Q2 2023 Western Digital Corp Earnings Call

Speaker 2: Good afternoon and thank you for standing by. Welcome to the Western Digital fiscal second quarter 2023 conference call. Presently all participants are in a 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 1 on your phone.

Speaker 3: And as a reminder, this call is being recorded. Now I will turn the call over to Mr. Peter Andrew. You may begin. This call was conducted

Speaker 4: Thank you and good afternoon everyone. Joining me today are David Deckler, Chief Executive Officer and Weisam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including expectations for a product portfolio, cost reductions, business plans and performance.

Speaker 5: Demanded market trends and financial results based on management's current assumptions and expectations and as such Does include risks and uncertainties

Speaker 6: We assume no obligation to update these statements.

Speaker 7: Please refer to our most recent financial report on Form 10-K followed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially.

Speaker 8: We will also make references to non-GAAP financial measures today.

Speaker 9: Reconciliation between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to David for introductory remarks.

Speaker 10: Thank you, Peter. Good afternoon and thank you for joining the call to discuss our 2023 second quarter results.

Speaker 11: The Western Digital team worked diligently within a dynamic market and delivered revenue at the high end of the guidance range we provided in October . We reported second quarter revenue of $3.1 billion and non-GAAP operating loss of $119 million. w invite you to watch more series on our website

Speaker 12: Our non-gap loss per share was 42 cents.

Speaker 13: Our ongoing efforts to control expenses optimize working capital and deploy capital judiciously helped us manage cashflow amidst a challenging flash pricing environment and larger than expected HCD under utilization that pressured gross margins.

Speaker 14: Before we discuss the details of our second quarter results, I wanted to cover two other announcements that we are making today.

Speaker 15: First, we disclosed that Western Digital has entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments totaling $900 million.

Speaker 16: In connection with the agreement, Reid Raymond, a partner at Apollo, will join our board starting immediately.

Speaker 17: On behalf of the board, I am pleased to welcome Reid, a leading technology investor who will provide us with additional financial and strategic expertise, which will be critical as we continue to execute on our business strategy and complete our strategic review.

Speaker 18: Second, on January 25th, we secured access to $875 million of financing through a delayed draw term loan.

Speaker 19: When combined with the actions we undertook to structure lower our cost structure, these financing provide valuable financial optionality and flexibility to Western Digital as we continue our strategic review.

Speaker 20: Regardless of the outcome of the strategic review, our goal is to ensure the business is in a solid financial position to invest in innovation and create long-term shareholder value.

Speaker 21: Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review process or making comments on market rumors.

Speaker 22: We will provide updates as we have them.

Speaker 23: Over the past three years, we have worked continuously to reinvigorate innovation and bolster business agility for both our Flash and HDD organizations, which enable the Western Digital team to stay ahead of the market.

Speaker 24: Over this same period, we paid down $2.7 billion in debt and arranged for settlement of a long-standing tax dispute.

Speaker 25: Since the beginning of fiscal year 2023, we have taken additional actions to reset the business in response to the post-pandemic environment.

Speaker 26: These actions include.

Speaker 27: First, we have further reduced our capital expenditures across Flash and HDD to moderate our supply. As a result, our projected cash capital expenditure for Fiscal 2023 has declined nearly 40% from six months ago.

Speaker 28: Second, we have decreased supply bit growth across both flash and HDD. In flash, we reduced wafer starts by 30% in January .

Speaker 29: In HDD, during the fiscal first quarter, we consolidated production lines across our manufacturing facilities and idled certain media production lines in Asia, reducing client hard drive capacity by approximately 40%.

Speaker 30: During the fiscal second quarter, we continued to optimize our capacity enterprise manufacturing footprint to align our supply with the new demand environment.

Speaker 31: Third, we have reduced our quarterly non-gap operating expense by over $100 million since the close of fiscal year 2022 driven by lower headcount, discretionary spending, and variable compensation.

Speaker 32: We are targeting to reduce quarterly non-GAAP operating expense level to below 600 million by the time we exit the fiscal year.

And lastly, in December , we successfully executed an amendment to the existing financial covenants under our credit agreement.

Turning to end market demand during the fiscal second quarter, demand for consumer oriented products stabilized as we discussed in October .

In consumer, we experienced a seasonal uptick across both flash and HDD.

In client, channel demand for both SSD and HDD have improved. However, commercial PCs are now being impacted by tightening budgets and spending across corporations, which is negatively affecting client SSD shipments.

In cloud, we experienced a decline in nearline shipments as our customers were undergoing inventory digestion and ongoing subdued China demand.

I'll now turn to business updates starting with HDD.

During the fiscal second quarter, our HDD revenue declined significantly as cloud inventory digestion intensified, while demand for retail and client HDD improved.

We continued to successfully execute on our product roadmap as we completed qualifications and commenced shipments of our latest generation 22 terabyte CMR hard drives at multiple cloud and major OEM customers last quarter.

We are aggressively ramping this 22TB CMR product this quarter and expect this drive along with its SMR variants to be our growth engine going forward.

Qualifications of our 26 terabyte ultra SMR drives are also progressing well. Our major customers remain committed to adopting SMR drives as the 20 percent capacity gain that ultra SMR drives over CMR offers multi-generation TCO benefits.

to the most complex data centers worldwide.

We expect sequential growth in revenue and margin into our fiscal third quarter and continued recovery as we move through calendar year 2023.

Turning to Flash, thanks to our broad portfolio, diverse routes to market, and leading retail franchise, combined with strong seasonal demand, BITS shipments increased 20% sequentially, exceeding our forecast.

While we continue to experience pricing pressure in the market, our premium brands, including Sandisk, Sandisk Professional, and WD-BLAC, continue to deliver strong share and profitability to support the business.

Our premium WD Black client SSD, which is optimized for gaming, continues to be well received in the marketplace.

It achieved a record of an exabyte chipmins, unit chipmins, and average capacity per drive, resulting in exabyte chipmins increase of 73% sequentially in 41% year over year for this product.

On the technology front, BIX5 represented 70% of our flash revenue in the December quarter, while BIX6 will reach cost crossover in the fiscal third quarter.

Our next generation 3D NAND node, BIX8, has entered productization phase.

Bix8 incorporates several groundbreaking 3D NAN architectural innovations to deliver a major leap in performance and cost-effective solutions to a broad range of exciting products.

demonstrating the benefits of Western Digital's strong partnership with Kyoksha.

and our innovation leadership and 3D nan architecture.

As we look into the fiscal third quarter, in hard drives, overall demand in cloud has stabilized and we expect modest improvement in nearline to offset a seasonal decline in client and consumer hard drives.

We expect stronger improvements in the second half of this calendar year led by the aggressive ramp of our 22 and 26 terabyte hard drives.

In Flash, we expect Energi's SSD product demand for the fiscal third quarter to be sharply reduced as certain large cloud customers have entered a digestion period.

In addition, a reduction in commercial PC demand is expected to impact client SSD shipments in the near term.

Proven by the lower customer demand forecasts in enterprise and client SSDs, we anticipate bit shipments to decline in the fiscal third quarter and return to growth in the fiscal fourth quarter.

As I mentioned earlier, Western Digital lowered wait for starts in January , and we remain flexible in adjusting the magnitude and duration to restore our flash supply and demand balance.

As noted, for calendar year 2023, we expect reduced capital investment and lower utilization in response to the new demand environment.

Our initial estimate is for flash demand bit growth to be in the low 20% range, with production bit growth to be well below that of demand.

With that, let me turn the call over to Isam who will discuss our second quarter results in greater detail and provide an outlook for the third quarter.

Thank you, David, and good afternoon everyone.

Total revenue for the quarter was $3.1 billion, down 17% sequentially and 36% year-over-year.

Nunga Plus per share was 42 cents.

Looking at our end markets, cloud represented 39% of revenue at $1.2 billion, down 33% sequentially and 36% year over year.

Sequentially, the declines in capacity enterprise drives sold to our cloud customers and smart video were partly offset by an increase in flash shipments.

Nearline bitchipments were 61 exabytes, down sequentially driven by inventory digestion.

The year-over-year decline was also primarily due to inventory digestion in hard drives.

Client represented 35% of total revenue at $1.1 billion, down 11% sequentially and 41% year-over-year.

sequentially

The decline was driven by pricing pressure across our flash products, which was partly offset by an increase in hard drive shipments.

The year over year decline was also due to pressing pressure in flash as well as lower client SSD shipments for PC applications.

Finally, consumer represented 26% of revenue at $0.8 billion, up 17% sequentially and down 25% year over year.

Sequentially, the increase was driven by seasonal uptick in both retail hard drives and flash shipplinks.

The year over year decline was driven by lower retail hard drive shipments and pressing pressure in flash.

Turning now to revenue by segment.

We reported HDD revenue of $1.5 billion, down 28% sequentially and 34% year-over-year.

Sequentially, total HDD exabyte shipments decreased 35%, and average price per hard drive decreased 21% to $99.

On a year-over-year basis, total HDD exabyte shipments decreased 33%.

an average price per unit increased 2%.

Plash revenue was 1.7 billion dollars, down 4% sequentially and 37% year-over-year.

Sequentially, flash ASBs were down 20% on a blended basis.

and 13% on a like for like basis.

Clash bid shipments increased 20% sequentially and remained approximately flat year over year.

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

Gross margin for the fiscal second quarter was 17.4%.

down 9.3 percentage points sequentially and 16.2 percentage points year over year.

Our HDD gross margin was 20.7%, down 7.8 percentage points sequentially.

and 9.9 percentage points year over year.

On both a sequential and year-over-year basis, the decline was due to underutilization related charges of approximately $100 million.

Our flash gross margin was 14.5%, down 10% points sequentially.

and 21.6 percentage points year over year.

We are continuing to reduce our costs with operating expenses at $659 million for the quarter, down $30 million sequentially.

Operating loss was $119 million.

Taxes were a benefit of $48 million.

Taxes are influenced by several factors, including the projected quarterly profitability for the rest of the year and our corporate tax structure.

Earnings per share was a loss of 42 cents.

Operating cash flow for the second quarter was $35 million and free cash flow was an outflow of $240 million.

Cash capital expenditure, which includes the purchase of property, plant and equipment, and activity related to our flash joint ventures on our cash flow statement was $275 million.

Our gross debt outstanding remained at $7.1 billion at the end of the fiscal second quarter.

Our trailing 12 months adjusted EBITDA at the end of the second quarter, as defined in our credit agreement, was $3.3 billion, resulting in a gross leverage ratio of 2.1 times. delta H3N3 is the power supply for our smaller Sl Kab my

compared to 1.5 times a year ago.

As a reminder, our credit agreement includes $0.8 billion in depreciation addback associated with the flash ventures.

This is now reflected in our cash flow statement. Please refer to the earnings presentation on the investor relations website for further details.

As David mentioned, during the fiscal second quarter, we executed an amendment to the credit agreement that temporarily increased the covenant leverage ratio for the next seven quarters.

Our liquidity position continues to be strong. At the end of the quarter, we had $1.9 billion of cash and cash equivalents and a revolver capacity of $2.25 billion for total liquidity of $4.1 billion.

Today, we announced multiple agreements to further enhance our liquidity position by $1.8 billion as follows.

On January 25, we closed the delayed draw term loan agreement with our lenders in the amount of $875 million.

In addition, as David mentioned, Western Digital entered into an agreement with Apollo Global Management and Elliot Investment Management for a convertible preferred investment of $900 million.

Together, these actions significantly increase our ability to access liquidity and provide additional financial flexibility and optionality as we manage through this challenging downturn and execute on our strategic review.

Before I go over guidance for the fiscal third quarter, I'll discuss the business outlook and the financial impact associated with the actions we are taking to right size our cost structure. The financial impact we are taking to right size our cost structure.

In HDD, we expect revenue to increase modestly in the fiscal third quarter.

as growth in near-line shipments outpace its decline in consumer.

In Flash, we expect both shipments and ASP to decrease sequentially.

We expect bit growth to resume in the fiscal fourth quarter.

For the fiscal year 2023, we are reducing our gross capital expenditures to approximately $2.3 billion compared to our prior forecast of $3.2 billion entering this fiscal year.

We are also aiming to reduce our cache capital expenditure.

to $900 million, which is about 40% below our forecast six months ago.

The primary drivers of our lower capital expenditures

are the delay of the big six transition in flash and reduce investment levels in both client and capacity enterprise hard drive manufacturing.

We have reduced our quarterly operating expenses by over $100 million compared to six months ago.

We are targeting to exit this fiscal year with quarterly operating expenses below $600 million.

These actions will allow us to weather this cycle, while also enabling us to continue advancing our innovative product road map going forward.

I'll now turn to guidance.

For the fiscal third quarter, our non-GAAP guidance is as follows.

We expect revenue to be in the range of $2.6 to $2.8 billion.

We expect gross margin to be between 9% and 11%.

which includes underutilization charges in flash and HDD told the being $250 million with flash driven by 30% reduction in wafer starts.

We expect operating expenses to be between $600 million and $620 million.

Interest and other expenses are expected to be approximately $90 million.

We expect tax expenses to be between $60 and $70 million for the fiscal third quarter and approximately $240 to $260 million for the fiscal year.

We expect loss per share of $1.70 to $1.40 in the third quarter, assuming approximately 319 million shares outstanding.

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

Thanks, we saw him.

Before we open up for questions, I wanted to reiterate our view of the long-term opportunities for both flash and HDD storage.

Importantly, our efforts have enabled us to regain architectural leadership in both Flash and HCD, and we are preparing these technologies to address the meaningful, long-term growth for data storage.

from client to edge to cloud.

With our diverse portfolio, broad go-to-market engine, an enviable retail franchise, and a lower cost structure, we remain confident in our ability to deliver long-term shareholder value.

Okay, Peter, let's open up for Q&A.

And ladies and gentlemen, we will now begin the question and answer portion of today's call. If you have a question, please press star then one on your phone.

If you would like to withdraw your question, please press star then 2. One moment please for the first question.

And our first question today will come from TJ News with Evercore. Please go ahead. Yeah, good afternoon. Thank you for taking the question. You know, obviously we're kind of in a perfect storm here. But, but curious, as you think about, you know, maintaining your technological competitiveness in the man's side.

while at the same time significantly slowing down CapEx for both you as well as what we heard from Kioxia for VIX6. I guess how do you balance those two things? How do you set the stage into recovery and maintaining that leadership?

And how much longer can you squeeze the requisite kind of 15% cost downs out of VIX-5?

Hey CJ, thanks for the question. Good to hear from you. So yeah, that's a balancing act, there's no doubt. I mean, one of the things we talked about in the script and we feel really good about is Bix8. Bix8 has reached productization. We'll have more to say about Bix8. I think we'll do a webinar during the quarter.

on all the technological innovation there. There's been an enormous amount of R&D going into that. So we feel very good about where we are from a technology roadmap. Actually, in my hand right here, I'm holding a Bix8 USB, one of the first ones. And so we're putting enough capital in the system to

move big six along. I mean big six will be a shorter node for us. It won't go into all products. We'll be making choices about what we take it into where we need big six. Big five will service well for the rest of the portfolio and then we'll move right into big eight, which quite frankly is ahead of schedule as far as production and we feel very good about it.

because we are far along in Bix 5 and Bix 6 is not ramping that much. We'll return to those as we start to ramp Bix 8, but we'll still have some, but not to the level, especially with the underutilization of the fab. So all of those mixed in, we will have gotten most of our cost downs in the first half of the year, and then we'll see them come back as we...

as we ramp up big six and especially big eight. Very helpful. If I could follow up with some. Can you confirm that for the March quarter it's just 150 million incremental underutilization charges and then how are you thinking about that rolling off through calendar 23? Thanks so much.

Hi CJ, so for the March quarter we're projecting 250 million in total. That's between both flash and HDD.

We expect the probably I would say three quarters of those to be in the flash on the flash side and one quarter in the HDD business. As we roll into the fourth quarter, I expect HDD to become minimal but flash will depend on how long we continue with the...

come in the first, let's say, 90 days and then the remaining impact would be in the following quarter. So the way to think of it is the March quarter will have around 60 to 70% of the impact from the underutilization.

for that would have taken the actual taken so far. Now that said, it could be that depending on how the demand picture evolves, we haven't yet decided how long the underutilization is going to be and we're going to manage this in a very dynamic way.

as we continue to look at market inputs and so on. My comments were around assuming, let's say, a one quarter event.

And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead. Aaron.

Aaron, you there?

Yeah, sorry about that. Can you guys hear me? Yeah, hey Aaron, how you doing?

Hey, good. Thanks for taking the question. So I'll try to slip into as well here real quick. You know, first of all, on the 30% reduction of the wafer starts, you know, starting in early January , I'm just curious in the context of what you had outlined, you still, it sounds like, think that...

You know, man-flash bit-demand growth is somewhere in a 20% plus range. You know, with that 30% reduction, how has your bit production changed as you look at, you know, calendar 23? What's your assumption as far as your own bit supply growth as we move forward?

So, first of all, let me talk about the kind of how we're thinking about it. It is a very dynamic situation. I think when we were looking at our CQ1, we've seen some demand drops. We're coming off a very strong quarter of bit growth. We just delivered 20% sequential bit growth.

That's why we didn't cut wafers earlier. When we look at our fiscal Q3, we're seeing some drop in both client and enterprise. The enterprise SSD side of it is more a digestion issue. So Age one, Heartlandiling is less of an integrate on a K2

We want to make sure we manage our inventory and we don't get things too built up. And so that's why we've decided to cut wafer starts in the first quarter. Again, as we said, it's literally a decision we can make every week about how do we load wafers into the fab. Right now, that's a one-quarter decision to make sure we keep our supply and demand balanced.

and they, The

I would say it's probably given the cat-back situation we're looking at this to be.

and the single digit growth from some light perspective.

That's helpful. And then as a quick follow-up, on the hard disk drive side, I mean, you know, looking at 61 exabytes of capacity shift, that's down 40, 45 percent sequential. What gives you the confidence that that's just a transitory, you know, digestion thing and maybe there isn't anything going on competitively? Any kind of visibility you want to share in that business.

Yeah, I think we signaled this a little bit last quarter. We knew there was going to be some variability in demand across the industry and across customers. Quite frankly, when you're at these revenue levels, which are the lowest we've seen in a long time, orders from big customers make a very big difference.

If you go back for the last couple of quarters, the way different big cloud customers, the way either LTAs were structured, the way big orders came in one way or another, you're seeing some pretty large share shifts quarter over quarter. But when you look at it on a six month basis, you look at it on a 12 month basis, you see.

pretty consistent share. I think we've gained a little bit. But again, we're managing for profitability. We think share is going to be over a multi-quarter period pretty stable. And that's actually the way it's working out. You're just seeing some pretty big swings here quarter over quarter. So we feel really good about the competitive situation.

additional 20% gain over CMR and that is in qualification across a number of very large customers. We feel like as we ramped throughout calendar year 23, we ramped into a stronger and stronger portfolio as we moved through the year.

Thank you guys.

Thank you guys. Thank you. Thank you.

And our next question will come from Joe Moore with Morgan Stanley . Please go ahead. Great, thank you. I just wanted to make sure I understood the mechanics of the underutilization charge. Is that sort of the cost of just higher cost per bit because you're running underutilized?

or are you, it sounds like you're pulling some of that forward in time, but maybe not all of it. Can you just talk about what exactly that charge will represent and how that's going to play out this quarter or next?

Yes, sure, Joe. I should have clarified when I talked about the underutilization that we don't necessarily have a similar approach to the accounting for underutilization as some of our peers. For us, the underutilization charges are taken as the period expands.

And so any portion of the factory that's not being utilized is basically expensed within the quarter. And so it does not flow through the inventory and back to the P&L, if that helps.

Okay, thank you.

How are you guys thinking about the signals of like when that goes back to full utilization? I mean do you wait for pricing to stabilize or is there something you can see beforehand that will tell you hey it's time to kind of keep this you know move the fat back to full?

Yeah, well, we're always talking to our customers, right? So we have a very good sense of where they're at and what their demand signals are going to be. I mean, as we talked about, we expect volume to increase going into our fiscal fourth quarter. So as we get closer to that and we understand what that looks like, we'll make an incremental decision on what we're talking about.

when and how to ramp back up the fab. Great, thank you very much. And our next question will come from Tim Arcuri with UBS.

Go ahead

Hi, thanks a lot. This is Jason for Tim from UBS. I have a couple of questions. So my first question is on the NEN segment.

Sorry if I misunderstood, but I believe you said that Cinco did a big work for NAN in calendar year 23. So I was just curious which end markets are driving this demand weakness this year. Also, I was just curious whether we should expect any potential risk for NAN inventory write downs in March quarter or June quarter.

Yes, so Jason my comment was around the supply side. I would say single digit, let's call it high single digit percentage growth. I didn't necessarily make any comments on the demand side. On the demand side it probably be in the low 20% range.

in Canada 23 versus Canada 22. As for the second part of your question, which is related to inventory, we go through the process at the end of every quarter as part of our quarter close.

look at the various demand signals versus the inventory on hand and the costs, etc. And we're comfortable with where we ended at the end of calendar 24.

My second question is, apart from your comment on the utilization charges, do you guys also see any potential additional risk for purchase order cancellation fees for any tech or pay agreements you have with your suppliers if it remains in the near term? Thank you.

I mean we typically don't forecast these things and we manage the business in a dynamic way. So I don't expect anything major there. Yeah, again going back to WeSim's prior comment, that's part of our normal quarterly closed process and if there were any adjustments that were needed to be made, we would have made them at that time.

But of course, you've got to re-measure it and take a look at it every quarter.

Thank you. Thank you. And our next question will come from Chris Stankar with Calvin and Compton.

I'm kind of curious how to think about pricing trends for Nearline HDD into the March and June quarter and also think about the Nearline extra by growth in the first half of this year and calendar 23 overall and then add a follow up.

Yeah, I mean, I think, you know, the pricing environment has been pretty good in HCD throughout this whole cycle. I mean, anytime you're seeing this kind of underutilization, you're going to see a little bit of pressure on pricing, which is not surprising. I would say we're seeing a little bit more. I mean, I think as we look at, you know, exabyte growth is, I think it's...

pretty clear that it'll be stronger in the second half than the first half. I mean, we're going to now ramp back off of this very low in calendar Q4, and we expect growth as we move throughout.

throughout the calendar year. As we said, we're anticipating modest revenue growth, maybe low to mid single digits, quarter over quarter here going into calendar Q1 or fiscal Q3. We expect margin improvement as of course the volume comes back and the underutilization charges.

We still got big customers going through inventory digestion. Some are coming out of it. We'll know more as we work our way through the calendar quarter. We also have a very dynamic situation in China. The China market has been very subdued for quite a long time now.

I would say there are some signs of things getting better. We'll see after we get past the new year how that progresses. But that could be, depending on how that comes back, will have an impact as well, of course. As we get more people through the fall, the land could be rather battle for a long time to everybody. Into the coming years it will behour and a half down twelve times it ends up without a doubt, present some things, I am levels six and seven to the 16, $5. Learn and maybe a carbon to growth.

Just kind of curious, you mentioned the cloud inventory digestion and you also mentioned that for HTV in March the cloud business stabilized. So curious on the NAM side or even HDE side, when do you expect this digestion to bottom?

And then when you think things start improving from a demand standpoint or maybe, you know, continuing your own inventory standpoint.

Yeah, that's a very difficult question given how dynamic the market is. I mean, I think we're coming off of a very strong quarter of bit growth, you know, 20% bit growth, sequential bit growth in our FQ2 was a good result. Obviously, it's a very challenging pricing environment.

going into our fiscal third quarter we see a drop in both.

of DITs and pricing, so that's a pretty significant impact on the business. Current forecast is going into our fiscal Q4. We see the volume pick back up.

So that's a little bit of how we see the dynamics. The pricing environment will change as supply and demand come more into balance. And we're doing everything we can to manage our supply situation demand balance so that we keep our inventory situation under control.

of agility in the organization to react, you know, it's important that we react faster than the market is moving. Otherwise, we just get carried along with the market. And I think we are we're doing a good job of that to get the best result we can out of a difficult market and prepare ourselves from a technology and portfolio position that when

When things get more in balance and we get to the inevitable upturn, that we're very, very well positioned and we feel good about that from flash technology. I talked about VIX8. Again, we'll talk more about that throughout the quarter. I think you're going to be impressed about the innovation that's in that. I certainly was. And also about where we're at in the product portfolio.

more in balance and we get to the inevitable upturn that we're very, very well positioned and we feel good about that from Flash Technology. I talked about Dix8. Again, we'll talk more about that throughout the quarter. I think you're going to be impressed about the innovation that's in that I certainly was. And also about where we're at in the product portfolio. Thank you.

And our next question will come from Juan T. Mohan with Bank of America. Go ahead.

Yes, thank you. If I could just follow up on your comment on under utilization charges, will be minimal in HDDs and in fiscal 4Q. What's giving you the confidence there that this inventory digeshed in particularly in high cap drives will largely be done. I know you're coming off low levels, but...

It also seems like some of the broader cloud customers are starting to take down as well in terms of their own demand. So any color you can share on what you're seeing in the market, that's giving us a confidence that those organization charges will grow away and HDD's life because it will work. You can have a follow up. Well, let me start with...

with the answer, WAMZI. When we look at our inventory exiting the fourth quarter, our inventory appears to be in a better position than our peers. And so obviously when we consider the utilization and where the demand is and the improvement in demand.

over time on the HDD side. That's really what drove my comment. So based on what we see today, this is how we anticipate things to unfold.

Okay, thanks for some. And Dave, you noted in your prepared remarks a lot of different things that you're doing.

You know, all the things that are kind of under your control, right? They go shading, covenants, cutting costs, lowering cap acts, lock acts.

And despite all these, you are sort of doing this convert. So maybe you can just talk about why this incremental liquidity is needed as you view on the market change materially or your share assumptions, change materially or as this more of a strategic investment and just optionality. Just maybe any color you can share around that would be helpful.

Yeah, it's a number of things. So first of all, it is to give us the flexibility to manage through the depths of the downturn. It's important that we look at, we have a blend of different kind of financing, both that and equity. We can't just take all that. We've got to watch our...

debt to equity, our EBITDA to debt ratios, and make sure we manage it all as one package. And I think so that's part of it. The big part of it is kind of facilitating the execution of our strategic review.

These, you know, you'll see in the 8Ks that are filed, these agreements are very complicated and are very well thought through to give us a better understanding of what the

the ability to execute a range of outcomes.

and make sure that we can be in a good position as we move to that stage of the process. I'm not putting a timeline on that, but these are set up in a way that give us a lot of optionality and flexibility to facilitate that outcome.

And then, you know, third thing, it brings additional capability to our company. Reid Raymond is a very sophisticated technology investor that will join our board. Elliott will have the right to join our board under an amended letter agreement with them when they... Q & A Talking megaw Creativity GentleDrift

clear some issues at their choice. So it brings a lot of capability to us as well.

We feel good about people investing in the business, about the opportunity to do this, and it puts us in a very strong position to continue to execute the business, invest in innovation, as well as set ourselves up for the next phase of our strategic review.

Okay, thank you. And our next question will come from Shannon Cross with Credit Tweet. Go ahead.

Thank you very much. I have a follow up to the last question and then an additional question. I just want to, so we assume that you're not going to initially draw down the term loan that you have and that that's kind of an insurance policy. And how should we, I'm just trying to figure out interest expense in that.

And then I have a follow-up. Yeah, Shannon. So the one thing to keep in mind is we still have the IRS settlement payment that's expected to be in the fourth quarter. And so when the time comes for that, we will make a decision based on what's the most efficient.

What changes are you looking at to get down to OpEx at about $600 million a quarter?

Just as you look across your cost basis. Thank you.

Yeah, so when you look at where we ended the December quarter, we were down versus also the September quarter, which was also down versus the previous quarter. So in other words, from the beginning of the fiscal year till now, we've taken down approximately 100 million.

And we guided to be 600 to 620. We continue to take similar actions going through the typical focusing on exiting or reducing all sorts of discretionary expenses. But more importantly, we're basically focusing on maintaining the critical R&D investments so that we continue to...

Thank you. Thanks, Shannon.

Our next question will come from Tom Amalie with Barclays. Please go ahead. Hey guys thanks for taking my question. My question is on the preferred equity convert. We've seen different companies handle them from a dilution perspective where sometimes even out of the money you'll see them come into the non-GAAP share count. Can you just talk about what you're expecting from dilution there?

of the preferred, the convert would be anti-dilutive and so that's why you don't see them reflected in the share count. However as we swing to a profit I would expect us to include them as part of our fully diluted share count so they'll have some limited dilution.

In fact, helpful. And then just on the recovery side into the fourth quarter on some of the bit shipments or the X-by-chipins and nanns, are you just thinking that it will inflectire or are you expecting the material stuff up? Because you outperformed your peers in the December quarter with the growth you saw You're obviously expecting a step down in March. But...

Just talk about the cadence. Is it an extreme step down in March with a small step up? Any kind of color and how you're looking at that forecast, given you're given some color there. Yeah, I think, well, one of the things we're seeing is one of our big enterprise SSD customers go through a digestion phase in our FQ3. And I think they'll get through that in a quarter and be back to buying. So that should be a, uh.

That'll get back to a good guy instead of a bad guy as far as the volume.

This is a very seasonally weak quarter for consumers, so we'll see some step up there. Client is a little bit TBD, is now commercial, and enterprise is a little weaker. The consumer side is stabilized. So I don't want to put too much of qualification on it, but again, we feel good about our ability to have a very diverse portfolio.

Very diverse go-to-market engine. We've talked about this from the channel to consumer to the big OEMs to the web players And you know, I think quite frankly we saw last quarter that go-to-market engine perform really well And when we get past a few...

seasonality things and a few things that are idiosyncratic with big customers, we'll see it kick back in and perform well. Thanks Tom.

Our next question will come from Jim Suba with Citi. Go ahead. Hey, Jim. Hi, Jim.

Thank you so much, David and we sound like it sounds like with a charge of 250 million now and you mentioned NAND underutilization starts to kind of go away in Q4 that kind of worse you're seeing a bottom or the worst of the utilization charges kind of in the March quarter is that fair to say I know you still have to do some adjustments for MAND.

of the business.

On the flash side or on the LAN side, I would say it is a dynamic situation. We will continue to assess as we see the demand signal coming. And so the example I gave earlier was on the assumption that we don't – that we have only one quarter of underutilization. I want to make

before, our inventory position was better than some of our peers. And we're taking this action to continue to manage our inventory given where the demand picture is today. But that's an evolving situation and we will be, you know, we can, as David said, this is a decision that we can take on a weekly basis if we need to change.

This is a capital inclusion from the convertible stock and draw on your revolver change or approach to ramping Bix 6 and Bix 8. I ask because 90 days ago you indicated you'd be pushing out the Bix 6 transition to reduce your cat-bex for fiscal 23, but today you're also indicating Bix 6 will reach cost-cross over with Bix 5 in March and you're also...

guidance, I guess I would call that, but I think what we're saying is big state is a Tao.

is well along in its technology evolution and its reproduction phase. Like I said, I wish we were on video, I could show you the Vix8 product I'm holding in my hands and playing with. But yeah, I would say the investment doesn't change the way we're thinking about our supply situation. What we're trying to do is match our supply situation.

brings in this whole question of how long we're going to stay on Bix-6, how fast do we transition to Bix-8, and you know we're working through all of that. You know again that's a bit dynamic, a lot of it depends on what Bix-8 looks like and how it's being productized. I think one of the things we're seeing here today is...

It has reached the productization stage. I had a schedule. And so we'll have more to say about what that Fab Mix looks like as we go forward. You know, it's clear we're going to have Bixix will be a shorter node. It won't go into every single product. It will go into the products that it needs and then we'll move other products straight to Bixix A.

I appreciate that. If I may, because you are discussing an improvement in HCDs beginning in March, could you discuss whether you need to take further action to right size your own inventory of components? Thank you.

The quick answer to this, Karl, is we don't see the need to do that. So this is why we don't project it. We continue to manage the inventory situation on a dynamic basis, but as of the end of the quarter we were comfortable on where we are.

And from where I stand today, we don't see the need to do that.

Hi, thanks for taking my question. I just want to follow up on that last question about the inventories. Can you expand on the strategy from here because I'm looking at your inventory days and they're up from 102 a year ago to 133 days and you mentioned there's still some demand questions, so

I'm trying to understand why start ramping back to HDD's next quarter versus taking an inventory right down versus other strategies to sort of get your inventories in better alignment and generate some better cash flows. Thanks.

So let me maybe just clarify on the HDD side to be clear when we look at the inventory movement in the December quarter that just ended, we did reduce the HDD inventory quite a bit. The increase came from the...

side that was partly offset by some of the growth in flash. And so we don't think the inventory situation on the hard drive side is bad. We obviously will continue to monitor as we do on a regular basis.

We also are as part of the

$250 million under utilization that we talked about for the March quarter, there are some continued underutilization on the hard drive side, which would allow us to continue to manage inventory very tightly and maintain that discipline on the supply side.

until obviously the demand growth accelerates. And that's what my comment was about the next quarter, not necessarily, in other words, the June quarter, not necessarily seeing as much of hard drive under-to-deception charges.

I hope this clarifies. Yeah, no, that definitely helps to show some of the blanks. I appreciate that. Thank you.

Yeah, no, that definitely helps, to fill in some of the blanks. I appreciate that. Thank you. Thank you, Stephen.

And our last question will come from Sydney home with Urtebaek.

will come from Sydney Ho with Deutsche Bank. Go ahead.

Thanks for squeezing me in. A couple of quick ones. On the gross margin side, if I think about fiscal third quarter, if hard drive under utilization charges goes down quarter over quarter and revenue goes up modestly, is it fair to assume that gross margin for hard drive goes up? And if that's the case, does that mean NAND gross margin could go below zero in the quarter?

Obviously, there's a one-time charge involved. So, Sidney, this is a fair way of looking at the transition from Q2 to Q3. With the improved utilization, or let's say smaller, lesser underutilization on the hard drive side, I expect to see some improvement.

in the gross margin quarter to quarter. And unfortunately with the high underutilization charge related to the 30% supply cut on the flash side, we're anticipating the gross margin there to be slightly negative. And so that's the...

quarter to quarter and unfortunately with the high underutilization charge related to the 30% supply cut on the flash side we were anticipating the gross margin there to be slightly negative and so that's That's something up

Great, thanks. And then my quick follow-up here is, maybe you've covered this already, but how would you characterize the inventory level in the channel and the customers for both hard drives and flash? I think the hard drive is in decent shape, but more curious on the flash side.

Yeah, I would say it's, you know, actually the channel has been pretty good on the client on SSDs this past quarter. So I don't think there's anything particularly unusual in the channel. I think the channel performance has been, uh, was actually one of the bright spots last quarter.

So I don't think we see anything too unusual there. Okay, thank you.

anything too unusual there. Okay, thank you. Thank you, Sydney.

All right, everyone. Thanks for joining us on the call. We look forward to talking to you throughout the quarter. Take care.

Thanks for joining us on the call. We look forward to talking to you throughout the quarter. Take care. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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