Q3 2023 Western Digital Corp Earnings Call

Good afternoon, and thank you for standing by welcome to Western Digital's fiscal third quarter 2023 conference call.

Presently all participants are in listen only mode. Later, we will conduct a question and answer session at that time, if you would like to ask a question you May Press Star One star one on your phone as a reminder, this call is being recorded I would now like to turn the call over to Mr. Peter Andrew Vice President financial planning and analysis of <unk>.

After relations you may begin.

Thank you and good afternoon, everyone. Joining me today are David <unk>, Chief Executive Officer, and what's some job brake Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking statements, including expectations for our product portfolio cost reductions business plans and performance.

Demand in market trends and financial results 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, and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially.

We will also make references to non-GAAP financial measures today reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.

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

Thank you Peter.

Good afternoon, and thank you for joining the call to discuss our 2023 third quarter results.

Western Digital's third quarter performance exceeded expectations with core metrics at the high end of our guidance range, demonstrating the company's resilience in a challenging market environment.

We reported third quarter revenue of $2 8 billion non-GAAP gross margin of 11% and non-GAAP loss per share of $1 37.

Over the last several years, our team is focused on enhancing business agility and delivering a range of innovative industry, leading products that address the increasing data storage demands of our customers.

The groundwork we laid combined with the actions we have taken since the beginning of this fiscal year to rightsize and refocus our business have enabled us to navigate a dynamic environment.

I am pleased that we delivered non-GAAP gross margin at the higher end of our guidance range due to strong execution across both our HDD and flash businesses.

In HDD, our early actions to streamline our manufacturing footprint and focus our product offerings on delivering the best value for our data center customers have resulted in gross margin upside in profitable market share gains in HDD.

And flash our broad go to market strategy anchored on our enviable retail franchise and a strong client SSD portfolio.

It enabled us to optimize bit placement and bolster gross margins.

During the fiscal third quarter, we saw signs of demand stabilizing across various end markets.

In consumer our.

Our flash and HDD results were consistent with the expectations we shared in January .

In client demand for each major product area came in better than we expected across PC OEM channel mobile and gaming and.

In cloud demand for capacity enterprise hard drives improved whereas the demand for flash drives was consistent with our expectations set in January .

Before I jump into updates on our HDD and flash businesses I would like to reiterate that the strategic review process is ongoing and we will provide updates as we have them.

I'll now turn to the business updates starting with H D D D.

During the fiscal third quarter, our HDD revenue improved sequentially with growth and capacity enterprise offsetting seasonal declines in retail and client.

During the quarter, our 'twenty two terabyte <unk> drive became the highest volume product among all of our 20 terabyte and above capacity points, demonstrating our leadership position at this capacity point.

In addition, we expect to complete qualification of our 26 terabyte Ultra SMIC technology in the fiscal fourth quarter. These.

These innovated innovative products provide multi generation benefits to our customers.

Turning to flash total exabyte shipment came in higher than expected in consumer mobile PC OEM and channel products.

Despite the industry experiencing the worst downturn in over a decade western digital delivered positive product gross margin, excluding underutilization charges driven by our unique combination of premium retail brands broad go to market channels and low cost flash supply from our joint venture fab with key oakeshott.

Furthermore, we continue to see encouraging signs of price elasticity driven content growth in retail flash led by WD Black SSD optimized for gaming as well as mobile PC Oems and channel within client.

On the technology front.

Six achieved its anticipated cost crossover during the quarter.

Moreover, on March 30th Western digital and <unk> announced our next generation <unk> eight node a groundbreaking technology that builds upon the success of <unk> five and <unk> six this new technology is based on circuit bonded to array architecture, which provides several benefits including reduced cycle time.

Faster yield ramp better lateral scaling and industry, leading io performance when compared to products based on circuit under a re architecture.

We continue to aggressively product ties VIX aid for a broad range of applications, which will position western digital for success as business conditions improve.

As we look to the fiscal fourth quarter and hard drives overall demand will be impacted by ongoing inventory digestion that cloud customers and a sustained decline in client.

However, we are beginning to experience improved demand at certain customers in China.

In flash, we are seeing signs of stabilization in content increase per unit.

PC Oems have emerged from inventory digestion and are now shipping closer to end demand.

Gaming will remain strong while enterprise SSD for cloud applications will remain soft, we anticipate modest growth in bit shipments into the fiscal fourth quarter.

Before I hand, the call over to with some I would like to thank the western digital team for the response efforts. They made in addressing the network security incident, we disclosed on April 2nd.

Our team took proactive and precautionary measures to secure our operations and successfully executed on our business continuity plans.

With that I'll turn it over to we sell them.

Thank you David and good afternoon, everyone.

Fiscal third quarter results reflected the challenging market environment with continued pressure on revenue and profitability.

Total revenue for the quarter was $2 $8 billion down.

Down, 10% sequentially and 36% year over year.

non-GAAP loss per share was $1 37.

Looking at end markets cloud represented 43% of total revenue at $1 2 billion.

Down 2% sequentially driven by an increase in capacity enterprise drive shipments, which was offset by a decrease in flat shipments.

Near line bit shipments were 79 exited bytes up 31% sequentially.

Year over year revenue declined 32%, primarily due to a decline in shipments of both hard drive and flash products as well as price decreases in flash.

Client represented 35% of total revenue at $1 billion.

10% sequentially and 44% year over year.

On both the sequential and year over year basis. The decrease was driven by price declines across our flash products.

And lower client SSD and hard drive shipments for PC application.

Finally, consumer represented 22% of total revenue at 0.6 billion down, 22% sequentially and 29% year over year.

Sequentially. The decrease was due to a seasonal decline in shipments of both retail and hard drive and flash products as well as price declines in retail flash.

The year over year decrease was driven by lower retained hard drive shipments and price declines in flash.

Turning now to revenue by segment.

HDD revenue was $1 5 billion up 3% sequentially and down 30% year over year.

Sequentially total HDD exabyte shipments increased 15% in average price per hard drive increased 10% to $109.

On a year over year basis, total HDD exabyte shipments decreased 23% and average price per unit increased 9%.

Flash revenue was $1 3 billion down, 21% sequentially and 42% year over year.

Sequentially Flash Asps were down 10% on a blended basis and 12% on a like for like basis.

Flash bit shipments decreased 14% sequentially and 1% year over year.

Moving to costs and expenses. Please note that my comments will be related to non-GAAP results unless stated otherwise.

Gross margin for the fiscal third quarter was 10, 6% down six eight percentage points sequentially.

And 21, one percentage points year over year.

This includes $275 million of charges for manufacturing Underutilization inventory write downs and other items.

HDD gross margin was higher than anticipated at 24, 3% up three six percentage points sequentially and down three four percentage points year over year.

Sequentially. The increase was primarily due to higher capacity enterprise volume as well as lower manufacturing costs and under utilization related charges.

Underutilization charges were less than projected at approximately $40 million or two seven percentage points, partially benefiting from the actions to streamline our manufacturing footprint and offsetting other charges of $22 million.

Flash gross margin was negative 5%.

Down 19, five percentage points sequentially, and 46 percentage points year over year.

Underutilization charges associated with the reduced manufacturing volumes were approximately $160 million or 12, two percentage points.

Less than expected as we focused on lowering manufacturing costs.

During the quarter we.

We incurred $53 million of flash inventory write down charges, resulting from projected setting prices falling below the cost of inventory.

We continue to tightly manage our operating expenses, which were at $602 million for the quarter down $57 million sequentially.

$138 million year over year.

Operating loss in the quarter was $304 million.

Given by Underutilization charges inventory write downs and other items totaling $275 million.

Income tax expense was $60 million. Despite the consolidated loss, we continue to have taxable income in certain geographies, resulting in taxes payable in those areas.

Fiscal third quarter and loss per share was $1 37.

Inclusive of the $9 million of dividend costs associated with the convertible preferred equity.

Operating cash flow for the third quarter was an outflow of $381 million and free cash flow was an outflow of $527 million.

Cash capital expenditures, which include the purchase of property plant and equipment and.

And activity related to our flash joint ventures on the cash flow statement was $146 million.

Gross debt outstanding was $7 1 billion at the end of the fiscal third quarter.

Trailing 12 month adjusted EBITDA at the end of the third quarter.

As defined in our credit agreement was $2 5 billion.

<unk> gross leverage ratio of two eight times compared to two one times in the fiscal second quarter.

As a reminder.

Our credit agreement includes zero point $7 billion in depreciation add back associated with the flash joint ventures.

This is not reflected in our cash flow statement.

These refer to the earnings presentation on the Investor Relations website for further details.

At the end of the quarter.

Total liquidity was $5 $3 billion, including cash and cash equivalents of $2 2 billion.

Undrawn revolver capacity of $2 25 billion and unused delayed draw term loan facility of $875 million.

Before I cover guidance for the fiscal fourth quarter discuss the business outlook.

We expect the HDD revenue decreased sequentially due to ongoing inventory digestion and cloud customers.

We expect flash revenue to decrease sequentially as modest growth in bit shipments is more than offset by ASP declines.

We expect flash bit shipment growth to accelerate in the first half of fiscal year 'twenty to 'twenty four.

In the fiscal fourth quarter total gross margin will be negatively impacted by underutilization charges and flash pricing.

We continue to tightly manage our cost structure through this dynamic environment and expect operating expenses to be below $600 million.

For fiscal year 2023.

Project gross capital expenditures to be approximately $2 $2 billion and cash capital expenditures to be approximately 0.8 billion.

The projected cash capital expenditures represent more than a 50% reduction from our forecast as we entered fiscal year 2023, and approximately 35% reduction from fiscal year 'twenty to 'twenty two.

I'll now turn to guidance for.

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

We expect revenue to be in the range of two four to $2 $6 billion.

We expect gross margin to be between three and 5%, which includes underutilization charges across flash and HDD totaling $220 million to $240 million.

We expect operating expenses to be between $580 million to $600 million.

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

We expect income tax expense to be between 60% and $70 million.

We expect loss per share of $2 22.

Two $1 90.

Assuming approximately 321 million shares outstanding.

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

Thanks, Chris.

Over the past few quarters, we have successfully ramped a series of industry, leading storage products and commercialized in innovative technologies, while concurrently right sizing our cost structure.

Our proactive actions have positioned western digital favorably for the future as demand gradually returns to normal levels.

In closing I would like to thank our team members for their unwavering commitment and advancing innovative products and driving operational efficiency.

Their exceptional efforts have allowed western digital to deliver industry, leading gross margins across our HDD and flash businesses, despite the challenging and rapidly changing landscape.

Additionally, I am immensely proud to share that western digital has been honored for the fifth consecutive year as one of the world's most ethical companies by the Ethisphere Institute.

This recognition is a testament to the dedication and support of our people worldwide and we remain committed to upholding the highest ethical standards and all that we do.

Okay I look forward to your questions, let's open it up.

Ladies and gentlemen, we will now begin the question and answer portion of today's call.

Do you have a question. Please press star one on your phone if you'd like to withdraw your question. Please press star two one moment. Please for the first question.

Our first question comes from C. J Muse from Evercore. Please go ahead.

Yes. Good afternoon. Thank you for taking the question I guess I'd love to get a sense for where you're seeing demand stabilized versus where you still see pockets of inventory.

As part of that.

I guess embedded in your revenue guide it looks like you're kind of suggesting HDD down maybe 10% to 15%.

<unk> down 5% to 10%. So I guess is that kind of the right way to think about it and then as part of that where do you think we're seeing stabilization and where do you think you need to to work down inventory some more.

Hey C. J. Thanks for the question good to hear from you as always.

I think as we talked about in consumer we're seeing some stabilization there as far as demand.

PC OEM, we've been talking about now for three plus quarters, and I think we see them.

Mainly shipping to true demand I mean, nobody's building inventory right now, but we think the inventory correction there is mostly behind us.

Our channel business performed really well this past quarter I think above what our expectation was the inventory issue is still very much in data center.

Very lumpy.

We have some some big big cloud customers that are.

Consuming we have others that are really in a.

Full inventory digestion and aren't taking anything so that that market is still where we see a lot of.

A lot of inventory digestion going on and I expect that to be lumpy for the next couple of quarters.

We're seeing some signs of stabilization in China, we talked about that.

I think it is setting up for a recovery in the second half of the year a lot more activity around rfps and discussions about what demand is going to look like in the second half. So that's a bit overview of where we see the market.

I think you on your numbers you are probably down a little more than we are on HDD.

That's probably more.

Single digit kind of number on a sequential basis.

Alright, very helpful and as a quick follow up can you kind of walk us through what you're thinking today in terms of Underutilization charges.

June quarter.

Yes, well, let's talk about it for each business I mean, I think in HDD and Im sure. We saw it will have a little bit to add here as well HDD.

Is the smaller part of the number but still significant we're going to see a drop in volume next quarter. So we will see some under utilization there on the flash side, we continue to Underutilize. The fab, we're managing it very in a very dynamic way kind of week to week month to month.

Make sure we fully understand demand and keep our inventory in a position where we want it and so but we will definitely see underutilization on both sides of the business next quarter.

And just to add.

C J, sorry, just to add a bit more color.

And our guide we are estimating around 220 to $2 40, the range of funding Underutilization charges and our buy business. This is a roughly two thirds flash one thirds HDD.

One third.

Okay. Thanks.

Thanks C J.

Our next question comes from Joe Moore from Morgan Stanley . Please go ahead.

Great. Thank you.

You mentioned that youre, taking lower customer market charges on NAND.

Can you talk about the methodology. There is that do you do you pull that and then take a charge overall or is it any time any individual product falls below the market price you adjusted down.

So Joe with respect to our our LCM charges, we do it at the finished good product level is not pooled.

Okay. Thank you and then in terms of.

Okay.

The underutilization charges and things like that do you know how the covenants are going to be defined or are you going to be able to remove those charges from the EBITDA number as defined in the covenant.

And those typically are allowed to be added back per our credit agreement.

The EBITDA.

Okay, great. Thank you very much thanks, Joe.

The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.

Yes. Thank you for taking the questions just to build on that last question just to just to be safe.

Your gross margin expectation in this current quarter.

I'm guessing the commentary assumes that youre not.

Expecting another inventory charge in the flash business.

If so why not.

So.

And we typically are factored into our guidance on the expectations and.

When we exited Q3, just like a typical quarter, we do our reserve reviews and we take the.

We make sure that the balance sheet is properly stated.

And so based on our forecast everything is baked into the <unk>.

The guidance typically we have a small amount in the guidance just like we did also in the best quarter.

Okay, and then I guess my follow up question is on the hard disk drive business I can appreciate you guys have seen some cloud customers.

It sounds like purchase really no product this last quarter.

Guessing from a competitive perspective, how would you characterize the current environment have you seen increased price aggressiveness. How do you guys think about the discussion around hammer in your roadmap.

Going forward et cetera.

Yes, I mean, I think there is always price pressure in this market are in but we've been very disciplined about the value of our products I think one of the things we feel very good about as well.

We've been investing in our HDD roadmap things like <unk> NAND <unk> Ultra SMA are these.

These products are really now starting to ship in volume, we talked about the 22 terabyte <unk> drive was the highest volume drive that 20 and above so we feel very good about where the portfolio is.

About where it's going.

We've got a number of very large customers qualifying SMA right now that's clearly the next step in the datacenter our ultra SMA product there. The 2016, we talked about will finish up calls.

This quarter and start deploying next quarter. So we feel like we've got a.

A portfolio that is aligned with what the market needs.

And that's showing up in kind of how the how we are able to monetize that portfolio and not have to compete on price. So.

Future technologies like camera will be there, we're still a ways away before that product is going to be a volume type product the volume products or the 'twenty twos going in and then <unk> is going to be the big volume products over the next couple of years and after that we'll get to we will get the hammer when we feel confident about that technology.

It's been in development for a long time, we're in the final stages of it as an industry and I think everybody is excited that it will be the roadmap.

For 30 and above when we need it.

Thank you.

Yep.

Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead.

Thank you I wanted to ask about the network security breach can you give us an update.

Covering there it looks like your operations are back to normal levels, but have you experienced or do you expect any more issues with production at all your ability to ship products.

Yes.

We've been very transparent about the incident.

We when we noticed that we let folks know we had that we took are we basically disconnected ourselves from the public internet to protect ourselves and then restore the environment.

We still have capabilities inside the companies in the factories were operational throughout that clearly a tremendous amount of work by the team.

We feel like were nearly all the way back now as far as operation. We got we got to bring the store online and here in another week or so.

But but yeah. It was really really good to see our business continuity plans.

You don't want to rely on them too often but when when when we had to they were there and they they kept the company moving forward.

Okay, great. Thanks for that update.

Sorry to Sidney I just wanted to.

For fiscal Q3, we don't have any impact in the numbers.

To the Nitro secured okay.

That's great.

A follow up question is Samsung in early April to talk about they are cutting production I'm curious if youll compensation with customers have changed since that announcement and related do you expect the June quarter to be the bottom.

Bargains.

Thank you.

I would say we have I mean, obviously, we have very robust conversations with our customers. All the time I wouldn't pin the tone of those conversations onto how any one particular player in the market.

Is acting or what they're doing.

Stay very focused on our business.

As far as whereas the bottom we expect the market to come into balance as we go through the second half of the year.

I think.

We're clearly taking a lot of actions in our own business to closely manage it supply and demand keep the utilization of the fab close to where our demand is so we manage our inventory.

Clearly, we're going through one of the one of the most severe downturns in a while but we think as we move through the second half of the year the market will get it will come into balance.

Great. Thank you.

Our next question comes from Mehdi Hosseini from Sig. Please go ahead.

Yes, thanks for taking my question.

One near term and more to do with inventory your inventories are absolute dollar value keeps going higher and I want to understand how the mix is changing between wafers finished goods and other material is there any way you can give us a color how incremental changes are happening for different.

Categories within our inventory and I have a follow up.

Yes.

Typically don't break that out as much.

On the call. This is a bit too much detail maybe for me to discuss here.

The one comment I would make so when when we think of inventory. Our operations team is really focused on minimizing minimizing where we can so we basically try to stage. It then the places that makes the most sense from a from a demand.

Perspective.

Well, let me rephrase the question.

Do you how should we think about the risk of.

Inventory write down.

Yeah.

I mean, the inventory write down typically is a.

It's really based.

The ones that was for instance, I called out is based on.

Basically the inventory value relative to where the market price is and so.

When prices decline.

By a lot than we do have we do have to take a look closer look and see if there's any impact.

And that's.

That's yes, that's what I would say about that.

So.

Are you assuming that the rate of price decline is moderating so maybe that would minimize the downside risk.

What I'm, what I'm, saying is we what.

What I'm, saying is at the end of every quarter on our balance sheet is properly stated because we do look at.

And where the inventory value is versus where the demand is and the prices and most particularly in the finished good level.

And so where do we see differences we have to adjust our inventory value otherwise it is properly stated.

I guess so quest.

Question is is more around trying to predict when.

When the price is going and we typically.

Yes.

We typically don't necessarily do that.

Okay. Thank you.

Question for David.

Looking at longer term more than just one quarter.

I think there is some confusion or unknown factor a whole new type of AI would impact demand for HDD versus SSD do you have any view of how these incremental demand created these are expensive workstations.

How is it going to impact SSD versus HDD.

Yes.

Doing analysis on that but what I would say is to me I'll, even go a little longer term bigger picture. This just reinforces the value of store data I think that.

It just seems like there's this constant.

Ways for people can figure out how to use all the data they have stored two two.

Do very productive things with it and I think that the latest as training. These AI engines and so we just think it's another.

Element of the long term value.

Data storage and is just a big secular tailwind for the HDD business and the enterprise SSD business again.

They are both.

Both have big <unk> in the data center and they are both growing.

And we think this is another reason why people will store more data is because they can monetize it in different ways in the future.

But I guess I was hoping you could shed some light as to how the HDD CAGR would change.

I don't think this is going to lift.

The town for each different types of it stood at the same rate.

Any thoughts you can share with us.

I think it will.

HDD is the lion's share of storage in the cloud. So you would expect that's where the bigger lift would be across those two technologies.

Okay. Thank you.

Thanks Mehdi.

Talk to you as always.

The next question comes from Shannon Cross from Credit Suisse. Please go ahead.

Thank you very much for taking my questions.

My first is as you look at what you're doing on the Opex in terms of holding in court.

You think about the how you are.

Where are you reinvesting and how you're making those decisions and how should we think about potential impact of future projects at this point and then as a follow up thank you.

Yeah, we've been very obviously, we've been one of the things we've been.

Building into the business over the last several years as we've restructured the business is more agility and the ability to proactively respond to the market. We're in and I think thats kind of a hallmark of the organization, we're trying to build as agile and dynamic.

But clearly on top of that Shannon, We we went to a business unit structure for a reason is because we have two very very focused organizations with very sophisticated leaders and then it is.

Constantly doing the <unk>.

ROI analysis of where we put our opex and we get the most out of it and I think quite frankly that has led to the portfolio. We have today I think we have the best portfolio we've ever had.

And that's the effort that goes on constantly continuously and so as we continue to draw down opex to resize the business to the realities of what the market our market is.

We've built the capability over the last couple of years to do that in a way where we can make sure we're going to get.

First of all the RF.

The Opex, we spend we get the best ROI out of it the best return and that we make sure that.

We're making we're taking actions to the business that don't harm the long term value of it and we make we make the right decision on a on a day by day week by week month by month basis. So I think this is really a capability. We built in the last three years and I think it is serving us well right now to make sure that we are we're not.

We're not cutting in ways that are going to <unk>.

Impacts the long term health of the business.

Thank you that was helpful.

I'm curious, maybe I'm trying to make lemonade out of lemons, but I'm just wondering as you've cut capacity on the HDD side.

<unk> had these underutilization charges are there things that you've learned in terms of maybe how you manufacture and the pathway to drive incremental productivity just thinking its kind of a.

Certainly a unique time to maybe take a step back and look at things.

How things have been done and what you can do in the future.

Ill make a few comments I suspect we will have a few comments as well I mean this is.

There's been a lot of focus on this in the last year of how do we become more efficient how do we automate more.

Several of our factories of one the World Economic Forum Lighthouse awards for automation.

How do we Reskill our employees.

And how do we just we've been very focused on driving a level of automation driving productivity and just lowering our fixed cost asset base in the HDD business in.

I think our fixed guys I don't think I know our fixed costs in that business are now the lowest they've been in well over a decade. So I think thats paying off in the way we are able to generate margin in the business at lower volume levels.

The volume starts to pick back up.

We've got capacity to meet what the market needs and I think we will do that at a much lower cost basis.

Yes, I mean, the one thing I would add also in addition to when David.

Some of the activities that we drive in terms of the manufacturing side.

<unk> taken back into the development organizations to think about things back common platforms and the ability to improve on the way our products are designed for manufacturing efficiency, even increasing manufacturing efficiency going forward and of course with that comes a better cost structure.

Great. Thank you very much.

Thanks, Shannon I appreciate it.

Our next question comes from Christopher Tank car from TD Cowen. Please go ahead.

Hi, Thanks for taking my question David Your first question is on.

The decline in March quarter, it seems to be better than what you're comping against.

Q any puts and takes you can talk about your expected pricing versus competition in March how do you think about it in June and along the same path we mentioned.

Demand will be.

In children's book logically.

Are you baking in some kind of a mobile recovery that's going to help you drive that and then I had a follow up.

I think on pricing is.

That's kind of the same story all the time right, whether it's downmarket upmarket mid cycle market, which is.

Really have a diverse portfolio, we've talked about this a lot from retail to channel business PC Oems enterprise SSD.

Gaming has become.

Very nice part of the portfolio and growing part of the portfolio.

And it's just the mobile obviously is a big part of our portfolio.

And it's just been mixing across that where we get the best return right, putting that putting our supply in our bids in the places where we can get the best best return and I do think that that is a.

That go to that breadth of go to market is in.

And markets that we can reach.

Literally from every single consumer.

Two the largest technology companies in the world and kind of everything in between and just the ability to mix across that with.

With a strong portfolio and a strong set of brands as well Sandoz Sandoz professional WD black.

Puts us in a good position to get the best best return on our supply.

Next quarter I mean, we don't really want to comment on future pricing. It's all it is.

All into the guide.

We've talked about the individual markets.

What I would say is where.

Pricing in or we're putting in what we think is going to do on an individual market by market basis, and how we will mix that.

Next quarter.

Got it got it thanks for that David and wanted to follow up on the HDD side, it's kind of nice to see the 20th agenda I'd like to see them. What is now bigger than 20 Petabytes in terms of volume how should we expect that could grow and what is the impact on gross margin.

I think that's fair that's our focus on our CMO drive that's our focused capacity point.

<unk>.

Significantly ahead of other TMR drives above 20, so are above the 2020 terabyte drive.

Expect that to be our Premier drive for the next until we have a different CMO product in.

That part of the business. So we expect that to be a very good growth engine.

We've talked a lot about that drive of.

It provides a lot of value. It provides a lot of tcl value for our customers and we.

Contributes inappropriate.

Margin from that perspective as well.

Got it thanks David.

<unk>.

Our next question comes from Columbus email him from Bank of America. Please go ahead.

Hi, Thanks for taking my questions that would be interesting.

For Onesie today, Hey, David I think maybe another pricing question for you I think you talked about price elasticity could you just elaborate a little bit on what exactly you're seeing either in flash and HDD and a related question to that is there's some worry that maybe a lot of memory inventory might be built again this.

Quarter from the likes of some Oems like Apple because they want to maximize their favorable component pricing do you think this could lead to a further elongation in the recovery of the market, even though in the near term it might get a little bit tighter just your thoughts on that and what exactly are you seeing in price elasticity.

I think the elasticity in NAND is mainly what I was talking about it I mean, we're seeing PC OEM up mid twenty's year over year on capacity I think a really interesting number to me is the <unk>.

Last density across our consumer franchise, which as you know.

Tens to one hundreds of millions of devices, we sell a year in that channel up up a third year over year on capacity per unit gaming up more than that.

And mobile up even more than that so I think we're seeing the market work.

Even in the midst of a great downturn, you expect well, especially in the midst of a great downturn.

Expect to see elasticity start to kick in and we are starting to see that.

Across the across the.

Portfolio.

This is I think the second part of the question again in terms of the month. It was a customer for mobile pre buying yes, I think you do see I think we are seeing.

Instances of that I wouldn't say, it's pervasive, but we see instances of it and I think.

Maybe it's a sign of where the customers think we are in the cycle as well.

Got it for my follow up if I can ask a quick one two weeks.

How are you thinking about free cash flow going forward I mean is it what needs to happen to get to positive free cash flow and is that possible in this calendar year, but just your thoughts on that I mean, how are you looking at working capital and thinking about free cash flow. Thank you.

Yeah real close so we are totally focused on free cash flow that as you've seen us since the beginning of the year, we've been very proactive on opex and using that quite a bit.

On Capex as well as taking under utilization to manage and preserve our cash and not build inventory and so this is very important to us.

In fact, we.

We continue to make improvements I mean, if you look at our Capex trend it's.

It's gone down quite a bit this year, we'll probably be spending.

Similarly, if not even more than 35% below last year with respect to.

The next few quarters, we typically you do not.

The guide for free cash flow, but what I can say is that this is as I said the top priority for us and is a big focus as you would imagine as we navigate the dynamic environment.

Thank you for all the details appreciate it thank.

Thank you. Thank you.

The next question comes from Tom O'malley from Barclays. Please go ahead.

Hey, good afternoon, guys and thanks for taking my question. My first one is related to the HDD side of the business.

Your competitor recently talked about a recovery that initially was expected to be in June and is now pushed out to the December quarter could you just frame the way that youre thinking about the recovery is that kind of in line with that you're obviously guiding to HDD business down, but any color you could give on the back half of the calendar year about when you expect that business to recover.

Yes, I think Tom.

It's.

I would say as we go through the second half of the year it'll get better. The issue is at these revenue levels and these unit levels is just very lumpy.

You have very large customers that if they buy or not buy can impact the tam and the available market in a very significant way so.

And that's what we're experiencing next quarter I mean this quarter, we saw things were a little better than we thought.

On capacity enterprise shipments, we will see a sequential decline in that and then we're expecting to go back up as we go into the second half of the year, but I expect it to be lumpy as we go through this inventory digestion because a lot like we saw in the PC OEM space.

Customers are just completely focused on inventory digestion, which is basically new new purchases just go to zero and customers of this scale with this kind of business that that has an impact so I expect to see that lumpiness over the next several quarters.

I do have a level of optimism about China in the second half of the year, we're seeing better activity there.

And so we expect to see that improve in the second half of the year as well, which should which should also help the business.

Helpful. And then just a follow up is on the.

The flash side.

You guys talked about a mix of customer behavior, right, where some are still consuming inventory.

And then others are more aggressively purchasing to various degrees.

I don't want you to speak on specific customers, but we've heard this across the ecosystem, particularly through this earnings period here, where there is a discrepancy in terms of spend could you help maybe just frame.

Where youre seeing that spend is there a certain type of customer.

Spending more than others or is it really just random Ware guide came in with certain inventory levels that are working through that just any color. There would be really helpful. As we've heard that data point from multiple companies here.

I guess I would say that customers that are different segments of the market that are through their inventory digestion or now.

More or less shipping to end demand being lean on inventory. There are instances of people doing strategic buys in that in some of those cases, where they've they've got their inventory to where they want it but now they are.

They're making their own they have their own view of the cycle.

That's a that's a very that's a very small number I would say.

And then the other ones is just inventory where they're at.

It does.

Data center customers, especially are just in.

There is a variability of the level of inventory at each customer and they are so big that it can impact the entire market. So.

And like I said the ones that have heavy inventory are basically working that down in an aggressive way and so I think it's going to like I said I think it will be lumpy for a couple of quarters.

Until we get we get through that.

Thank you.

Thanks, Tom.

Our next question comes from Toshi Hari from Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you so much for taking the question David three months ago. You mentioned that you were cutting production in your NAND business by 30% I'm curious if the magnitude of the cuts today are kind of in that ZIP code. If anything has changed materially and going forward, what would you need to see to start.

Taking up your utilization rates in the flash business.

Yeah.

We're kind of at the point, where I think it's I think probably the same ZIP code is probably a fair way.

Ending on where he lives of codes can be pretty big if you are in the country I guess.

But.

It's really about managing to where we see the demand and keeping our inventory relatively in check we know its going up somewhat but we want to we want to make sure. It doesn't get away from us. So we will use the fab in that.

We're going to have to see.

Demand signals for our customers. It's just as simple as that we are very very close relationship with a lot of them were in the obviously in the market every single day a lot of these consumer.

Consumer and channel markets are more transactional where we can you can see the business across a wide swath and then of course, we are talking to the biggest customer's biggest technology.

Companies in the world So.

We'll get a pretty good idea of where their demand is and.

We will set the fab appropriately to make sure that we.

We keep the right inventory position and we have the product win when they are ready.

Got it that's helpful. Thank you and then one follow up on the balance sheet side of things.

You don't guide to free cash flow on a quarterly basis or annual basis, but just curious how we should be thinking about inventory whether it be dollars of days going into the June quarter, and working capital overall is going to be a consumer of cash in the June quarter or do you think you can generate some cash from.

Working capital Thank you.

Sure Toshi.

Yes.

With respect to inventory.

The current projection is I would say flattish.

In terms of Thunder.

But in terms of days I anticipate we should see a downtick from here.

We continue to as David said manage it on a on a very very regular basis very closely.

And so that's the that's probably the biggest.

In terms of the working capital and Thats, the number that would be moving moving the most.

Uh huh.

Again, we don't guide to free cash flow, so I wouldn't want to make.

And many more comments on working capital, but I think the answer on the.

Inventory it would be a good indicator.

With working capital.

Our next question comes from Harlan sur from Jpmorgan. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

Market share numbers are up for last year, you guys still have a strong number two position in client SSD strong double digit.

The percentage share position right, but.

In enterprise you guys still sort of low single digit enterprise SSD market share last year and it sort of hovered in this 4% to 7% range for a while now.

This is the team doing to try and drive its share in this fast growing market too.

What I would call appropriate sort of double digit percentage share profile.

Yes. Thanks for the question Harlan always good to hear from you.

We've talked about this quite a bit over the last year its about qualifying the products at the big players qualified in the channel.

We just qualified this last quarter on VIX five enterprise SSD with some of the biggest customers. So.

The roadmap is moving forward as we expected.

A very dynamic market right now so it's difficult.

To judge share obviously, our goal is what we put out there is to drive that higher.

And I have every confidence we will do that as the market stabilizes and some of these big customers get back to their normal rates of purchasing.

Our next question comes from Sarine Pituri from Raymond James. Please go ahead.

Yes. Thank you other question on the cost side with them. So it's a little tricky to figure out given all the.

I guess, the one time charges. So I'm just wondering you previously talked about NAND cost declines in the mid teens I believe just wondering if you're tracking to that and then as we go to big sale, how should we think about the cost declines, especially I guess historically, we've had 30% to 40% demand growth and going forward.

Dynamic changes if it's lower than 30% do you think we can still kind of get to that mid teens cost declines or do we need that 30% to get to that level.

Sure. So thanks for the question.

In terms of Q3, we have to think of it.

<unk> with <unk>.

With and without the under utilization.

When you factor in the entry Underutilization charges, we wouldn't be we wouldn't have reduced the cost our cost income down by a mid teens. However, if we exclude that then where.

We're close to mid teens.

In Q3.

Now to your question on Big say to I mean this is with.

The way our road map works and the timing of when it makes sense to start ramping.

It is pretty much designed in a way to allow us to continue that mid teens reduction cost reduction over time.

I wouldn't want to comment about the exact percentage and so on in terms of the crossover and because I think it's a little bit premature to talk about this but conceptually that's what we're aiming with.

With the ramping in <unk>.

Eight a slightly earlier than previously anticipated.

Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead.

Yes. Thank you.

I was hoping you could discuss the trajectory of exabyte demand of your cloud customers. The next couple of quarters and whether there is a divergence.

Recovery across on Prem and public cloud.

And I guess as you address that question, how do you assess whether you might be shipping below normalized replacement demand.

Yes.

Hum.

I think we see the enterprise in the cloud market, both soft right now.

So we don't see a huge difference between the two again.

The difference is Carl.

You've got this idiosyncratic behavior, it really big customers, so customer that usually buys.

A significant amount of hard drives in a quarter hundreds of millions of dollars goes to zero you can pretty much assume they are buying under replacement demand. So that's kind of where we're at we just again other customers are going along more according to plan so that the inventory levels.

A bit distributed across big customers. So.

We look at this quite a bit to understand like what do we think the exabyte growth is and where are we setting the.

Our long term production capabilities and all of that but right now it's.

Just a little difficult to draw long term conclusions and some a little bit behind some of your question given.

Just the way the market is the lumpiness of the market.

The next question comes from Vijay Rakesh from Mizuho. Please go ahead.

Yeah, Hi, just a quick question I don't know if you talked about earlier.

Right.

<unk>.

It had failed so.

<unk> had some filings, but just wondering how that processes focusing I don't know if you can talk to it.

It's progressing.

Very active.

Everybody and it is under NDA, So I can't say anything about it and we look forward to talking about it when we reach exclusion.

Our last question comes from Ananda Baruah from loop capital. Please go ahead.

Hey, Thanks, guys I appreciate it.

Maybe for with them.

Yeah.

Missed it by that.

Wondering if there's any context, you can provide around how you're thinking about the.

The debt instead.

In February of 2000, and for how that how you're going to handle that.

Yeah and on the.

With respect to the $1 1 billion of convert due in February 'twenty four.

The plan is to address it over the next couple of quarters.

Okay.

Okay.

Okay. Jason is that the last one that was the last question. Okay, alright, everyone. Thanks for joining US today, we look forward to seeing it through the quarter take care.

Thank you.

This concludes today's conference call. Thank you for joining you may now disconnect.

Yeah.

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Yes.

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Yeah.

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Good afternoon, and thank you for standing by welcome to Western Digital's fiscal third quarter 2023 conference call.

Presently all participants are in listen only mode. Later, we will conduct a question and answer session at that time, if you would like to ask a question you May Press Star Wars Star one on your phone.

As a reminder, this call is being recorded I would now like to turn the call over to Mr. Peter Andrew Vice President financial planning and analysis of Investor Relations you may begin.

Thank you and good afternoon, everyone. Joining me today are David Goggler, Chief Executive Officer, and what some job Ray Chief Financial Officer.

Before we begin let me remind everyone that today's discussion contains forward looking statements, including expectations for our product portfolio cost reductions business plans and performance demand and market trends and financial results based on management's current assumptions and expectations and as such does include.

The risks and uncertainties, we assume no obligation to update these statements.

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

We will also make references to non-GAAP financial measures today reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website.

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

Thank you Peter.

Good afternoon, and thank you for joining the call to discuss our 2023 third quarter results.

Western Digital's third quarter performance exceeded expectations with core metrics at the high end of our guidance range, demonstrating the company's resilience in a challenging market environment.

We reported third quarter revenue of $2 8 billion non-GAAP gross margin of 11%.

non-GAAP loss per share of $1.37.

Over the last several years, our team is focused on enhancing business agility and delivering a range of innovative industry, leading products that address the increasing data storage demands of our customers.

The groundwork we laid combined with the actions we have taken since the beginning of this fiscal year to rightsize and refocus our business have enabled us to navigate a dynamic environment.

I am pleased that we delivered non-GAAP gross margin at the higher end of our guidance range due to strong execution across both our HDD and flash businesses.

In HDD, our early actions to streamline our manufacturing footprint and focus our product offerings on delivering the best value for our data center customers have resulted in gross margin upside in profitable market share gains and HDD.

And flash our broad go to market strategy anchored on our enviable retail franchise and a strong client SSD portfolio.

Enabled us to optimize bit placement and bolster gross margin.

During the fiscal third quarter, we saw signs of demand stabilizing across various end markets.

In consumer our flash and HDD results were consistent with the expectations we shared in January .

And client demand for each major product area came in better than we expected across PC OEM channel mobile and gaming and.

In cloud demand for capacity enterprise hard drives improved whereas the demand for flash drives was consistent with our expectations set in January .

Before I jump into updates on our HDD and flash businesses I would like to reiterate that the strategic review process is ongoing and we will provide updates as we have them.

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

During the fiscal third quarter, our HDD revenue improved sequentially with growth and capacity enterprise offsetting seasonal declines in retail and client.

During the quarter, our 'twenty two terabyte <unk> drive became the highest volume product among all of our 20 terabyte and above capacity points.

<unk>, our leadership position at this capacity point in.

In addition, we expect to complete qualification of our 26 terabyte Ultra <unk> technology in the fiscal fourth quarter.

These innovated innovative products provide multi generation benefits to our customers.

Turning to flash total exabyte shipment came in higher than expected in consumer mobile PC OEM and channel products.

Despite the industry experiencing the worst downturn in over a decade western digital delivered positive product gross margin, excluding underutilization charges driven by our unique combination of premium retail brands broad go to market channels and low cost flash supply from our joint venture fab with key oakeshott.

Furthermore, we continue to see encouraging signs of price elasticity driven content growth in retail flash led by WD Black SSD optimized for gaming as well as mobile PC Oems and channel within client.

On the technology front fixed six achieved its anticipated cost crossover during the quarter.

Moreover, on March 30th Western digital and <unk> announced our next generation <unk> eight node a groundbreaking technology that builds upon the success of <unk> five and <unk> six this new technology is based on circuit bonded to array architecture, which provides several benefits including reduced cycle time.

Faster yield ramp better lateral scaling and industry, leading io performance when compared to products based on circuit under array architecture.

We continue to aggressively product ties VIX aid for a broad range of applications, which will position western digital for success as business conditions improve.

As we look to the fiscal fourth quarter and hard drives overall demand will be impacted by ongoing inventory digestion of cloud customers and a sustained decline in client.

However, we are beginning to experience improved demand at certain customers in China.

In flash, we are seeing signs of stabilization in content increase per unit.

PC Oems have emerged from inventory digestion and are now shipping closer to end demand.

<unk> will remain strong while enterprise SSD for cloud applications will remain soft, we anticipate modest growth in bit shipments into the fiscal fourth quarter.

Before I hand, the call over to Tom I would like to thank the western digital team for the response efforts. They made in addressing the network security incident, we disclosed on April 2nd.

Our team took proactive and precautionary measures to secure our operations and successfully executed on our business continuity plans.

With that I'll turn it over to we sum.

Thank you David and good afternoon, everyone.

Fiscal third quarter results reflected the challenging market environment with continued pressure on revenue and profitability.

Total revenue for the quarter was $2 $8 billion down, 10% sequentially and 36% year over year.

non-GAAP loss per share was $1 37.

Looking at end markets cloud represented 43% of total revenue at $1 2 billion down.

Down 2% sequentially driven by an increase in capacity enterprise drive shipments, which was offset by a decrease in flat shipments.

Near line bit shipments were 79 exited bytes up 31% sequentially.

Year over year revenue declined 32%, primarily due to a decline in shipments of both hard drive and flash products as.

As well as price decreases in flash.

Clients represented 35% of total revenue at $1 billion.

110% sequentially and 44% year over year.

On both a sequential and year over year basis. The decrease was driven by price declines across our flash products.

And lower client SSD and hard drive shipments for PC application.

Finally, consumer represented 22% of total revenue at 0.6 billion down, 22% sequentially and 29% year over year.

Sequentially. The decrease was due to a seasonal decline in shipments of both retail and hard drive and flash products as well as price declines in retail slash.

The year over year decrease was driven by lower retained hard drive shipments and price declines in flash.

Turning now to revenue by segment.

HDD revenue was $1 5 billion up 3% sequentially and down 30% year over year.

Sequentially total HDD exabyte shipments increased 15% in average price per hard drive increased 10% to $109.

On a year over year basis, total HDD exabyte shipments decreased 23% and average price per unit increased 9%.

Flash revenue was $1 3 billion down, 21% sequentially and 42% year over year.

Sequentially Flash Asps were down 10% on a blended basis and 12% on a like for like basis.

Flash bit shipments decreased 14% sequentially and 1% year over year.

Moving to costs and expenses. Please note that my comments would be related to non-GAAP results unless stated otherwise.

Gross margin for the fiscal third quarter was 10, 6% down six to eight percentage points sequentially and 21, one percentage points year over year.

This includes $275 million of charges for manufacturing Underutilization inventory write downs and other items.

HDD gross margin was higher than anticipated at 24, 3% up three six percentage points sequentially and down three four percentage points year over year.

Sequentially. The increase was primarily due to higher capacity enterprise volume as well as lower manufacturing costs and under utilization related charges.

Underutilization charges were less than projected at approximately $40 million or two seven percentage points, partially benefiting from the actions to streamline our manufacturing footprint and offsetting other charges of $22 million.

Flash gross margin was negative 5%.

Down 19, five percentage points sequentially, and 46 percentage points year over year.

Underutilization charges associated with the reduced manufacturing volumes were approximately $160 million or 12, two percentage points less than expected as we focused on lowering manufacturing costs.

During the quarter.

We incurred $53 million of flash inventory write down charges, resulting from projected selling prices falling below the cost of inventory.

We continue to tightly manage our operating expenses, which were at $602 million for the quarter down $57 million sequentially.

$138 million year over year.

Operating loss in the quarter was $304 million.

Given by Underutilization charges inventory write downs and other items totaling $275 million.

Income tax expense was $60 million. Despite a consolidated loss, we continue to have taxable income in certain geographies, resulting in taxes payable in those areas.

Fiscal third quarter and loss per share was $1 37 inclusive.

Inclusive of the $9 million of dividend costs associated with the convertible preferred equity.

Operating cash flow for the third quarter was an outflow of $381 million and free cash flow was an outflow of $527 million.

Cash capital expenditures, which include the purchase of property plant and equipment and activity related to our flash joint ventures on the cash flow statement was $146 million.

Gross debt outstanding was $7 1 billion at the end of the fiscal third quarter.

Trailing 12 month adjusted EBITDA at the end of the third quarter.

As defined in our credit agreement was $2 5 billion.

Nothing in the gross leverage ratio of two eight times compared to two one times in the fiscal second quarter.

As a reminder.

Our credit agreement includes zero point $7 billion in depreciation add back associated with the flash joint ventures.

This is not reflected in our cash flow statement. Please refer to the earnings presentation on the Investor Relations website for further details.

At the end of the quarter.

Total liquidity was five $3 billion, including cash and cash equivalents of $2 2 billion.

Undrawn revolver capacity of $2 25 billion and unused delayed draw term loan facility of $875 million.

Before I cover our guidance for the fiscal fourth quarter I'll discuss the business outlook.

We expect the HDD revenue to decrease sequentially due to ongoing inventory digestion and cloud customers.

We expect flash revenue to decrease sequentially as modest growth in bit shipments is more than offset by ASP declines.

We expect flash bit shipment growth to accelerate in the first half of fiscal year 'twenty to 'twenty four.

In the fiscal fourth quarter total gross margin will be negatively impacted by underutilization charges and flash pricing.

We continue to tightly manage our cost structure through this dynamic environment and expect operating expenses to be below $600 million.

For fiscal year 2023.

Gross capital expenditures to be approximately $2 $2 billion in cash capital expenditures to be approximately 0.8 billion.

The projected cash capital expenditures represent more than a 50% reduction from our forecast as we entered fiscal year 2023, and approximately 35% reduction from fiscal year 2022.

I'll now turn to guidance for.

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

We expect revenue to be in the range of two four to $2 $6 billion.

We expect gross margin to be between three and 5%, which includes underutilization charges across flash and HDD.

$220 million to $240 million.

We expect operating expenses to be between $580 million to $600 million.

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

We expect income tax expense to be between 60% and $70 million.

We expect loss per share of $2 20.

Two $1.90, assuming approximately 321 million shares outstanding.

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

Thanks, Chris.

Over the past few quarters, we have successfully ramped a series of industry, leading storage products and commercialized in innovative technologies, while concurrently right sizing our cost structure.

Our proactive actions have positioned western digital favorably for the future as demand gradually returns to normal levels.

In closing I would like to thank our team members for their unwavering commitment and advancing innovative products and driving operational efficiency.

Their exceptional efforts have allowed western digital to deliver industry, leading gross margins across our HDD and flash businesses, despite the challenging and rapidly changing landscape.

Additionally, I am immensely proud to share that western digital has been honored for the fifth consecutive year as one of the world's most ethical companies by the Ethisphere Institute.

This recognition is a testament to the dedication and support of our people worldwide and we remain committed to upholding the highest ethical standards and all that we do.

Okay I look forward to your questions, let's open it up.

Ladies and gentlemen, we will now begin the question and answer portion of today's call.

You have a question. Please press star one on your phone if you'd like to withdraw your question. Please press star two one moment. Please for the first question.

Our first question comes from C. J Muse from Evercore. Please go ahead.

Yes. Good afternoon. Thank you for taking the question I guess I'd love to get a sense for where you're seeing demand stabilized versus where you still see pockets of inventory.

As part of that.

I guess embedded in your revenue guide it looks like you're kind of suggesting HDD down maybe 10% to 15%.

<unk> down 5% to 10%. So I guess is that kind of the right way to think about it and then as part of that where do you think we're seeing stabilization and where do you think we need to to work down inventory some more.

Hey C. J. Thanks for the question could hear from you as always.

Yeah, I think as you know as we talked about in consumer we're seeing some stabilization there as far as demand.

PC OEM, we've been talking about now for three plus quarters, and I think we see them.

Mainly shipping to true demand I mean, nobody's building inventory right now, but we think the inventory correction there is mostly behind us.

Our channel business performed really well this past quarter I think above what our expectation was the inventory issue is still very much in data center.

It's very lumpy.

We have some some big big cloud customers that are.

Consuming we have others that are really in a.

Full inventory digestion and aren't taking anything so that that market is still where we see a lot of.

A lot of inventory digestion going on and I expect that to be lumpy for the next couple of quarters.

Well, we are seeing some signs of stabilization in China, we talked about that.

I think it is setting up for a recovery in the second half of the year a lot more activity around rfps and discussions about what demand is going to look like in the second half. So that's an overview of where we see the market.

I think you on your numbers you are probably down a little more than we are on HDD.

I think thats probably more.

Single digit kind of number on a sequential basis.

Great very helpful and as a quick follow up can you kind of walk us through what youre thinking today in terms of Underutilization charges.

June quarter.

Yes, well, let's talk about it for each business I mean, I think in HDD and Im sure. We signed will have a little bit to add here as well HDD.

Which is the smaller part of the number but still significant we're going to see a drop in volume next quarter. So we'll see some under utilization there on the flash side, we continue to Underutilize. The fab, we're managing it very in a very dynamic way.

Week to week month to month to make.

Make sure we fully understand demand and keep our inventory in a position where we want it and so.

We will definitely see underutilization on both sides of the business next quarter.

And just to add.

C J, sorry, just to add a bit more color I think we in our guide we are estimating around $2 20 to $2 40, the range of funding under utilization charges and our buy business. This is a roughly two thirds flash one thirds HDD.

One third.

T D.

Thank you.

Thanks C J.

Our next question comes from Joe Moore from Morgan Stanley . Please go ahead.

Great. Thank you.

You mentioned that Youre, taking a lower of cost per market charges on NAND.

Can you talk about the methodology. There is that do you do you pull that and then take a charge overall or is it any time any individual product falls below the market price you adjusted down.

So Joe with respect to our LCM charges, we do it at the finished good product level is not pulled.

Got it okay. Thank you and then in terms of.

Okay.

The underutilization charges and things like that.

How the covenants are going to be defined or are you going to be able to remove those charges from the EBITDA number as defined in the covenant.

And those are typically are allowed to be added back per our credit agreement does it.

EBITDA.

Okay, great. Thank you very much thanks, Joe.

The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.

Yes. Thank you for taking the questions just to build on that last question just just to be safe.

Your gross margin expectation in this current quarter.

I'm guessing the commentary assumes that you are not.

Expecting another inventory charge in the flash business.

If so why not.

So.

And we typically factor into our guidance all the expectations and when we exited Q3, just like a typical quarter, we do our reserve reviews, and we take the we make sure that the balance sheet is properly stated.

So based on our forecast everything is baked into the <unk>.

Guidance typically we have a small amount in the guidance just like we did also in the best quarter.

Okay, and then I guess my follow up question is on the hard disk drive business I can appreciate you guys have seen some cloud customers kind of it sounds like purchase really no product this last quarter.

From a competitive perspective, how would you characterize the current environment have you seen any.

<unk> price aggressiveness, how do you guys think about the discussion around hammer in your roadmap.

Going forward et cetera.

Yes, I mean, I think there's always price pressure in this market Erin, but we've been very disciplined about the value of our products I think one of the things we feel very good about us.

We've been investing in our ACD roadmap things like <unk> Ultra <unk>. These.

These products are really now starting to ship in volume, we talked about the 22 terabyte <unk> drive was the.

Highest volume drive that 20 and above so we feel very good about where the portfolio is.

About where it's going.

We've got a number of very large customers.

Qualifying SMS right now that's clearly the next step in the data center or ultra SMA product. There. The 2016, we talked about will finish up calls.

This quarter and start deploying next quarter. So we feel like we've got.

A portfolio that is aligned with what the market needs.

And that's showing up in kind of how the how we are able to monetize that portfolio and not have to compete on price. So.

Future technologies like Ameren will be there, we're still a ways away before that product is going to be a volume type product the volume products or the 'twenty twos going in and then <unk> going to be the big volume products over the next couple of years and after that we will get to we will get to hammer when we feel confident about that technology.

It has been in development for a long time, we're in the final stages of it as an industry.

I think everybody is excited that it will be the roadmap.

30, and above when we need it.

Thank you.

Yep.

Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead.

Thank you I wanted to ask about the network security breach can you give us an update.

Covering there it looks like your operations back to normal levels, but have you experienced or do you expect any more issues with production at all your ability to ship products.

Yes.

We've been very transparent about that incident.

We when we noticed that we let folks know we had that we took our <unk>.

Disconnected ourselves from the public internet to protect ourselves and then restore the environment.

We still have capabilities inside the companies in the factories were operational throughout that clearly a tremendous amount of work by the team.

We feel like were nearly all the way back now as far as operation. We got we got to bring the store online and here in another week or so.

But but yeah. It was really really good to see our business continuity plans.

You don't want to rely on them too often but when when we had to they were there and they they kept the company moving forward.

Okay, great. Thanks for that update.

Sorry, you said, yeah I just wanted to.

For fiscal Q3, we don't have any impact in the numbers.

To the network security Okay.

That's great.

My follow up question is Samsung in early April to talk about they are cutting production I am curious if youll compensation with customers have changed since that announcement and related do you expect the June quarter to be the bottom.

Hopefully a bargain.

Thank you.

I would say we have I mean, obviously, we have very robust conversations with our customers. All the time I wouldn't pin the tone of those conversations onto how any one particular player in the market.

Is acting or what they're doing.

Stay very focused on our business.

As far as whereas the bottom I mean, we expect the market to come into balance as we go through the second half of the year.

I think.

We're clearly taking a lot of actions in our own business to closely manage it supply and demand keep the utilization of the fab close to where our demand is so we manage our inventory.

Clearly, we're going through one of the one of the most severe downturns in a while but we think as we move through the second half of the year the market will get and will come into balance.

Great. Thank you.

Our next question comes from Mehdi Hosseini from Sig. Please go ahead.

Yes, thanks for taking my question.

One near term and more to do with inventory your inventories are absolute dollar value keeps going higher and I want to understand how the mix is changing between wafers finished goods and other material is there any way you can give us a color how incremental changes are happening for different.

<unk> within the inventory and I have a follow up.

Yes.

Typically don't break that out as much.

On the call. This is a bit too much detail for me to discuss here.

The one comment I would make so when when do we think of inventory. Our operations team is really focused on minimizing minimizing where we can so we basically try to stage. It then the places that makes the most sense from a from a demand.

Perspective.

Let me rephrase. The question how do you how should we think about the risk of.

Inventory write down.

Okay.

I mean, the inventory write down typically is a.

It's really based.

The ones that was for instance, I called out is based on.

Basically the inventory value relative to where the market price is and so.

Got it.

When prices decline.

By a lot than we do have we do have to take a look closer look and see if there is an impact.

And that's.

That's yes, that's what I would say about that.

So.

Are you assuming that the rate of price decline is moderating so maybe that would minimize the downside risk.

What I'm, saying is we what I, what I'm, saying is at the end of every quarter on our balance sheet is properly stated because we do look at.

And where the inventory value is versus where the demand is and the prices most particularly at the finished goods level and.

So where do we see differences, we have to adjust our inventory value otherwise it is properly stated.

I guess your question is a is more around trying to predict when.

When the price is going and we typically are.

Yes.

We typically don't necessarily do that.

Okay. Thank you and then the question for David.

Looking at longer term more than just one quarter.

I think there is some confusion or unknown factor, how new type of AI would impact demand for HDD versus SSD do you have any view of how these incremental demand created these are expensive workstations.

Is it going to impact SSD versus HDD.

Yes.

Doing analysis on that maybe what I would say is to me I'll, even go a little longer term bigger picture. This just reinforces the value of store data I think that.

It just seems like there's this constant.

Ways for people can figure out how to use all the data they have stored two two.

Do very productive things with it and I think the latest is training.

And so we just think it's <unk>.

Another.

Element of the long term value.

Data storage and this is just a big secular tailwind for the HDD business and the enterprise SSD business I mean again, you know that they are both.

They both have big <unk> in the data center and they are both growing.

And we think this is another reason why people will store more data is because they can monetize it in different ways in the future.

Well I guess I was hoping you could shed some light as to how.

HDD CAGR would change.

I don't think this is going to lift.

The town for each different types of it stood at the same rate.

Any thoughts that you can share with us.

I think it will.

HDD is the lion's share of storage in the cloud. So you would expect that's where the bigger lift would be across those two technologies.

Okay. Thank you.

Thanks Mehdi.

Talk to you as always.

The next question comes from Shannon Cross from Credit Suisse. Please go ahead.

Thank you very much for taking my question.

My first is as you look at what Youre doing on Opex in terms of holding in court.

You think about the how you're where you're investing and how are you, making those decisions and how should we think about potential impact of future projects at this point and then as a follow up thank you.

Yes, we've been very obviously, we've been one of the things we've been.

Building into the business over the last several years as we've restructured the business is more agility and the ability to proactively respond to the market. We're in I think thats kind of the hallmark of the organization, we're trying to build as agile and dynamic.

But clearly on top of that Shannon.

We went to a business unit structure for a reason is because we have two very very focused organizations with very sophisticated leaders and then it is.

Constantly doing the <unk>.

ROI analysis of where we put our opex and we get the most out of it and quite frankly thats led to the portfolio. We have today I think we have the best portfolio we've ever had.

And that's the effort that goes on constantly continuously and so as we continue to draw down opex to resize the business to the realities of what the market our market is.

We've built that capability over the last couple of years to do that in a way where we can make sure we're going to get <unk>.

First of all the RF.

The Opex, we spend we get the best ROI out of it the best return and that we make sure that.

We're making we're taking actions to the business that don't harm the long term value of it and we make we make the right decision on a on a day by day week by week month by month basis. So I think this is really a capability. We built in the last three years and I think it's serving us well right now to make sure that we are we're not.

We're not cutting in ways that are going to <unk>.

Impacts the long term health of the business.

Thank you that was helpful.

I'm curious, maybe I'm trying to make lemonade out of lemons, but I'm just wondering as you've cut capacity on the HDD side.

Had these underutilization charges are there things that you've learned in terms of maybe how you manufacture and the pathways to drive incremental productivity, you're seeing and it's kind of a surge.

A unique time to maybe take a step back and look how things.

How things have been done and what you could do in the future.

Yes, I'll make a few comments I suspect we will have a few comments as well I mean this is.

There's been a lot of focus on this in the last year of how do we become more efficient how do we automate more.

Several of our factories of one the World Economic Forum Lighthouse awards for automation.

How do we Reskill our employees.

And how do we just we've been very focused on driving a level of automation driving productivity and just lowering our fixed cost asset base in the HDD business in.

I think our fixed guide I don't think I know our fixed costs in that business are now the lowest they've been in well over a decade. So I think thats paying off in a way we are able to generate margin in the business.

Lower volume levels, and then as the volume starts to pick back up.

We've got capacity to meet what the market needs and I think we will do that.

Much lower cost basis.

Yes, I mean, the one thing I would add also in addition to what David.

Some of the activities that we drive in terms of the manufacturing side.

<unk> taken back into the development organizations to think about things come on platforms and the ability to improve on the way our products are designed for manufacturing efficiency, even increasing manufacturing efficiency going forward and of course with that comes a better cost structure.

Great. Thank you very much.

Thanks, Shannon I appreciate it.

Our next question comes from Chris Carr from TD Cowen. Please go ahead.

Hi, Thanks for taking the question David.

First question is on.

The decline in March quarter seems to be better than what your confidence is high but I'm just kind of curious any puts and takes you can talk about your pricing versus competition in March how do you think about it in June and along the same path you mentioned.

Supply demand balance globally, this year and bit shipment booked large growing are you baking in some kind of a mobile recovery that's going to help you drive that and then I had a follow up.

Yes, I think on pricing is that.

Kind of the same story all the time right, whether it's downmarket upmarket mid cycle market, which is.

Really have a diverse portfolio, we've talked about this a lot from retail to channel business PC Oems enterprise SSD.

Gaming has become.

A very nice part of the portfolio and growing part of the portfolio.

And it's just the mobile obviously is a big part of our portfolio.

And it's just been mixing across that where we get the best return right, putting that putting our supply in our bids in the places where we can get the best best return and I do think that that is a.

Go to that breadth of go to market is.

And markets that we can reach.

Literally from every single consumer.

Two the largest technology companies in the world and kind of everything in between and just the ability to mix across that with.

With a strong portfolio and a strong set of brands as well Sandoz Sandoz professional WD black.

Puts us in a good position to get the best best return on our supply.

Next quarter, we don't really want to comment on future pricing. It's all it is.

All into the guide.

We've talked about the individual markets.

What I would say is where we are.

Pricing in or we're putting in what we think is going to do on an individual market by market basis, and then how will mixed that.

Next quarter.

Got it got it thanks, David and then as a follow up on the HDD side, it's kind of nice to see the turning to.

I'd like to see them, what is not bigger than 20 terabyte in terms of volume.

Should we expect that could grow and what is the impact on gross margin.

I think Thats fair Thats, our focus on our CMI drive that's our focus capacity point.

Sure.

Significantly ahead of other TMR drives above 20% so are above the 2020 terabyte drive.

Spect that to be our Premier drive for the next until we have a different CMI product in that.

That part of the business. So we expect that to be a very good growth engine.

We've talked a lot about that drive of.

It provides a lot of value. It provides a lot of tcl value for our customers and.

It contributes inappropriate.

Margin from that perspective as well.

Got it thanks David.

Thank you.

Our next question comes from Columbus email him from Bank of America. Please go ahead.

Hi, Thanks for taking my question.

For one thing today.

David I think maybe another pricing question for you I think you talked about price elasticity could you just elaborate a little bit on what exactly you're seeing either in flash and HDD and a related question to that is there's some worry that maybe a lot of memory inventory might be built again this quarter from the likes of summit.

OEM.