting our bit growth in general independent of no given the reality of what the demand environment as overall bit demand is coming down.
An oversupply environment.
<unk> driven oversupply, it's not a supply driven oversupply, but will reset we're looking at our Capex and we'll make adjustments given what the current situations.
Yeah, if I can if I can add CJ.
We're targeting a cash capex.
Our target model, which is.
10% of revenue, but of course as the macro conditions develop if we need to adjust to that we will manage it dynamically.
Thank you and ladies and gentlemen, our next question today comes from Aaron Rakers at Wells Fargo Wells Fargo. Please go ahead.
Yeah. Thanks, guys. Good morning, So I've got a couple of questions if I can as well.
I just wanted to unpack a little bit more the implied flash revenue expectation you are making this quarter with hard disk drive revenue being flat roughly sequentially. It looks like you are talking about a high 20 or 30% sequential decline in the NAND revenue this quarter the flash revenue.
With that in mind I mean, how are you guys thinking about bit shift versus what is your assumption around pricing.
Ached into that expectation I'm, just trying to understand is this more pricing versus mix shift and.
Is this really kind of do you think that this guide represents a bottom here.
I think the way to think about it as I said earlier, it's kind of a demand driven situation, where we're just seeing our biggest customers and really not all of our customers across the PC space, just resetting inventory and really dropping their demand in the quarter. So they can reset their inventory.
So.
That leads to pricing pressure and volume pressure so it's both of them.
So as we work through the quarter and they get their inventory to where they needed to then I think we'll see we'll see some of the volume come back.
As we work through this.
From some of our customers I have more confidence that this is a one quarter change, but other ones I think it may take a little longer than that so we'll see we'll have more information as we worked through the quarter and we will be we'll be talking about that through the quarter and the appropriate forums.
As I said before I will point out I mean, this is a very dynamic market. I mean this is some of this has happened in the quarter. So.
So it is very difficult to buy on this but we think we're very we're confident of the guide don't get me wrong, but.
Im happy we guided when we did because it's a very very dynamic environment out there, but I think that I think our customers are aggressively managing their inventory and my sense is they'll get through it in a pretty expeditious fashion like I said in the prepared remarks, we've got kind of the supply chain is loosening up.
We're getting more components. So I think our customers are getting more components.
Maybe that's giving you more confidence in how they manage their own inventory and at the same time, we're going into a softer economy. So everybody is in a in a big reset and.
It's especially impacting the flash business to your point the HDD business.
Still get consistent.
Strong growth out of out of the Hyperscale or is in the U S.
We feel very very good about the portfolio position, there and what we're going to drive throughout the fiscal year.
Okay and as a quick follow up just kind of thinking about the flash business a little bit more.
These last couple of quarters and appreciating that mix is a factor, but these last couple of quarters. It looks like you've seen a little bit of a slowing of your ability to kind of drive costs down.
On the flash business as we think about <unk> six power.
Are you thinking about the relative cost down structure of fixed six relative to <unk> five thank you.
Yes.
As we've talked about cost downs, we target, 15%, we always know there's going to be some quarters below some above.
Hopefully there is more and more on the favorable side and I think that's been the history, but we've hit a couple of quarters, where.
That's not the case, but if you look at our fiscal year, we delivered right at the 15% I think even even a tick over is that right. Yes, that's correct, David and one of the things to keep in mind. Aaron is we didn't have the fab contamination in the third fiscal quarter and so this is why this is Bart.
Why we haven't seen necessarily the same cadence of cost reduction in the last couple of quarters of the fiscal 2022.
So erinn, we feel we feel really good about the big six transition and what that's going to bring and I think youll see in the upcoming quarters the costs will get back to where we expect it to be.
We explicitly drive our roadmap around this number we explicitly drive the nodal transition in the roadmap development around making sure we can deliver the 15% year over year and we are very pleased that we just delivered it again in the last fiscal year.
Thank you and our next question today comes from Joe Moore of Morgan Stanley . Please go ahead.
Great. Thank you.
I Wonder if you could address I mean.
I didn't hear a specific answer to volume versus prices in NAND in Q3, but I guess, what what is your inventory balance going to look like at the end of Q3 and I know in the past you guys have been willing to take fab utilization adjustments to keep that number in your control have you thought about that.
Environment.
Yes, I'll make a few comments I'll, let we saw I'll make a few comments and we don't guide to that level of specificity, but.
They are both roughly down about the same yes.
Yes.
That's where the numbers.
Shape up.
Roughly about the same.
And your inventory balance.
Well given that this is a.
Mostly demand driven.
We expect inventory to be.
To grow a bit.
This quarter.
As.
As the supply.
Yeah.
As the supply is higher than the U S where the demand is however.
As we said in the prepared remarks, we are in discussions with our JV partners due to take appropriate action.
To the extent we can.
Limit that.
Thank you. Our next question today comes from Patrick Ho Stifel. Please go ahead.
Alright. Thank you very much maybe just as a follow up on the HDD side on.
On the positive event, Dave maybe if you could give a little color on your confidence level on the sustainability of the U S. Hyperscale is spending trends what gives you the confidence that this will at least carry through the second half of this year and maybe into the early parts of 2023.
Yes couple of things one is.
The message we get from them, obviously, we have a very very close relationship and talk on a daily basis and so the message we get in planning for the second half continues to be a strong and consistent message.
We've got.
A great portfolio.
122% and 26 in <unk>.
One of the big highlights of last quarter on the HDD side as we got our second hyperscale or that fully qualified SMS <unk> and with our position with ultra SMA are getting 20% more out of a drive.
Puts us in a great position for that that transition. So it continues to be a very very consistent message from them about how they plan to consume.
The product in the second half and going into next year and like I said from a portfolio point of view, we've got lots of new.
Qualifications underway on 22, terabyte, <unk> 'twenty six terabyte <unk> and as we go through the fiscal year Youll see all of those products start to ramp and be adopted in volume.
Great that's helpful and maybe as my follow up question.
In terms of.
Following up from your Analyst day, where you did a big focus on the NAND flash.
Moving to the SSD market with the cloud.
Segment itself as well do you see this shift.
Beginning with big six or is this more of a fixed cost type of.
Endeavor, where it'll be future generations, we see the biggest shift.
Towards that <unk> NAND.
No I mean, the shift is happening now I mean, we just delivered a quarter of 105% sequential growth on our enterprise SSD portfolio now that's a particularly strong result.
But we're very confident that as we work through the next couple of years, we're going to drive our share of enterprise SSD from the 8% to 16.
We've got a very good plan for that it's a great market to participate in.
Like I said, we broke through with the qualifications.
And the success has been strong.
Be lumpy not every quarter is going to be up.
But the trajectory over the three year time span as we are we have we have a lot of confidence we're going to drive that to the 16% share in FY 'twenty five.
Thank you and ladies and gentlemen, before we go to our next question. We do ask you. Please limit yourself to one question and answers.
Uh huh.
Today's next question comes from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you good morning.
Really shipping well below demand levels, given the inventory correction. When you look at the September quarter can you maybe help quantify that.
And help us think through if the digestion that youre, calling for is completed let's say in September .
Whats roughly the right base, we should be thinking off.
To drive any sequential growth off of that.
For the December quarter.
Well I mean for the PC market. We think the market is there was consensus earlier in the year, maybe 325 million units.
We think that's going to land more around 305 million units.
So that gives you a sense of the correction, that's happening and aggressively right now.
And we saw I think we talked about smartphone demand being down single digits mid single digits on a unit percentage so.
Think romsey, we're just going through this very sharp step down right now where everybody reset their inventory, especially as they have I personally think as they have more confidence that.
The inventory in the supply chain is loosening up it's not completely loosened up theres still tight areas, but in general we're able to get more upsides on products that.
Components that even a couple of quarters ago, we're very tight. So I think everybody is kind of resetting for that world and they're resetting going into a softer.
Tumor environment so.
I think that gives you a little bit to bracket, how we're thinking about it.
Thank you next question today comes from Sydney.
Please go ahead.
Thanks for taking my question.
So looking at your flash margins they are still at pretty decent enough when the June quarter, but obviously that will come down.
In the September quarter, but with margins coming down in the let's say the next few quarter, given where the pricing is heading do you think your margins will get back get back to that last trough in 2019, when it was still over 20% obviously pricing is under the control but are there things in your control that you will make the next trough be better than the last one.
Yes, I mean, I think we've done a tremendous amount of work on the portfolio in the last couple of years and I think that's that is going to show up in the <unk>.
We think about through cycle margin, we've talked a lot about this at our Investor day, we're managing for through cycle margin.
We want to drive.
The higher lows and higher highs and we think we're set up well to do that given the qualifications across enterprise SSD.
Our very strong position in gaming.
It's been a great market for us and a growth area just over the last year and a half so.
Yeah, I think it's I think we go into this situation with a lot better portfolio and a lot better diversity a lot more places to put our supply.
And we think that's going to lead to a better result.
Thank you and our next question today comes from.
Hari with Goldman Sachs. Please go ahead.
Good morning, Thanks for taking the question I had a multi part question on your HDD business, primarily around utilization rates and Capex.
The restructuring plans that you've talked about.
Terms of utilization rates your nearest competitor talked about making some adjustments.
Near term.
Is that something that you guys are thinking about are doing.
In ACD and on the Capex side whats contemplated in your fiscal 'twenty three outlook again as it pertains to your hard drive business and.
And then on the restructuring I was hoping you could expand on what exactly you're doing how much capacity is coming online over the next.
Medium to long term thank you.
Thanks Moshe.
So let me just set a little context, and we certainly can give a little more detail on capex and how we're thinking about this so.
As we talked about that.
Client HDD market has been interesting over the last couple of years, we went into the pandemic and we saw a big surge in demand for client.
Our drives.
Just in general we saw a big surge in demand for Pcs.
That has turned around dramatically.
And what we're seeing right now is that business is down.
Over 50% year over year. So we're seeing it's returning to pre pandemic trajectory and even going down faster than that now as far as the transition to <unk>.
Slash happens.
A good transition for us because we have such a great portfolio and client SSD. So we've been playing that transition for years, but it really calls for us to reset or how.
How much client HDD capacity, we have in the system and Thats what were were.
Aggressively undertaking right now.
Yes, so on that Josh.
On the restructuring.
Basically as David said, we're taking we're reducing our manufacturing footprint on the client side and the expectation is this should benefit us from.
A couple of areas a little bit on the Capex side, but also in terms of the cost of goods sold and so if there is any underutilization that was associated with that or it would have been associated with that part of the manufacturing capacity, it's being basically.
Managed out and so that should help us be able to as we sort of set in terms of the gross margin transitioned for the HDD business from the fourth quarter to the.
First quarter, you were expecting it to be.
More or less flat and so.
Based on that we should probably see even.
Further improvements in the following quarters.
On Capex and on Capex, we typically don't break out the capex between HDD and flash, but as I said.
Yes.
We do plan to stay within our target model of 10% of revenue and if you recall an investors day.
I did say that.
We would we would like to get to a point where for the.
HDD business, we target 4% to 6%.
Higher than this.
In the near term simply because we are investing in the capacity enterprise side of the.
The manufacturing of the <unk>.
Yes.
The one thing though to keep in mind is we are keeping a close eye to the supply demand situation and we do not plan to be investing or building overcapacity short term to be able to maintain that supply demand balance.
So, especially in just a few more comments on this so we fully paint the picture so.
Youre really starting to see this what we've talked about at our analyst day in heads and media.
We still have to invest I mean, there is there is we need these big drives have a lot of heads in them.
So we're still investing in and heads.
Media, we transition.
Two capacity enterprise, but we just have the manufacturing ability to produce millions of millions of client drives that we don't need any more so that's the part we're resetting.
And to get that cost out of the system.
Yeah.
Thank you and ladies and gentlemen, our next question today comes from Palma modeling of Barclays. Please go ahead.
Hey, good morning, guys and thanks for taking my question I just I just wanted to look at the overall business, obviously, you've talked about the moving parts into September but could you talk about when you think you might see that the total top line start to recover I know, there's a lot of moving parts I know, there's not a ton of visibility right now, but obviously from a net income pro forma earnings perspective.
Do you guys see yourselves, making losses in the coming quarters and just if you do can you talk about the depth in which you're kind of planning for that based on a recessionary scenario just any color on where you might see the bottom from a total company perspective. Thank you.
So first of all if we don't see losses.
So look you hit on it.
Very dynamic right now let me, let me paint the picture and we can say, maybe a little bit about that.
Out quarters.
<unk>.
We're seeing I would say if we went back several quarters, we started talking about it very earlier this year the consumer started softening.
Really in Europe , when the war broke out and.
And.
In China with the Lockdowns and that progress throughout the first half of the year. The consumer business is something that usually is soft it's seasonally the weakest part of the year.
April and May.
Calendar Q2 is a.
An interesting quarter for that business because it always starts off in April and May It comes on strong in June .
That really didn't happen. It stayed soft and then we started to see the spread into consumer.
<unk> purchasing Pcs.
And now smartphones and so now we're seeing the.
The Oems and the PC and the smartphone business as we talked about very aggressively reset their inventory levels.
At the same time, we're starting to see the.
The consumer in our channel business stabilize so we're starting to see the early signs of the consumer business stabilizing.
The channel business stabilizing if I look at sell through.
For the first part of the quarter. It was two plan.
Sell in is still a little bit behind because nobody wants to build inventory right now, but sell through has stabilized and in some regions like I said in Europe , or even seeing Q over Q growth in the channel. So.
It all depends on how we get how fast we get through the inventory correction on the OEM side, and then just to cap that off in the cloud we continue to see very consistent demand.
From the U S. Hyperscale is and we see some digestion in China cloud and we expect that digestion and China cloud to work its way through this quarter and.
In General China has been.
I think the word I would say it has been quiet across all the markets. There is not a lot of visibility.
We will see how that comes back throughout the quarter.
But that gives you a little bit of kind of the.
The evolution of how we've seen this and kind of how we see it going forward as I said, although the PC and the Oems are going through PC and smartphone Oems are going through a very very sharp correction. We're seeing other parts of the market start to stabilize some of those we saw do you want to add that we don't really forecast the out quarters, but.
Anything to say about that yes.
We don't forecast the out quarters, we don't see losses the ones. The couple of points I would add to that David is.
We obviously are.
With this downcycle, where we're starting from a much much stronger financial position, we've done a lot over the last couple of years to strengthen our financial position.
Also launched very exciting set of products.
Last quarter. So we have really a very strong portfolio we have.
Good additions to the leadership team and so.
We're in a much better positioned to manage through this.
Thank you and our next question today comes from Timothy Arcuri with UBS.
Please go ahead.
Thanks, a lot I also had a two part question I guess the first question is on the HDD gross margin.
And Youre still running a couple of hundred basis points lower than your peers and I'm wondering if you can sort of unpack that is this related to the client capacity that you are trying to take out and then on the NAND side you answered the prior question, saying that.
I think you were implying that the decline is roughly equal between bits and pricing.
And I just wanted to clarify is that what you meant to say because if that's the case then bits are certainly well both gets and pricing are down more than your.
Peers. So I'm just wondering if you can sort of handicap why your NAND business is performing worse than your peers. Thanks.
So on HDD I think.
I think the gap in gross margin is now 100 basis points, but.
First of all I feel good about the quarter, we had on gross margin.
We expected.
Q, we expected well, let's put it this way we're able to.
Get the gross margins up in HDD, a little faster than we thought when we talked about last quarter, we thought they would start.
Going up sequentially going into the second half and we were able to pull some of that back into.
Calendar Q2, our fiscal Q4.
That was due to a number of things one is pricing continues to be pretty benign.
To even up a little bit which is something we've been I think the industry has been striving for again given all the innovation, we're bringing to market and then we were able to work some on the cost side as well.
Us versus our competitors remember everybody has a different mix.
There are some markets, especially the performance enterprise market that western digital exited a number of years ago and thats.
Thats, a declining but margin rich part of the part of the HDD market that we don't participate in but.
But in general from a margin perspective on HDD again, I get back to the innovation the portfolio. The 'twenty two terabyte drive the 2006 terabyte Ultra SLR drives.
Those are <unk>.
<unk> position in the industry.
We have a plan as we move through FY 'twenty, three those will become bigger and bigger.
And in fact, the predominant part of the portfolio and what we're shipping as we move through the year.
So I think that sets us up in a very strong position to have a really good TCR conversation with our customers as we continue to drive innovation.
Second part of your question was in Flash again. This is a very dynamic market things have changed even in the last week and a half to two weeks so.
I think that we're at a different point of when we're forecasting and we are rolling in everything we have heard from our customers as I said, we have customers that are very very significant amounts of demand that are changing within the quarter. So.
We put a guide around that obviously, we will work to make that better, but that's the reality of where the businesses today.
Thank you ladies and gentlemen, today's final question comes from Mehdi Hosseini.
Please go ahead.
Thank you. Thanks for squeezing me, David just wanted to follow up with events come in you.
Right.
Earlier in the call that you made.
Comfortable with near line cloud demand, especially in North America.
Then you just said that given the very volatile what gives you confidence that it is.
In North America.
Most service providers.
Go through inventory digestion later this year and into next year is there anything that you can share with us.
I think it's.
Let's just start.
Deep relationship with them and the conversation we have we also have multi quarter agreements with a lot of these customers, which gives us more visibility into what their plans are.
Obviously in.
In deep conversations with them about our next generation products, which is very exciting we're able to bring a market leading capacity points to them.
Across CMI and SME so.
Again, 22, terabyte <unk> is a unique product in the industry.
And then we have 26 terabyte FMR, which is again a unique product in the industry nobody else can go to those capacity points and so we feel very good about where the portfolio is those are being adopted in qualified across our customer base.
I think the strength of where we're at in the Tcl equation, we bring to our customers as well as the visibility that we see and given the relationship.
It gives us confidence as we move through the second half of the year.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
Alright. Thanks, everyone. We appreciate you spending time with us here early on.
Friday morning.
Thanks for all the great questions and we'll look forward to talking to you throughout the quarter.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Thanks.
[music].
[music].
Good day, and thank you for standing by.
Welcome to Western Digital's fiscal fourth quarter 2022 conference call.
Presently all participants are in listen only mode.
Later, we will conduct a question and answer session.
At the time of people who'd like to ask a question.
Star one on your phone.
As a reminder, this call is being recorded.
I will now turn the call over to Mr. Peter Andrew Vice President S. P. N. A head of Investor Relations. You may begin. Thank you and good morning, everyone. Joining me today are David <unk>, Chief Executive Officer, and we some job Ray Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking.
Including product portfolio expectations.
<unk> plans and performance demand and market trends.
And financial outlook based on management's current assumptions and expectations and as such does include risks and uncertainties. We assume no obligation to update. These statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual.
Results to differ materially.
We will also make references to non-GAAP financial measures today reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.
With that I'll now turn the call over to David for introductory remarks.
Thank you Peter good.
Good morning, everyone and thanks for joining the call to discuss our fourth quarter and fiscal 2022 results.
I am pleased that the western digital team executed well and delivered solid results in light of the ongoing macro and geopolitical dynamics.
We reported fourth quarter revenue of $4 5 billion non-GAAP gross margin of 32% and non-GAAP earnings per share of $1 78.
All within the guidance ranges, we provided in April .
Fiscal year 2022 revenue totaled $18 8 billion and we reported non-GAAP earnings per share of $8.22.
This compares to revenue of $16 9 billion and non-GAAP earnings per share of $4 55.
In fiscal year 2021, we.
We grew revenue, 11% and rent.
And EPS increased 81% demonstrating progress in unlocking the earnings potential of our business.
In addition to strong financial performance fiscal year 2022 was a hallmark year for western digital from an innovation product development and execution perspective.
In particular, we regained innovation leadership with the introduction of multiple products and technologies for the cloud.
In May we announced a 26 terabyte drive leveraging our <unk> NAND in ultra <unk> technologies, as well as <unk> and <unk>.
Preferably this means we've nearly double drive capacity relative to when I joined Western digital just over two years ago.
In flash, we expanded adoption of our Nvme enterprise SSD from one cloud Titan to three as well as qualification at several enterprise OEM suppliers.
From an organization perspective, we have bolstered the company's executive management team further strengthening our ability to derive to drive operational excellence innovation and disciplined financial management.
On top of all of these achievements, we reduced debt by $1 $7 billion and obtained an investment grade corporate rating, placing western digital on a solid financial foundation.
Before I jump into.
Into additional detail on the quarter I wanted to provide an update on our strategic review as.
As you know two months ago, we announced that we are reviewing potential strategic alternatives aimed at further optimizing long term value for our shareholders.
The Executive Committee of the Board, which I lead continues to oversee the review and Elliott management is participating alongside us under a nondisclosure agreement along with other interested parties.
We're evaluating a range of alternatives, including options for separating our market, leading flash and HDD franchises. We are moving expeditiously, but this work will take time, we will not be answering any questions about the strategic review today, giving the given the ongoing nature and confidentiality of the prop.
We will provide updates in the future as appropriate.
Now I'll provide updates on our HDD and flash businesses.
During the fiscal fourth quarter strong demand from our cloud customers for our latest generation energy assisted drives drove near record near line shipments of 111 extra bytes.
Total HDD revenue declined declined sequentially, due primarily to consumer and client HDD demand.
We commenced commercial shipments of a number of products incorporating our <unk> NAND technology.
In addition to shipments of our 2020 two terabyte <unk> drives qualifications of our 26 terabyte <unk> drive are underway.
As we noted our product launch event in May.
This <unk> enabled drive enables 20% higher capacity that our CMO variance offering significantly better tcl for our cloud customers and further highlighting the performance driven benefits of the innovation that western digital is packing into a hard drive.
Finally, we are ramping our second cloud customer with SMIC technology this quarter and remain on track to lead the industry's transition to SMS based drives for the cloud.
We are very confident in our multi year product roadmap for capacity enterprise drives, which combined <unk> Nan ultra <unk> and triple stage accurately actuators to deliver a cutting edge portfolio of dries in commercial volumes at a wide variety of capacity points we.
<unk> continued to invest in hammer and the commercialization of this technology alongside our other HDD technologies that are leading the industry.
The breadth and depth of this portfolio strongly positions us to be the provider of choice for the largest and most complex data centers in the world.
Building on the expertise cultivated over decades of bringing to market industry, leading technologies. We are committed to leveraging our innovations to continue driving business results and capacity enterprise into the future.
Turning to flash revenue grew sequentially on an improving product mix and increased flash supply.
Growth in flash during the quarter came primarily from enterprise SSD with revenue more than doubling sequentially.
Gaming is another key growth market for us, where we continue to demonstrate the strength of our client SSD franchise with exabyte shipment growing nearly 70% year over year.
We have a leading position in gaming with our WD black brands being recognized globally for innovation performance and quality.
The latest example of this is our WD Black Sn 850, Nvme SSD products certified for Sony PS five game consoles, which enables players to expand the high speed storage capacity of their PSA PS five console and allows them to store and <unk>.
Both PFS five in PFS for games directly from the drive.
On the technology front.
<unk> five represented about half of our flash revenue in the June quarter.
Up from 46% in the previous quarter.
We are preparing to ramp big six late this calendar year and into 2023 based on circuit under array architecture Big six enables many exciting high performance products for <unk> phones.
<unk> and <unk> flash.
Let me now offer a few observations on the demand environment.
In the cloud end market, we experienced strength in the fiscal fourth quarter as supply constraints at western digital and <unk> and our end customers started to ease.
Overall demand from our cloud customers has been consistently strong and we expect this strength in cloud to carry into the second half of calendar year 2022.
We believe the accelerated digital transformation will continue to drive cloud growth and believe we are on track to generate about a half of our revenue from this market by fiscal year 'twenty five.
Outside of cloud our expectations for calendar year 2022 demand growth.
Moderated since our last earnings call.
As the fiscal fourth quarter progressed, we saw consumer spending softened impacting both retail flash and HDD demand.
This weakness has migrated to the consumer PC end market as we enter the second half of the calendar year.
In client.
The market generally expect PC PC shipments to decline approximately 10% in calendar year 2022.
We are seeing our PC OEM customers aggressively right size their inventory to reflect current demand conditions, which will impact our business in this market in the second half of the calendar year.
After going through that correction, we expect a more normal flow of business going forward as we believe <unk> will continue to fulfill broader use cases as the foundation of the increasingly comrade common hybrid enterprise driving unit demand above pre pandemic levels in <unk>.
Richer SSD content.
All of these PC market dynamics are accelerating the final phase of the shift of client devices from HDD to flash technology.
Consequently, the client HDD market is now declining at an accelerated rate relative to the period before the onset of the pandemic.
To reflect this reality, we are now taking aggressive action to restructure our HDD manufacturing footprint to reflect this market dynamic.
And mobile expectations for smartphone units have come down in recent months led primarily by reduced demand in China.
Industry analysts expect the smartphone industry unit volume to decrease by a mid single digit percentage year over year in calendar 2022.
While we are well positioned and supplying flash memory for <unk> smartphones. We are also seeing our largest customers aggressively resetting their inventories for these products we.
We expect the inventory correction to be primarily impact our fiscal first quarter and returned to market demand for the remainder of the fiscal year.
In consumer we have a premium brand and a great franchise in the marketplace. In particular, we have developed an enviable position and excellent relationships with major brick and mortar retailers and online retailers across the globe.
Including best buy and target in the U S.
Age group in Europe , JD Dot Com in China and office works in Australia as.
As a result of these strong relationships are impressive scale product breadth and trusted brand, we lead most consumer storage product categories.
While macroeconomic factors and Covid measures have impacted consumer demand in the near term.
Our customers' loyalty and preference for the performance and quality of our solutions are key differentiators, which will position western western digital well for the upcoming back to school and holiday seasons.
Before turning the call over to <unk>.
I want to leave you with few takeaways.
First at the Investor Day, we laid out the case, where the world of ever increasing intelligent devices powered by the cloud is creating an astonishing amount of data, but which only a small percentage of stored.
Our conviction remains strong and our view on near double digit revenue growth remains intact.
Over the past several years the storage market has entered an era of accelerated growth.
Led by the strength of the cloud market, which drove HDD revenue growth for western digital and the industry.
Flash capital investments for incremental NAND bit growth are becoming more expensive, resulting in a more disciplined investment across the industry.
At Western digital our long standing and growing relationships with Hyperscale and OEM customers across the world coupled with our leadership in commercializing innovations for capacity enterprise hard drives and momentum with Nvme enterprise SSD for data Center has made us a trusted partner.
This combination of rapid demand growth in storage technology leadership and product momentum offer western digital opportunities for financial outperformance.
With that let me now turn the call over to Assam, who will discuss our fiscal fourth quarter results and provide an outlook for the fiscal first quarter.
Thanks, David and good morning, everyone.
As David mentioned.
Our results for the fiscal fourth quarter were in line with our expectations, reflecting their resilience and agility of our business model.
Such a dynamic macro environment.
Total revenue for the quarter was $4 5 billion up 3% sequentially and down 8% year over year.
non-GAAP earnings per share was $1 78.
Within the guidance range, we provided in April .
For the full fiscal year 2022 revenue was $18 $8 million.
Up 11% from fiscal 2021.
non-GAAP gross margin expanded four three percentage points.
non-GAAP operating margin increased five seven percentage points as we proactively manage our expenses.
<unk> non-GAAP EPS of $8 22.
Up 81% from last year.
Turning to our end markets for the fiscal fourth quarter cloud represented 46% of total revenue at $2 1 billion.
Up 18% sequentially.
And 5% from a year ago.
Within cloud Western Digital's continued success in leading the industry transition to energy assisted hard drives.
Drove the growth.
The continued ramp of our 18 terabyte and 20 terabyte drives drove a 7% year over year increase in near line HDD revenue.
Sequentially near line bit shipments increased 9% to 111 exited bites.
In flash.
Enterprise SSD revenue more than doubled sequentially and was up 38% year over year.
The client end market represented 36% of total revenue at $1 6 billion.
Down, 5% sequentially and 14% year over year.
On both a sequential and year over year basis.
Client HDD led the revenue decline, while flash revenue was roughly flat.
Consumer represented 18% of revenue at 0.8 billion.
Down, 9% sequentially and 23% year over year.
On a sequential basis.
The revenue decline was primarily due to lower HDD retail shipments.
The year over year decrease was due to broad based decline in retail products across HDD and flash.
For the full fiscal year 2022.
<unk> revenue increased 40% year over year led by a 38% increase in near line HDD.
Flash product revenue for enterprise SSD applications more than doubled year over year.
Client revenue decreased 3% year over year as growth in flash was offset by 30% decrease in client HDD.
Client HDD for Pcs and notebooks represents just mid single digit percentage of thoughts on HDD revenue exiting the fiscal year.
Lastly.
Consumer revenue decreased 6% for the year.
All attributed to a decline in retail HDD.
Turning now to revenue by segment.
In the fiscal fourth quarter.
Ported flash revenue of $2 4 billion up 7% sequentially and down 1% year over year.
Sequentially Flash Asps were up 2% on a blended basis and up slightly on a like for like basis.
Flash bit shipments increased 6% sequentially.
The 11% year over year.
HDD revenue of $2 1 billion was flat sequentially and down 15% year over year.
Sequentially.
Total HDD exabyte shipments increased 1%.
While the average price per HDD increased by 19% to $120.
As our mix continues to transition towards the cloud.
On a year over year basis, though to the HDD exabyte shipments decreased by 10% and average price per unit increased by 24%.
As we move to costs and expenses my comments will be related to non-GAAP results unless stated otherwise.
We continue to exert disciplined financial management to drive better results.
Gross margin for the fourth quarter was 32, 3%.
Up 60 basis points sequentially, and down 60 basis points year over year.
Our flash gross margin was 35, 9% up 30 basis points sequentially.
And 40 basis points year over year.
On both a sequential and year over year basis.
Growth in enterprise SSD for datacenter applications led the improvement in gross margin.
Our HDD gross margin was 28, 2%.
50 basis points sequentially.
And down 210 basis points year over year.
Operating expenses of $760 million were below our guidance range.
As we continue to prudently manage our expenses.
Operating income was $702 million representing.
Representing an 8% increase from the prior quarter and a 15% decrease year over year.
Our tax rate was 11% for both the fiscal fourth quarter and fiscal year 2022.
Earnings per share was $1 78.
Compared to $1 65.
In the prior quarter and $2 16 in the year ago quarter.
Operating cash flow for the fourth quarter was $295 million and free cash flow was an outflow of $97 million.
Operating cash flow was impacted by revenue linearity.
The ramp back to normal production output at the flash joint venture.
Timing of component deliveries to our factories and.
And Covid related control measures in China contributed to a backend loaded quarter.
Cash capital expenditures, which include the purchase of property plant and equipment and activity related to our flash joint ventures on our cash flow statement.
It represented a cash outflow of $392 million in the fiscal fourth quarter.
We remain disciplined in investing in manufacturing capacity.
Gross capex and cash Capex for the fiscal year, 2022 were $2 7 billion and $1 $2 billion respectively.
Below our expectation as we actively managed our capital investments.
We made a $150 million scheduled and discretionary debt repayment.
Gross debt outstanding was $7 1 billion at the end of the fiscal fourth quarter.
We ended the quarter with $2 3 billion of total cash and cash equivalents.
Our trailing 12 months adjusted EBITDA at the end of the fourth quarter as defined in our credit agreement was $4 8 billion.
Resulting in a gross leverage ratio of one five times compared to two four times a year ago.
As a reminder.
Credit agreement includes zero point $9 billion in depreciation add back associated with the Flash ventures.
This amount is not reflected in the cash flow statement.
Please refer to our earnings presentation on the Investor Relations website for further details.
I'll now provide our view of both HDD and flash businesses for the fiscal first quarter as well as comments on several key items for fiscal year 2023.
For the fiscal first quarter.
We expect flash to lead the sequential revenue decline as our customers right size their inventory.
We expect relatively modest decline in overall HDD revenue.
Mainly driven by client and consumer with.
With gross margin relatively flat.
As we look towards fiscal year 2023, we expect cash capital expenditures to be in line with our target model.
Within the range of 8% to 10% of total revenue.
Total gross capital expenditures are expected to be approximately $3 2 billion.
Regarding flash Capex, we remain excited about our technology roadmap. Despite what is clearly a volatile period in the memory industry.
As we have discussed on prior calls <unk> six is a more capital intensive technology node that will require an increase in capital expenditures.
Our capex outlook for fiscal year 2023 reflects our commitment to technology leadership and will accelerate our path to leapfrog from big six two big blocks plus and.
In the next several years.
I'm also pleased to share that the flash JV fab seven manufacturing facility at <unk> plant has been approved to receive a subsidy of up to $92 9 billion yen from the Japanese government further demonstrating the strategic importance of what is the world's largest manufacturing facility.
Given the macro environment, we continue to actively manage our capital expenditures and supply.
We are in discussion without joint venture partner to adjust capital investments and align our production growth with demand.
In HDD.
We will continue to focus our capital spending primarily in heads and media in order to meet the future growth in cloud demand.
Offsetting these investments we are taking aggressive actions to restructure our client HDD manufacturing footprint.
We strive to optimize free cash flow generation in response to the macroeconomic dynamics.
For our fiscal first quarter, our non-GAAP guidance is as follows.
We expect revenue to be in the range of three six to three 8 billion.
We expect gross margin to be between 27, 5% and 29, 5%.
We expect operating expenses to be between $760 million and $780 million.
Interest and other expenses are expected to be approximately $70 million.
Our tax rate is expected to be between 28% and 30% in the first quarter and for fiscal year 2023.
This increase is due to the tax law changes that became effective for our fiscal year 2023.
It requires the capitalization of certain R&D expenses that were previously eligible for immediate deduction from taxable income.
These changes are expected to result in an immediate increase in our tax rate of approximately 12 percentage points, which will then decrease gradually overtime.
We expect earnings per share to be between 35, and <unk> 65 in the first quarter.
Assuming approximately $319 million fully diluted shares outstanding.
I'll now turn the call back over to David.
Thanks Sam.
Sure.
Let me just wrap up and then we'll open up for questions. In summary, we continue to believe that we have built the right foundation for long term growth.
We have reignited our innovation.
Tablets discipline in spending and investment.
And remained consistent and deleveraging our balance sheet.
The innovation engine that drives tcl benefits and value to our customers the multiple channels to deliver our products to market and the large and growing storage markets put us in a great position to capitalize on the opportunity presented by the proliferation of intelligent devices and rapidly accelerating data creation.
<unk>.
While segments of our end markets are now going through an aggressive inventory adjustment as supply chain impacts of the pandemic start to ease.
And the macro economy softens secular demand for storage continues to be strong and underpins the digital transformation that continues across all industries.
I also want to thank our employees for their hard work during the fiscal year.
<unk> ongoing geopolitical and macro challenges our team worked together to deliver strong financial performance for Western digital.
I'm proud of what this team has accomplished and excited to see what we can do together in the next fiscal year.
Peter with that let's open it up for Q&A.
Thank you.
Ladies and gentlemen, we will now begin the question and interest portion of today's call.
The other question. Please press star one on your phone if.
If you would like to withdraw your question. Please press star two.
Please for the first question.
Today's first question comes from C. J Muse with Evercore ISI. Please go ahead.
Yes. Good morning. Thank you for taking the question I guess first off just wanted to.
Clarify here in terms of what's driving the weakness is it safe to say that it's entirely a consumer client.
On the Hyperscale and enterprise side Youre not seeing.
Any changes in as part of that as you think about inventory correction on the consumer clients.
How long do you think the duration will last year.
One quarter phenomenon of too early to tell what would love to hear your thoughts there.
Hey, C J good morning.
Yes, I would say.
Pretty much got it right. The one thing I would add to that on the cloud side as we are seeing some inventory digestion in China cloud.
U S hyperscale or continue to chug along.
But.
Especially in the PC Oems is where we saw it first very sharp inventory correction.
Really in.
In the current quarter, taking down their demand significantly to reset their inventory for.
What is the reality for the number of unit sales.
So right now we think that is a relatively short period of time is it one quarter two quarter, we'll see that as we go through the quarter, but it's definitely a very very sharp.
In the quarter, we're in and then in the smartphone market, we are seeing it as well as a matter of fact, it's Steven developing within the quarter. Just a couple of weeks ago, We had one of our biggest customers.
Take down their take down their forecast in the quarter by over $150 million. So.
And it's all like.
The message very strong message, we're getting directly from our customers. This is just resetting inventory.
So.
That one we expect to be a one quarter phenomenon I think in the larger market will see over the next couple of quarters.
I will say that in the consumer and channel space, given our broad reach and where we operate around the world in the consumer business we.
We are starting to see some stabilization of those markets. Our channel business. If you look at sell through for the first four weeks of the quarter has been on plan and even some regions like Europe , we're starting to see some strength and I would say consumer is pretty much in the same place starting to stabilize.
Not not great growth yet but.
But that part of the market.
It looks better than it did let's say two months ago, and it's really the Oems that are really in a rapid and significant correction of inventory as well as I said some of the some of the cloud business in China.
Very helpful and just a follow up question on the NAND side of the house you.
You talked about rising capital intensity.
But at the same time, it sounds like Youre talking about temporary investments at the JV. So could you kind of walk through how youre thinking about forward capex given the changes you're seeing in the end.
Yes, I'll make a few comments and then we saw them can comment as well, but we've always known that <unk> six was going to be a more capital intensive node I mean again, we're coming off of <unk>, five which is the most capital efficient node in the history of our.
Our roadmap so that's not not surprising.
And we're driving through that transition we feel very good about the notice just that it's a more capital intensive known I will note as we talked extensively about at our Investor day, our capital intensity in general per bit is the best in the industry and that's something we really strive for in our Roadmaps. So when we're talking about are more capital intensive no remember that.
It's a relative issue.
And we're still in the best position as far as capital per additional bit and Thats, a very very big focus of ours.
And on the more macro question is we're obviously, having conversations across the JV about resetting our bit growth in general independent of node given the reality of what the demand environment as overall bit demand is coming down.
An oversupply environment.
<unk> driven oversupply, it's not a supply driven oversupply, but will reset we're looking at our Capex and we'll make adjustments given what the current situation as well.
Yes, if I can if I can add CJ.
We are targeting cash capex.
Our target model, which is.
10% of revenue, but of course as the macro conditions develop if we need to adjust to that we will manage it dynamically.
Thank you and ladies and gentlemen, our next question today comes from Aaron Rakers at Wells Fargo Wells Fargo. Please go ahead.
Yeah. Thanks, guys. Good morning, So I've got a couple of questions if I can as well.
I just wanted to unpack a little bit more the implied flash revenue expectation you are making this quarter with hard disk drive revenue being flat roughly sequentially. It looks like youre talking about a high 20 or 30% sequential decline in the NAND revenue this quarter the flash revenue.
With that in mind I mean, how are you guys thinking about bit ship versus what is your assumption around pricing.
Looked into that expectation I'm, just trying to understand is this more pricing versus bits shipped and.
Is this really kind of do you think that this guide represents a bottom here.
Yes, I think the way to think about it as I said earlier, it's kind of a demand driven situation, where we're just seeing our biggest customers and really not all of our customers across the PC space, just resetting inventory and really dropping their demand in the quarter. So they can reset their inventory.
So.
That leads to pricing pressure and volume pressure so it's both of them.
So as we worked through the quarter and they get their inventory to where they needed to then I think we will see we will see some of the volume come back.
As we work through this.
From some of our customers I have more confidence that this is a one quarter change, but other ones I think it may take a little longer than that so we'll see.
More information as we worked through the quarter and we'll be we'll be talking about that through the quarter and the appropriate forums.
As I said before I will point out I mean, this is a very dynamic market. I mean this is some of this has happened in the quarter. So.
So it's very difficult.
Boundless, but we think we're very we're confident in the Guy who don't get me wrong, but.
Im happy we guided when we did because it's a very very dynamic environment out there, but I think that I think our customers are aggressively managing their inventory and my sense is they will get through it.
Expeditious fashion.
Like I said in the prepared remarks, we've got kind of the supply chain is loosening up we're getting more components I think our customers are getting more components.
Maybe that's giving you more confidence in how they manage their own inventory and at the same time, we're going into a softer economy. So everybody is in.
And a big reset and it's especially impacting the flash business to your point the HDD business.
Still good consistent.
Strong growth out of out of the Hyperscale or is in the U S and feel very very good about the portfolio position, there and what we're going to drive throughout the fiscal year.
Okay and as a quick follow up just kind of thinking about the flash business a little bit more.
These last couple of quarters and appreciating that mix is a factor, but these last couple of quarters. It looks like you've seen a little bit of a slowing of your ability to kind of drive costs down in the flash business as we think about VIX six how are you thinking about the relative cost down structure of fixed six relative to <unk> five thank you.
Yes.
We've talked about cost downs, we target, 15%, we always know there's going to be some quarters below some above.
Hopefully there is more and more on the favorable side and I think that's been the history, but we've hit a couple of quarters, where.
That's not the case, but if you look at our fiscal year, we delivered right at the 15% I think even even a tick over is that right. Yes, that's correct, David and one of the things to keep in mind. Aaron is we didn't have the fab contamination in the third fiscal quarter and so this is why this is partly.
Why we haven't seen necessarily the same cadence of cost reduction in the last couple of quarters of the fiscal 2022.
So erinn, we feel we feel really good about the big six transition and what that's going to bring and I think youll see in the upcoming quarters, the cost will get back to where we expect it to be.
We explicitly drive our roadmap around this number we explicitly drive the nodal transition in the roadmap development around making sure we can deliver the 15% year over year and we are very pleased that we just delivered it again in the last fiscal year.
Thank you and our next question today comes from Joe Moore of Morgan Stanley . Please go ahead.
Okay, great. Thank you.
I Wonder if you could address that.
I didn't hear a specific answer to volume versus prices in NAND in Q3, but I guess, what what is your inventory balance going to look like at the end of Q3 and I know in the past you guys have been willing to take fab utilization adjustments to keep that number under control have you thought about that.
Great.
Yes, I'll make a few comments ill make a few comments and we don't guide to that level of specificity, but.
They are both roughly down about the same yes.
Yes.
That's where the numbers.
Shape up.
Roughly about the same.
And your inventory balance.
Well given that this is a.
Mostly demand driven.
We expect inventory to be.
To grow a bit.
This quarter.
As.
As the supply.
Ed.
As the supply is higher than the U S where the demand is however.
As we said in the prepared remarks, we are in discussions with our JV partners due to take appropriate action.
To the extent we can.
Them at that.
Thank you. Our next question today comes from Patrick Ho Stifel. Please go ahead.
Alright, Thank you very much and maybe just as a follow up on the HDD side on.
On the positive event, Dave maybe if you could give a little color on your confidence level on the sustainability of the U S. Hyperscale is spending trends what gives you the confidence that this will at least carry through the second half of this year and maybe into the early parts of 2023.
Yes couple of things one is.
The message we get from them, obviously, we have a very very close relationship and talk on a daily basis and so the message we get in planning for the second half continues to be a strong and consistent message.
We've got.
A great portfolio.
22% and 26 in SME.
One of the big highlights of last quarter on the HDD side as we got our second hyperscale or that fully qualified <unk> and with our position with Altra SMS marketing, 20% more out of a drive.
It puts us in a great position for that that transition. So it continues to be a very very consistent message from them about how they plan to consume.
The product in the second half and going into next year and like I said from a portfolio point of view, we've got lots of new.
Qualifications underway on 22, terabyte, <unk> 'twenty six terabyte SME <unk>.
And as we go through the fiscal year Youll see all of those products start to ramp and be adopted volume.
Great that's helpful and maybe as my follow up question.
In terms of.
Following up from your Analyst day, where you did put a big focus on the NAND flash.
Moving to the SSD market with the cloud.
<unk> itself as well do you see this.
Beginning with page six or is this more of a fixed cost type of.
Endeavor, where it'll be future generations, we see the biggest shift.
Towards that <unk>.
No I mean, the shift is happening now I mean, we just delivered a quarter of 105% sequential growth on our enterprise SSD portfolio now that's a particularly strong result.
But we're very confident that as we work through the next couple of years, we're going to drive our share of enterprise SSD from the 8% to 16.
We've got a very good plan for that it's a great market to participate in.
Like I said, we broke through with the qualifications.
And the success has been strong.
Be lumpy not every quarter is going to be up.
But the trajectory over the three year time span as we are we have we have a lot of confidence we're going to drive that to the 16% share in FY 'twenty five.
Thank you and ladies and gentlemen, before we go to our next question. We do ask you. Please limit yourself to one question.
Uh huh.
Today's next question comes from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you good morning.
Acyclic shipping well below demand levels, given the inventory correction. When you look at the September quarter can you maybe help quantify that.
And help us think through if the digestion that youre, calling for is completed let's say in September .
Whats roughly the right base, we should be thinking off.
To drive any sequential growth off of that.
For the December quarter.
Well I mean for the PC market. We think the market is there was consensus earlier in the year, maybe 325 million units.
We think that's going to land more around 305 million units.
So that gives you a sense of the correction thats happening and aggressively right now.
And we saw I think we talked about smartphone demand being down single digits mid single digits on a unit percentage so.
Think romsey, we're just going through this very sharp step down right now where everybody reset their inventory, especially as they have I personally think as they have more confidence that.
The inventory in the supply chain is loosening up it's not completely loosened up theres still tight areas, but in general we're able to get more upsides on products that.
Components that even a couple of quarters ago, we're very tight. So I think everybody is kind of resetting for that world and they're resetting going into a softer.
Tumor environment so.
I think that gives you a little bit to bracket, how we're thinking about it.
Thank you next question today comes from Sidney Ho with Deutsche.
Please go ahead.
Thanks for taking my question.
So looking at your.
Slash margins they are still at pretty decent enough when the June quarter, but obviously that will come down.
In the September quarter, but with margins coming down in the let's say the next few quarter, given where the pricing is heading do you think your margins will get back get back to that last trough in 2019, when it was still over 20% obviously pricing is out of your control, but are there things in your control that you will make the next trough be better.
Last one.
Yes, I mean, I think we've done a tremendous amount of work on the portfolio in the last couple of years and I think that's that is going to show up and the way we think about through cycle margin. We've talked a lot about this at the <unk>.
Investor Day, we're managing for through cycle margin.
We want to drive.
The higher lows and higher highs and we think we're set up well to do that given the qualifications across enterprise SSD.
Our very strong position in gaming.
It's been a great market for us and a growth area just over the last year and a half or so.
Yes, I think it's I think we go into this situation with a lot better portfolio and a lot better diversity a lot more places to put our supply.
And we think that's going to lead to a better result.
Thank you and our next question today comes from.
With Goldman Sachs. Please go ahead.
Good morning, Thanks for taking the question I had a multi part question on your HDD business, primarily around utilization rates in Capex and.
The restructuring plan that you talked about.
In terms of utilization rates your nearest competitor talked about making some adjustments in the near term.
Is that something that you guys are thinking about are doing.
In ACD and on the Capex side, what's contemplated in your fiscal 'twenty three outlook again as it pertains to your hard drive business.
And then on the restructuring I was hoping you could expand on what exactly you're doing how much capacity is coming online over the next in the.
Medium to long term thank you.
Thanks Tricia.
So let me just set a little context, and we certainly can give a little more detail on capex and how we're thinking about this so.
As we talked about that.
Client HDD market has been interesting over the last couple of years, we went into the pandemic and we saw a big surge in demand for client.
Hard drives.
And just in general we saw a big surge in demand for Pcs.
That has turned around dramatically.
And what we're seeing right now is that business is down.
Over 50% year over year. So we're seeing it is returning to pre pandemic trajectory and even going down faster than that now as far as the transition to.
Flash happens.
It's a good transition for us because we have such a great portfolio and client SSD. So we've been playing that transition for years, but it really calls for us to reset or how.
How much client HDD capacity, we have in the system and Thats what were were.
Aggressively undertaking right now.
Yes, so on that.
So she on the on the restructuring we are basically as David said, we're taking we're reducing our manufacturing footprint on the client side and the expectation is this should benefit us from.
A couple of areas a little bit on the Capex side, but also in terms of cost of goods sold.
So if theres any.
Under utilization that was associated with that we would have been associated with that part of the manufacturing capacity that's being basically.
Managed out and so that should help us be able to.
And as we sort of set in terms of the gross margin transition for the HDD business from the fourth quarter to the.
First quarter, we're expecting it to be.
More or less flat and so.
Based on that we should probably see even.
Further improvements in the following quarters.
On Capex and on Capex, we typically don't break out the capex between.
<unk>, HDD and flash, but as I said.
We do plan to stay within our target model of the 8% to 10% of revenue and if you recall in Investor's day I did say that we typically we would we would like to get to a point where for the.
HDD business, we target 4% to 6%.
To be higher than this.
In the near term simply because we are investing in the capacity enterprise side of the.
The manufacturing of the.
The house.
One thing, though to keep in mind is we are keeping a close eye to the supply demand situation and we do not plan to be investing or building overcapacity short term to be able to maintain that supply and demand balance.
So to achieve just a few more comments on this so we fully paint the picture so.
Youre really starting to see this what we've talked about at our analyst day in heads and media.
We still have to invest I mean, there is there is we need these big drives have a lot of heads in them.
So we're still investing in.
And heads.
Media, we transition.
<unk> capacity enterprise, but we just have the manufacturing ability to produce millions of millions of clients drives that we don't need any more so that's the part we're resetting.
And to get that cost out of the system.
Yeah.
Thank you and ladies and gentlemen, our next question today comes from Palma modeling of Barclays. Please go ahead.
Hey, good morning, guys and thanks for taking my question I just I just wanted to look at the overall business, obviously, you've talked about the moving parts into September but could you talk about when you think you might see that the total top line start to recover I know, there's a lot of moving parts I know, there's not a ton of visibility right now, but obviously from a net income pro forma earnings perspective.
Do you guys see yourselves, making losses in the coming quarters and just if you do can you talk about the depth in which you're kind of planning for that based on a recessionary scenario just any color on where you might see the bottom from a total company perspective. Thank you.
So first of all if we don't see losses.
So look you hit on it.
Very dynamic right now let me, let me paint the picture and we can say, maybe a little bit about that.
Out quarters.
We're seeing I would say if we went back several quarters, we started talking about it very earlier this year the consumer started softening.
Really in Europe , when the war broke out and.
And in China, with the Lockdowns and that progressed throughout the first half of the year. The consumer business is something that usually is soft it's seasonally the weakest part of the year.
April and May.
Calendar Q2 is a.
An interesting quarter for that business because it always starts off in April and May It comes on strong in June .
That really didn't happen. It stayed soft and then we started to see the spread into consumer consumers purchasing Pcs.
Smartphones and so now we're seeing the.
The Oems and the PC and the smartphone business as we talked about very aggressively reset their inventory levels at.
At the same time, we're starting to see the the.
The consumer in our channel business stabilize so we're starting to see the early signs of the consumer business stabilizing.
<unk> business stabilizing if I look at sell through for.
For the first part of the quarter. It was two plan.
Sell in is still a little bit behind because nobody wants to build inventory right now, but sell through has stabilized and in some regions like I said in Europe , or even seeing Q over Q growth in the channel. So.
It all depends on how we get how fast we get through the inventory correction on the OEM side, and then just to cap that off in the cloud we continue to see very consistent demand.
From the U S. Hyperscale is and we see some digestion in China cloud and we expect that digestion and China cloud to work its way through this quarter and.
In General China has been.
I think the word I would say it has been quiet across all the markets. There is not a lot of visibility.
We will see how that comes back throughout the quarter.
But that gives you a little bit of kind of the.
The evolution of how we've seen this and kind of how we see it going forward as I said, although the PC and the Oems are going through PC and smartphone Oems are going through a very very sharp correction, we're seeing other parts of the market start to stabilize.
We saw you want to add that we don't really forecast the out quarters, but.
Anything to say about that yes.
We don't forecast the out quarters, we don't see losses the ones. The couple of points I would add to that David is.
We obviously are.
With this downcycle, where we're starting from a much much stronger financial position, we've done a lot over the last couple of years to strengthen our financial position.
Also launched very exciting set of products last quarter. So we have really a very strong portfolio we have.
Good additions to the leadership team and so we are.
We're in a much better positioned to manage through this.
Thank you and our next question today comes from Timothy Arcuri with UBS.
Please go ahead.
Thanks, a lot I also had a two part question I guess the first question is on HDD gross margin.
And Youre still running a couple of hundred basis points lower than your peers and I'm wondering if you can sort of unpack that.
This related to the client capacity that youre trying to take out and then on the NAND side you answered the prior question, saying that.
I think you were implying that the decline is roughly equal between bits and pricing.
And I just wanted to clarify is that what you meant to say because if thats. The case, then bits are certainly well both.
And pricing are down more than you are.
Here. So I'm just wondering if you can sort of handicap why your NAND business is performing worse than your peers. Thanks.
So on HDD I think.
I think the gap in gross margin is now a 100 basis points, but.
First of all I feel good about the quarter, we had on gross margin.
We expected.
Q, we expected well, let's put it this way we're able to.
Get the gross margins up in HDD, a little faster than we thought when we talked about last quarter, we thought they would start.
Going up sequentially going into the second half and we were able to pull some of that back into.
Calendar Q2, our fiscal Q4.
That was due to a number of things one is pricing continues to be pretty benign.
Even up a little bit which is something we've been I think the industry has been striving for again given all the innovation, we're bringing to market and then we were able to work some on the cost side as well.
Versus our competitors remember everybody has a different mix.
There are some markets, especially the performance enterprise market that western digital exited a number of years ago and thats.
That's a declining but margin rich part of the part of the HDD market that we don't participate in.
But in general from a margin perspective on HDD again, I get back to innovation the portfolio. The 'twenty two terabyte drive the 2006 terabyte Ultra SLR drives.
Those are <unk>.
Unique position in the industry.
We have a plan as we move through FY 'twenty, three those will become bigger and bigger.
In fact, the predominant part of the portfolio and what we're shipping as we move through the year.
So I think that sets us up in a very strong position to have a really good TCR conversation with our customers as we continue to drive innovation.
Second part of your question was in Flash again. This is a very dynamic market things have changed even in the last week and a half to two weeks so.
I think that we're at a different point of when we're forecasting and we are rolling in everything we have heard from our customers as I said, we have customers that are very very significant amounts of demand that are changing within the quarter. So.
We put a guide around that obviously, we will work to make that better, but that's the reality of where the businesses today.
Thank you ladies and gentlemen, today's final question will come from Mehdi Hosseini.
Please go ahead.
Thank you. Thanks for squeezing me, David just wanted to follow up to the events come in.
<unk>.
Earlier in the call.
Are you comfortable with near line cloud demand, especially in North America, and then you just said that given the very volatile what gives you confidence that.
In North America.
Most service providers.
Go through inventory digestion later this year and into next year is there anything that you can share with us.
I think it's it's.
Let's just start.
Deep relationship with them and the conversation we have we also have multi quarter agreements with a lot of these customers, which gives us more visibility into what their plans are.
We're obviously in.
In deep conversations with them about our next generation products, which is very exciting.
We're able to bring a market leading capacity points to them.
Across CMI and SME so.
Again, 22, terabyte <unk> is a unique product in the industry.
And then we have 26 terabyte <unk>, which is again a unique product in the industry nobody else can go to those capacity points and so we feel very good about where the portfolio is those are being adopted in qualified across our customer base.
I think the strength of where we're at in the Tcl equation, we bring to our customers as well as the visibility that we see and given the relationship.
It gives us confidence as we move through the second half of the year.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
Alright. Thanks, everyone. We appreciate you spending time with us here early on.
Friday morning.
Thanks for all the great questions and we'll look forward to talking to you throughout the quarter.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.