Q1 2023 Western Digital Corp Earnings Call
Good day and welcome to the Western digital first quarter fiscal 2023 earnings conference call.
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I would now like to turn the conference over to Peter Andrew. Please go ahead.
Thank you and good morning, everyone. Joining me today are David <unk>, Chief Executive Officer, and we calibrate Chief Financial Officer.
Before we begin let me remind everyone that today's discussion contains forward looking statements, including product portfolio expectations business plans and performance 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 morning, everyone and thank you for joining the call to discuss our 2023 first quarter results I am pleased to see the western digital team worked together to deliver revenue at the upper half of the guidance range in the midst of an incredibly dynamic and challenging macroeconomic environment.
We reported first quarter revenue of $3 7 billion and non-GAAP operating income of 307 million. Our operating income performance was above the midpoint implied by our guidance and demonstrated our ability to actively respond and navigate this environment.
Our non-GAAP earnings per share was 20 cents and included an approximately 30 cent impact due to higher than forecasted tax rate.
Overall the actions we've taken over the past few years are enabling us to manage through business cycle troughs more effectively and position the company to thrive as market conditions improve.
These efforts have reinvigorated the western digital innovation engine and strengthened our product portfolio.
In particular, we are leading the transition to SMA based hard drives alongside our cloud customers showcasing our product leadership.
In flash, we have nearly tripled our bit shipments in the nvme enterprise SSD product category as compared to the last down cycle, adding.
Adding another large and growing end market in which we can allocate our flash bits.
Our industry, leading innovation diversified portfolio and broad go to market strategy across cloud client and consumer end markets allow us to enjoy strong relationships with our customers.
And meet the full range of storage needs.
The breadth of markets. We address also offers us unique visibility into end market demand signals, which allowed us to recognize the potential challenges to our business as they unfolded.
We are proactively and effectively managed our business through weakening consumer demand by optimizing product mix and right sizing our hard drive manufacturing footprint.
As part of these efforts to manage through this part of the cycle, we are reducing our capital investments and operating expenses as we move towards align our cash flow and cost structure with market conditions. We saw him will go over our efforts in more detail.
As we closely monitor the macro environment, we were encouraged to see retail flash and channel demand leveling out in.
And orders from PC customers stabilizing assign.
The consumer led to inventory correction is abating.
We believe the long term growth in flash demand combined with reduced flash industry supply will restore supply and demand balance in the next couple of quarters.
Before I jump into updates on our HDD and flash businesses I wanted to provide a short update on our strategic review process. The Executive Committee of our board, which I lead continues its process, which I previously announced includes the participation of Elliott management under a Nondisclosure agreement.
Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review today.
We will provide updates as we have them.
Now turning to our ACD business.
During the first quarter, our HDD revenue declined modestly as we had forecasted in August sequentially total HDD in near line Exabyte shipments were both flat.
<unk> momentum with U S cloud customers and accelerated adoption of SM are hard drives were.
All set by softness in other capacity enterprise product channels and consumer HDD demand.
Shipment of capacity enterprise drives based on S. EMR technologies exceeded 25% of this category.
One quarter ahead of our expectations, we now expect <unk> to represent over 40% of our capacity enterprise exabyte shipment.
Excluding fiscal year 2023.
And some of our adoption drove a 19% sequential and 21% year over year increase in average capacity to 17 terabytes per capacity enterprise drive and our 20 terabyte drive exabyte shipments increased more than 150% sequentially.
We are deep into the process of qualifying our latest generation of hard drives, including our 26 terabyte Ultra S. M. Our hard drives at multiple U S cloud and OEM customers interest in SMS from other hyper scaler worldwide is increasing as the 20% capacity gain offers much.
T generation Tcl benefits to the most complex data centers worldwide.
Looking ahead, our U S cloud customers have started sharply reducing their hard drive inventory alongside other components for their data center build outs.
This along with continued subdued demand across markets in China will impact near term demand over the next few quarters.
Despite these near term corrections it is clear from our conversations with these customers that HED products will be the foundational storage for their continued cloud buildout in the years to come.
Our product leadership and innovation engine remain as strong as ever and we are confident that western Digital's hard drive business will thrive over the long term as demand improves and new products continue to ramp.
Turning to flash revenue was slightly ahead of our expectations. Thanks to our broad portfolio diverse routes to market and leading brands, including WD Black Sandisk and Sandisk professional that are recognized globally for their cutting edge innovation performance and quality I am pleased to say that we.
<unk> our bit shipment forecast this quarter, our client SSD products for PC, OEM retail and mobile drove the upside in bit shipments.
Average capacity per client SSD increased 24% sequentially and 54% year over year, driven by doubling of standard storage capacity for Pcs sold by multiple Oems.
This is another reminder of the insatiable demand for data storage and the resilience of flash demand as price elasticity drives increased consumption per device.
On the technology front fixed five accelerated to over two thirds of our flash revenue in the September quarter.
About half in the previous quarter.
<unk> six yield and development of subsequent three D. NAND flash are both progressing well.
For the December quarter, we expect flash shipments to increase sequentially led by seasonal strength in retail and mobile.
With the abrupt change in market conditions, we are acting decisively to adjust our supply trajectory to align with demand we are pushing out fixed six transition to meaningfully reduce our capital expenditures for fiscal year, 2023, which may offer us a potential opportunity to leapfrog to a future of <unk>.
<unk> node as demand normalizes.
With that let me now turn the call over to Lisa who will discuss our first quarter results in greater detail and provide an outlook for the second quarter.
Thank you David and good morning, everyone.
As David mentioned.
Revenue was in line, thanks to our team's agility and resilience and managing through this dynamic environment.
Total revenue for the quarter was $3 7 billion down, 17% sequentially and 26% year over year.
non-GAAP earnings per share was <unk> 20.
And as David mentioned included an approximately 30 cent impact due to the higher than forecasted tax rate.
Yeah.
Looking at our end markets cloud represented 49% of revenue at $1 8 billion down, 13% sequentially and 18% year over year.
Compared to the prior quarter continued momentum in capacity enterprise drives sold to U S cloud customers and an increase in smart video hard drives demand.
Partly offset the decline in all other hard drive product channels and flash.
Sequentially.
<unk> bit shipments were flat at 112 extra bytes, driven by our success in leading the industry transition to SM on hard drives.
The year over year decrease was due to broad based decline across both hard drive and flash products.
Client represented 33% of total revenue at $1 2 billion down, 25% sequentially and 34% year over year.
Sequentially the decline was attributed to flash drive.
By inventory reduction at PC, Oems and lower pricing.
Year over year decline resulted primarily from the reduced pricing.
Lastly, consumer represented 18% of revenue at 0.7 billion.
Down, 15% sequentially and 30% year over year.
On both a sequential and year over year basis. The revenue decline was due to flash pricing and lower retail HDD shipments.
Turning now to revenue by segment.
We reported HDD revenue of $2 billion down, 5% sequentially and 21% year over year.
Compared to the prior quarter total HDD exabyte shipments increased by 1%.
And average price per hard drive increased by 4% to $125.
On a year over year basis, total HDD exabyte shipments decreased by 12% and average price per unit increased by 23%.
Flash revenue was $1 7 billion.
28% sequentially and 31% year over year.
Sequentially Flash Asps were down 22% on a blended basis and 17% on a like for like basis.
Bit shipments decreased 10% sequentially and 7% year over year.
As we move to costs and expenses. Please note that my comments will be related to non-GAAP results unless stated otherwise.
Gross margin for the fiscal first quarter was 26, 7%.
Down five six percentage points sequentially and seven two percentage points year over year.
Our HDD gross margin was 28, 5%.
Up 30 basis points sequentially and down two four percentage points year over year.
Our flash gross margin was 24, 5% down 11, four percentage points sequentially and 12 five percentage points year over year.
Operating expenses were $689 million down $71 million sequentially and below our guidance range due to lower variable expenses and tighter expense management, including reduction of discretionary spending.
Operating income was 307 million, representing a 56% decrease from the prior quarter.
And a 68% decrease year over year.
As David mentioned, we are pleased to have delivered operating income above the midpoint implied by our guidance in a challenging market backdrop.
Our tax expense was $168 million, resulting in a tax rate of 72%.
Than previously forecasted.
Tax expense is influenced by several factors, including the projected quarterly profitability for the rest of the year and our corporate tax structure.
Earnings per share was <unk> 20.
Compared to $1 78 in the prior quarter and $2 49.
In the year ago quarter.
Operating cash flow for the first quarter was $6 million and free cash flow was an outflow of $215 million.
Cash capital expenditures, which includes the purchase of property plant equipment.
And activity related to our flash joint ventures on our cash flow statement represented a cash outflow of $221 million.
Our gross debt outstanding remained at $7 1 billion at the end of the fiscal first quarter.
Our liquidity position continues to be strong at the end of the quarter, we had $2 billion of cash and cash equivalents and our revolver capacity of $2 25 billion.
Our trailing 12 months adjusted EBITDA at the end of the first quarter as defined in our credit agreement was $4 1 billion, resulting in a gross leverage ratio of four seven times.
Baird to two times a year ago.
As a reminder.
Credit agreement includes 0.9 billion in depreciation add back associated with the Flash ventures.
This is not reflected in the cash flow statement.
Please refer to the earnings presentation on the Investor Relations website for further details.
Before I go over guidance for the fiscal second quarter I would like to discuss the business outlook for the balance of this fiscal year.
And the actions we are taking to align our execution plan with the changes in business environment.
In flash, we expect shipments to increase sequentially in the fiscal second quarter and the balance of the fiscal year 2023, as the market stabilizes.
And H D D.
We expect our revenue to recover as our U S cloud customers reduced their inventories over the next two quarters.
On the manufacturing front, we have sharply reduced client hard drive production capacity.
By approximately 40%.
For the fiscal year 2023, we are reducing our gross capital expenditures to $2 7 billion.
We are also aiming to reduce our cash capital expenditure by 20% versus our prior expectation.
The main drivers of our lower capital expenditures are primarily the pushout of big six transition in flash and reduced investments in hard drive manufacturing.
As for our operating expenses, we proactively reduced our spending by approximately $80 million in the first fiscal quarter relative to the midpoint of the guidance range we.
We are also taking further action to lower our ongoing operating expenses range to 650 to 700 million as we navigate this dynamic environment.
We believe these actions we are taking will allow us to continue to invest in innovation as a top priority for our company going forward.
For the fiscal second quarter, our non-GAAP guidance is as follows.
We expect revenue to be in the range of $2 nine to $3 1 billion.
We expect gross margin to be between 20% and 22%.
We expect operating expenses to be between $650 million and $670 million.
Interest and other expenses are expected to be approximately $80 million.
We expect the tax benefit between 70 and $90 million we.
We expect loss per share of 25 to earnings per share of <unk> in the second quarter, assuming approximately 319 million fully diluted shares outstanding.
I'll now turn the call back over to David.
Thanks.
Let me briefly wrap up and then we'll open up for questions.
While near term market conditions are challenging digital transformation continues to drive the long term growth for data storage from client to edge to cloud.
With products and solutions that play in every part of the technology ecosystem Western digital can meet customer's needs across the spectrum and unlock the possibilities of data.
For example.
While we are successfully managed managing through the consumer led downturn, which is showing signs of stabilization. We are ramping multiple new products into data centers worldwide.
We remain focused on innovation and execution I am optimistic that western digital will emerge stronger as we continue to ramp multiple new products in the data centers worldwide and market conditions improve with.
With our top tier team innovative and diversified portfolio broad customer base and differentiated go to market engine, we are uniquely positioned to capture the opportunities stemming from the rapid global adoption of the cloud and the expansive and growing ecosystem. It supports.
Finally.
I want to thank our employees for their hard work during this quarter and further solidifying our leadership in storage in the face of an extremely challenging macro environment. Our team worked together to deliver solid financial performance for Western digital.
I am proud of what this team has accomplished and excited to see what we can do together in calendar 2023 and beyond.
All right Peter with that let's open it up for Q&A.
We will now begin the question and answer session.
To ask a question you May press Star then one on a touchtone phone.
If you are using a speakerphone please pick up your handset.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question today comes from Aaron Rakers with Wells Fargo. Please go ahead.
Yes, thanks for taking the question.
I wanted to go into the flash business and kind of.
First out kind of how youre thinking about the gross margin trajectory into the December quarter guidance and specifically within that.
Your JV partner <unk> announced a couple weeks ago that they were going to cut production by as much as 30%.
Curious your gross margin expectation.
<unk> taken any actions to take out production and with that any underutilization charges that are baked into your expectations into the December quarter. Thank you.
Yeah, Aaron good morning, and thanks for the question.
We have not taken any major underutilization actions in the fab, we always reserve that rate in the future depending on market conditions.
So when we look at our.
The way to think about Q4 and I'll invite calendar Q4, we saw him to obviously make some comments I mean, we.
We were still under a.
Pricing is still under pressure I think that's fairly clear what's going on in the market and then we've got a sequential increase slight increase in bit shipments. So I think that's one way to think about how we're thinking about the quarter. We saw them anything to add the only thing I mean, I think the only thing I would add David is yes price.
<unk> is pretty much what's going to be the main driver of our gross margin and the kind of into Q4.
And then as a quick follow up on the hard disk drive the near line. It sounds like you and your competitor going through some digestion at some of your CSP partners.
What's the expectation for the December quarter. It sounds like you expect is the expectation that that shipments start to improve going into the March quarter. At this point and then I'll cede the floor. Thank you.
Yeah, we're going to you've got it we're going to see a sharp decline in shipments in calendar.
Calendar Q4, and that's going to lead to some pretty significant absorption charges or underutilization charges, and then we will grow back out of that.
As we move into as we move through 'twenty three.
Thank you.
The next question comes from Danielle <unk> with Evercore. Please go ahead, yes. Good morning. Thank you for taking the question I guess a follow up to.
So the prior first question around NAND was hoping you could speak maybe more broadly around your new NAND bit allocation strategy.
You spoke to no underutilization charges today.
I think your NAND gross margins.
Obviously, moving lower and in the last cycle I think in 2019, we dropped it at 19%. So curious how are you thinking about what business, you'll take what you won't take.
And how.
That will impact whether desire to build inventory and or <unk>.
<unk> two to cut utilization at some point.
Yeah.
Hey, good morning so.
Yes, I think this is the strategy we've been executing over the last couple of years and what we've been talking about I think is really paying off for US now at this part of the cycle. We've worked very hard to to drive the portfolio abroad.
<unk> portfolio across consumer.
Across mobile, we obviously still stay qualified at all of the vendors.
The client SSD portfolio as an anchor of the portfolio gaming.
And now we've added enterprise SSD into the mix so.
We've always talked about we want to we want to have a broad portfolio be qualified everywhere we can.
And then be able to mix based on what gets us the best return and so I think at this part of the cycle, we're able to do that and it also gives us.
Quite a few homes for our supply so.
That allows us.
<unk> quarter of sequential bit growth.
Obviously pricing is market based pricing so we participate in a market and it allows us to basically just change the mix too.
To get the best return we can.
So again I think the I think the portfolio strategy, we've been pursuing and we've been talking about getting qualified it it's a hyper scaler on enterprise SSD.
And that is.
That gives us another another really important home for for our supply. So that's how we're thinking about it I think when you look across the portfolio.
We have.
Five or six categories, depending on the depending on the quarter. If you look at it for the whole fiscal year will have six different categories, where we have a double double digit mix of bits going into those different parts of the market. So.
I think it gives us a lot of optionality and the ability to generate the best return we can.
That's very helpful I guess a.
A follow up on your technology roadmap, you talked about theoretically potentially skipping a node in historically.
Players in the market.
<unk> done very well when they pursue that strategy. So I guess can you kind of walk through what gives you the confidence that that's something that would make sense for you guys just given the historical precedents.
Yeah, I think the way we think about it right now you know big six is we're taking the actions around capital investment to slowdown our bit supply in the market to try and get the market balanced I think everybody is doing that.
Really an enormous number of actions to try and get the market back in balance.
We feel good about those will take effect next year as we move through the year.
What it means for US is big six will be a shorter node.
At this point the follow on notebooks aid is progressing very very well and as we move through the year, we'll be able to make a judgment about how long we're going to stay on which node.
There's a there's a number of issues around qualifications of products and all those kinds of things. So we'll make thoughtful decisions about that when we get closer to that point as we move through 'twenty three but we feel very good about where both nodes are and how they are progressing and that'll give us the give us again more.
Optionality about how we think about what what products, we put in the market to get us the best the best financial returns and obviously the best solution for our customers.
Thank you.
The next question comes from Joe Moore with Morgan Stanley . Please go ahead.
Great. Thank you.
It sounds like you guys are pretty optimistic that this improves but I guess in the event that it doesn't.
Earnings stay at this level for a few quarters or get worse. It looks like you might be challenged on the leverage ratio.
We've talked to a bunch of people on credit and it sounds like Thats a relatively easy.
To make that there is no stranger to it if you do it quickly. So just wondering how are you thinking about that are you and then just sort of broader more philosophically. It feels like it's going to be a tough economic year next year, there could be a lot of challenges.
Chinese supply out of the mix. The next NAND cycle should be pretty exciting so I feel like.
As you think about more negative scenarios, how do you think about weathering the storm and making sure that the kind of $15 of earnings power. You did a few years ago is something we might see in the future.
Yes, good morning, Joe Thanks for the question so.
With respect to the first part of your question look where.
We entered this down cycle and a very a much stronger financial position than the previous one if you recall we.
Reduced our debt by $2 $7 billion, we've improved the earnings power of the business, we strengthened our portfolio.
And also if you look at our liquidity at the end of.
Q1.
We had around $4 $3 billion between.
Yeah, a little bit more than $2 billion of cash and cash equivalents and $2 25 billion revolver. That's undrawn. So we have ample liquidity to operate within the in the next.
Few quarters.
And from where we are now we're very comfortable in terms of the.
The continued profitability of the business.
Yes.
Hey, Joe and just to add to that I mean, we're thinking about how you are I mean look we've got a <unk>.
We've got to get through this phase of the cycle.
I think the there are a lot of discussion about everything from reduced utilization to pushing out capex.
Two to.
To your point there is there are some regulations that are going to impact supply in the market in 'twenty three so we're optimistic about the next cycle about getting there.
The market is.
All of them.
We're reacting strongly to get supply and demand.
Supply and demand back in balance so.
But as we.
Some said we've invested in our balance sheet we.
We've invested in innovation in our portfolio.
To build the resiliency and the agility in the business to manage through this.
Okay. Thank you.
In the interest of time, we ask that you. Please ask only one question to allow others to that.
The next question comes from <unk> Hari with Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking the question.
I had a question on the NAND business as well.
So David based on the Capex decisions, you've made over the past couple of months.
How should we think about your bit supply growth in calendar 'twenty three.
Obviously, you've got <unk>.
On your on your balance sheet, but on a manufacturing basis.
Given the decisions you've made how should we think about that supply growth and it seems like youre not cutting production like many of your other peers.
I guess my question is why not is that a function of the contaminant issue earlier in the year and Youre looking to regain some ground or is there something else. Thank you.
No.
On the second part of your question, it's not not because of that at all it's because we have a lot of homes for our supply and we're able to get we think a good economic return for that so.
From a.
Just purely from an economic point of view it makes sense for us to continue to to to build the supply.
We're definitely going to slow down our bit supply I think you can think like low to mid twenties for supply next year.
It's kind of the way we're thinking about it.
Okay. That's helpful. Thank you.
The next question comes from Juan.
And with Bank of America. Please go ahead.
Yes. Thank you good morning.
To go back to your initial comments around consumer stabilization I know you alluded to some some points around retail MPC orders and I was hoping that you could maybe double click a little bit on what you're seeing both in retail and PC orders, specifically and also perhaps touch on.
Your expectation of inventory levels exiting the December quarter. Thank you so much.
So let me take the first part and I'll ask Simon to comment on inventory.
We go back and we look at kind of the progression of what's happened this year back in March.
Roughly the March timeframe, we saw the consumer market come under pressure.
<unk> talked a lot about that.
And let's call. It the June timeframe, we saw the PC Oems really start adjusting their inventory.
Very aggressively.
We talked about that last quarter.
<unk> seen that play out during the quarter now in a number of different number of different fronts and then.
Just within the last month or two we've started to see.
The data Big data center operators do the same thing.
Really sharply address adjust their inventory.
Tori and obviously thats factored into our guide.
So we've seen this kind of rolling change as it goes through one market to the <unk>.
Next if you look at the other side event.
Where are they add in that process consumer market.
We're seeing you know relatively predictable behavior.
It's not it's not like it's at a great point.
It's a.
Not not falling the way it was our ability to predict where it's going to be week over week and month over month have increased and so we've got more confidence we understand where that market is that and how it is going to play out going forward.
In the PC market in CQ, four we're actually going to see.
Some sequential growth in units of client SSD and not a huge amount, but its sequential growth again, we talked about a very very sharp inventory correction. So we're starting to see.
We're getting to the point, there where the inventory correction last quarter was quite severe and customers.
Going down to less than 10% of their usual demand now, we see things coming back and stabilizing a little bit. So I don't want to leave you with the impression that things are back up and back.
And back up into the right, but they are stabilizing a bit and we're starting to see some signs that.
We're getting more predictable behavior and then we can then grow out at this point.
Obviously, the data center, the big use hyper scaler, we're just kind of going into that and we.
We will have more to say as we it's going to be a couple of quarters, but we'll have more to say as we go through the quarter of what we're seeing and then what we see going into next quarter.
Inventory, yes, and on the second part of the question Onesie and Q1, we saw.
Similarly, a couple of hundred million dollars of some growth in inventory at the end of the quarter.
And then Tony Ware.
28.
We're expecting to see similar type of trends in the calendar Q4.
Really speaking, let's say you want to go into to $100 million growth in.
The increase in dollars and days of inventory.
Thank you.
Yeah.
The next question comes from Timothy Arcuri UBS.
Thank you.
Hi, I had a question and then I had a clarification. So the question is on NAND cost.
And the question really is sort of what the push out of big fix does to your longer term and when I say longer term I mean like inside of calendar 'twenty three 'twenty four like what that does to your NAND cost curve, you've been bringing costs down mid teens I know it can be less than that.
Next year, but what what is the push out through to your cost curve and then I wanted to clarify.
<unk>.
On the HDD margin assumption for December can you sort of disaggregate.
It'll bit.
What you think HDD margins will be for December like whats implied it seems like gross margins down a smidge that's.
Being applied in your guidance. Thanks.
Yeah on NAND cost when we went through the Capex exercise, we obviously kept a very close eye on still be able to drive cost declines thats, a very important element of the of the whole model of what we're doing here. So.
Still comfortable with you modeling, 15% year over year cost declines.
Alright, clearly there'll be some variability from quarter to quarter, but we still target that 15% year over year.
It's a big part of it I've talked about this a lot in the past.
It's actual input into the process into the design process not an output and so we really designed to meet that.
And.
Its a strong part of what we are what the whole business is about.
HED margins will be under pressure next quarter.
We will have.
As I said before we will have some significant underutilization cost that will go.
Into into into the.
The financials.
The other side of that is pricing in near line in capacity enterprise.
Has been stable benign about what we expect.
But we're clearly going to have to we're going to we're going to slow down production significantly and that will hit us in the margin line next quarter.
And then we will grow out of that as the volume comes back so.
We as we go through 'twenty three we also feel very we feel very good that we're going to be ramping into the 'twenty to 'twenty two terabyte drive which is deep in qualification at a lot of different places around the world and also the 26 terabyte Ultra <unk> drive.
And qualification as well and we talked a lot about.
<unk> in the prepared remarks that.
That is a technology, we believe very strongly that as the next phase of the datacenter is that <unk> and <unk>.
It was just last quarter, we talked about ending the year with 25% of our extra bytes and that market being <unk>, we achieve that a quarter early and now we expect to exit the fiscal year with over 40% of our of our exabyte is being shipped on SME. So feel really good about where the portfolio is in.
As we as we grow out of this.
Sharp inventory correction through 'twenty, three will be will be going into strengthen in the product roadmap.
The next question comes from Shannon Cross with Credit Suisse. Please go ahead.
Thank you very much for taking my question I'm. Just wondering can you talk a bit about the pricing environment, both in NAND and drives and how both.
Do you expect the prices to move from an absolute basis, and then also from a mix basis as you know the 'twenty to 'twenty six et cetera comes out over time I'm just wondering how we should sort of think about that thank you.
Yeah.
Pricing in HDD has been something we've been very much focused on.
We feel very very positive about the innovation, we're bringing to market I mean, thats, where all everything about pricing starts with innovation, you've got to bring a great product to market.
<unk> got to continue to drive a better value proposition for our customers and we believe strongly we are doing that these new drives of very good <unk>.
Benefits for our.
Largest data center operators in the world.
So pricing in near line has been.
I think benign is the word I have used for many quarters now and I would continue to use that word and we're going to be focused on value based pricing as we ramp into 2022 and 2006. So that's the way we're thinking about it again, it's all about driving a better <unk>.
Value proposition through innovation, and then we get to share the benefit of that with our customers.
In NAND.
Racing has clearly been under pressure I think that is very well documented.
We as I said before that look at our pricing last quarter like for like minus 17 blended minus 22, we're clearly mixing.
The mix hurts the pricing a bit but it also allows us to move a lot of supply and we think it's the right. We think it's the right decision for the business, we expect pricing to be under pressure in calendar Q4 as well.
Okay.
The next question comes from Chris <unk> with Cowen. Please go ahead.
Hi, Thanks.
My question I had a quick one on <unk> can you talk a little bit about <unk>.
So think about it somewhat in terms of your revenue mix and also how many customers you have and are you seeing any near line HDD shifts shifts.
My position thank you.
Yes, well, we don't talk about specific customers, but what I can say is there's multiple very large customers committed to SME.
Some of the largest data center operators in the world.
And I think the whole industry is especially ultra <unk> has been around a long time <unk> has been shipped and client drives for a long time, but it actually requires some work on the host side for the data center operators.
So.
When we were able to introduce ultra <unk> and <unk> plus 20% on a CMI drive versus the industry standard of plus 10.
That really change the equation a bit and when you can get 20% capacity uplift it's worth the investment.
On the host side and we're seeing that.
We're seeing that move across a lot of operators be.
I'd be very interested in that so we don't break out specific customers I sit on an exabyte basis, we expect it to be over 40% exiting the fiscal year. I think you can assume on a revenue basis will be slightly more than that but.
And I think that's that's that's how we think about it.
The next question comes from Matthew Hoffman with Us.
Please go ahead.
Yes.
To your question I also have one question in two parts.
With your weekly approaches based on cost plus.
Given continued weakness in loan prices.
Who is that going to impact your margin there was the restaurants earlier minimum margin of 19% and I just wanted to make sure that we understood that do the minimum gross margin given the.
Did you actually purchase wafer from the JV and the HDD side.
As you think about the dynamics.
Actually in the diving into next year, how you're planning for your capacity and looked into the exabyte growth.
<unk> you.
You too.
Casting.
For U S manufacturing capacity that you have going on.
How are you thinking about your HDD capacity.
So it shouldn't be.
Yeah.
Alright, let me I'll make some comments here and.
Then.
Sure, Sean will probably have something to add as well. So first of all let's clarify the comment on gross margin. There is no minimum gross margin I think the comment.
The comment was that in the last.
Down cycle.
Company's gross margin bottomed at 19% and flash.
I'll note that that number did not include the underutilization charges and when you include the Underutilization charges with some I know we calculated this number we're in the.
Sort of let's say between the it's in the low teens low teens okay.
So I think that was just.
I just think that was a benchmark that one of the previous questioners was using so.
Yes, you are right about how we get how we the JV economics work, but again, our the way we think about the portfolio as if we can get if we can if we have a home for the bits that number that's the first thing like do we have a place where we can do we have customers that value, our innovation and our portfolio and we have a place too.
Put the supply and then we then we look at pricing and then we look at that equation and does it make economic sense to do that and we drive the portfolio that we were actually.
Given where we are in the cycle, where we're pleased with the gross margin we're able to drive in the business at this point. So that's how we're thinking about an exabyte growth.
Clearly, we're going to slowdown HDD exabyte growth I think this.
Yes.
<unk>.
The industry is going through a pretty large digestion cycle part of the capex push out that.
We talked about.
The lion's share of that is on the flash side of the business, but we're also moving out.
ACD capex as well to slowdown our exabyte growth there we have a lot of conviction that the market is still going to grow in that high <unk> 30, plus range on exabyte growth, but we're going to have to grow back into that as we go through this inventory correction.
The next question comes from Harlan sur with JP Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
Inventory, 6% sequential growth and I know you guys expect more sequential growth in inventories. This quarter was the build more flash or HDD, driven I'm talking about the September quarter.
And then given the sharp pullback in the cloud guys are cutting utilizations in HDD this quarter, but are you guys.
Also holding back shipments of HDD and the December quarter, and then on the met side, despite the sequential growth.
And flash.
Are you guys holding back some shipments in the December quarter.
So let me take the <unk>.
So with respect to inventory.
In the September quarter.
The majority of the inventory growth it wasn't NAND.
On the <unk>.
HDD side were mostly flattish.
As we look into the December quarter.
<unk>.
We're expecting.
To continue to see more NAND inventory growth.
There will be some HDD inventory growth, but not not as much as we.
Anticipating to see NAND growth there.
Yes.
HDD growth wouldn't be basically just driven by the weakness we're seeing in the.
Market, but also we will we're carefully managing our utilization there wouldn't be under absorption costs, but we're also trying to carefully manage our utilization going forward.
And in terms of the cliff.
Part of the question with respect to holding shipments.
We're not planning on shipments.
The next question comes from Tom O'malley with Barclays. Please go ahead.
Hey, Thanks for taking my question guys you guys have seen a pretty long stretch here of seeing HDD asps fees, all the rise obviously with a lot of moving parts.
<unk>.
No.
And if that Youre seeing could you guys comment on what you expect <unk> as a whole you report the number every quarter to do.
Sequentially is it falling because of mix or is there any puts and takes that we need to be considering when we look at the December guidance. Thank you.
Yeah.
The transition is primarily driven by mix.
Sure.
Sure.
Yes, that's the key driver for <unk>. So Tom if you look at calendar Q4, you should expect asps for hdds to be down mainly driven by mix.
The Hyperscale guys go through the digestion phase right.
Helpful. Thank you.
Your next question comes from Ken is that with Citigroup. Please go ahead.
Sure.
Thank you you mentioned Q4 will be both.
December quarter will be burdened with underutilization charges is that kind of a blunt of it what are the most amount to be absorbed there and then we start to improve going after or does it continue and you mentioned capex.
Slowing that down can you quantify or give us some capex that was about what we should kind of.
Sure.
So for Capex and for modeling cash flow without capex. Thank you.
Yes, so on the.
The comment with respect to under utilization from.
From where we stand today and this seems to be the way.
We see.
Probably Andreas Underutilization.
The lowest and we would start.
Getting ourselves out of that as demand improves.
With respect to Capex.
We are aiming to reduce our cash capex for the fiscal year.
By 20% ideally, we want to do more.
The the way to think of it as a.
Our cash Capex.
20% is roughly split.
30%.
The reduction with it and these are relative to our previous expectations.
30% lower than previously expected on the NAND side and on the HDD side, it's a reduction of 10% to 15% relative to the previous expectations.
Sure.
The next question comes from Sidney Ho with Deutsche Bank. Please go ahead.
Thanks for taking my question.
I wanted to ask about the free cash flow expectation.
Is your expectation for the December quarter and for fiscal 'twenty, three and perhaps they can it's.
Trajectory of how things go and maybe I'll throw this one in too when you look at the inventory still going up next quarter are you concerned about inventory write downs, especially given named gross margin I think it was 25% probably going down for a couple more quarters.
Yes, so sidney for free cash flow.
Projecting a negative free cash flow in the December quarter.
And for the fiscal year.
Keep in mind that we have.
IRS settlement payment that is still projected to be in the fiscal 'twenty three and this was estimated at.
6% to $700 million.
With respect to inventory.
Look the.
We did we did see a small impact in terms of write down in the September quarter.
Timothy It all depends on how the NAND pricing develops in the next few quarters.
It is difficult to predict at this time, but it will depend on where the pricing.
Progresses.
Okay.
The next question comes from Ananda Baruah with loop capital. Please go ahead.
Hey, good morning, guys and thanks for taking the question David.
Yes, good morning.
Yes.
And hearing what Youre, what youre seeing and what your thoughts are.
With your guidance.
Yeah, a lot of demand from your OEM customers. It might go at all the on premise.
Yes, I would say those are under pressure as well I mean, I think across the whole data center business, we see pressure on on on that part of the market.
From the OEM side and on the Hyperscale or I would say the hyperscale or is a little more severe correction, but.
But we're seeing pressure on both sides of the datacenter business.
The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.
Yes. Thank you.
I was hoping you could discuss the run rate level of Opex for the next few quarters and as you as.
As you address that question how much of the $70 million improvement. This quarter is from the 40% reduction in hard drive capacity versus changes in accounting for R&D in NAND as well as could you touch on your ability.
To redeploy heads and media production into cloud products, where demand should grow very well on a structural basis going forward. Thank you.
Yes, so with respect to the run rate of Opex.
When you look at maybe I'll talk a little bit about where we ended in Q1, because this is a bit relevant on how we think.
About it going forward so in Q1.
And approximately $70 million to $80 million actually dropped from.
The prior quarter. So we ended at around $689 million.
We took action on variable expenses non discretionary spend basically we are tightening the.
Totally.
Expenses management.
As we look forward for the next few quarters. The run rate is expected to be $6 $52 million to $700 million.
Where.
We're still.
Contemplating.
Their actions net net.
Let me help us keep things even tighter.
So that's that's the run rate.
<unk>.
On the part of the question related to the client.
Capacity.
The restructuring.
The Opex does not reflect that this mostly the impact of that is mostly on the cost of goods sold.
And then.
With the reduction of approximately 40% of our capacity, we expect to see.
On an annual basis, roughly $45 million to $50 million benefit.
So that's roughly speaking a little bit more than 10 million, let's call it around $10 million to $12 million a quarter.
The.
In terms of the last part of the question on the heads and media.
Yeah.
So.
Some of this capacity is.
<unk>.
Fungible.
And.
We are we.
Part of our capital investment to us.
To continue to invest in our heads and media to ensure we have the capacity to.
Driving the ore supply the growth expected in the future, but you know as we talked about that also we are managing our capital expenditures over the next few quarters to manage our cash flow.
I think you've got the headset rate, which is in the transition from client to cloud.
We move all the heads and media over to cloud we've been in that transition for a long time, we're very very deepen that I would say we're in the last stages of that transition so.
Simple thing with client drives have a lot more discs and headsets.
We use all of that capacity.
Yes.
Your next question comes from Mark Miller with benchmark.
Please go ahead.
Thank you for the question.
A decline in cash.
Current quarter.
Talking about negative free cash flow, where do you think casualty at the end of the December quarter in the year.
Yes so.
I won't necessarily guide to a cash number, but we arent expecting a negative.
Free cash flow quarter in the calendar.
Q4.
From a liquidity perspective.
We ended.
The Q1 to $4 3 billion with around $2 billion of cash.
Cash and we still have $2 25 billion.
Yes.
Revolver and so from a liquidity perspective, we're comfortable in the <unk>.
And the ability for us to continue to operate comfortably.
Thank you.
Okay.
Okay.
This concludes our question and answer session I would like to turn the conference back over to David <unk> for any closing remarks.
Alright, thanks, everyone for joining us.
Look we will be talking to all of you throughout the quarter.
We appreciate your participation in the call.
It's obviously a very dynamic.
Environment, we're all facing out there I feel really good about the way we've been navigating this hopefully we've given you. Some good color about how we're thinking about the business going forward again have a great day, everyone. Thank you.
Okay.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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