Q2 2025 Western Digital Corp Earnings Call
Speaker Change: Good afternoon and thank you for standing by. Welcome to Western Digital's second quarter fiscal 2025 conference call.
Speaker Change: 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 1 on your phone.
As a reminder, this call is being recorded.
Speaker Change: Now, I will turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analysis at Investor Relations. You may begin, sir. Thank you and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer, and Wissam Jabre, Chief Financial Officer.
Speaker Change: Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on management's current assumptions and expectations, and as such, does include risks and uncertainties.
Speaker Change: We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations.
We will also make references to non-GAAP financial measures today.
Speaker Change: 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.
David Goeckeler: Thanks, Peter. Good afternoon, everyone, and thank you for joining the call to discuss our second-quarter fiscal year 2025 performance.
David Goeckeler: Before we dive into our second quarter results, I want to express my gratitude to our employees, customers, partners, and shareholders for their unwavering support throughout my tenure.
David Goeckeler: It has been an honor and a privilege to serve as the CEO of Western Digital, and I'm immensely proud of what we've accomplished together to position both of our franchises for long-term success as standalone companies.
David Goeckeler: Now on to the results. For the second fiscal quarter, Western Digital delivered revenue of $4.3 billion, non-GAAP gross margin of 35.9%, and non-GAAP earnings per share of $1.77.
David Goeckeler: Our commitment to enduring quality and reliability, driven by our industry-leading innovation and diversified portfolio, has enabled us to navigate the current market dynamics effectively.
David Goeckeler: While our HDD business is experiencing robust growth, particularly in high-capacity enterprise drives, our flash segment faces temporary headwinds due to pricing pressure.
David Goeckeler: Despite these challenges, we are strategically well positioned to capitalize on growing long-term storage demand from the AI data cycle.
David Goeckeler: Our HDD business continues to perform well, propelled by our cutting-edge Ultra-SMR technology. This innovation allows us to push the boundaries of storage capacity while maintaining the gold standard in reliability, quality, and performance.
David Goeckeler: The market has responded to our products enthusiastically, driving our HDD revenues to a 12-quarter high with a record non-GAAP gross margin.
David Goeckeler: We're seeing increasing adoption of our newer and higher density drives, underscoring their ability to meet the evolving demands of the storage market.
David Goeckeler: I'm pleased to report that we're in the final stages of our plan to separate our flash and HDD businesses and expect this to be completed on schedule.
David Goeckeler: During the second fiscal quarter, we achieved two crucial milestones, completing our Form 10 filing and finalizing key financing activities necessary for the separation.
David Goeckeler: Thanks to the meticulous planning and dedication of our teams, we're ready to operate as independent entities.
David Goeckeler: We invite you to join us for our upcoming investor days on February 11th for Sandisk and February 12th for Western Digital, where our respective management teams will share their strategic visions and demonstrate how each business will drive shareholder value as standalone entities.
David Goeckeler: Turning to our business units update. In flash, revenue was stable and in line with expectations. Strength in client and consumer resulted in better than expected bid shipments.
David Goeckeler: However, increased pricing pressure due to short-term oversupply from increased utilization rates throughout calendar year 24, coupled with customers working down inventory, offset our bit shipment results.
David Goeckeler: Cloud pricing was a positive given continued AI-driven demand. Taken together, the result was sequential decline in profitability.
David Goeckeler: In fiscal year 2024, consumer experienced growth across revenue, units, and gross margins, as the end market benefited from a market recovery.
David Goeckeler: While revenue and units grew sequentially in the fiscal second quarter of 2025, gross margin declined due to pricing pressure caused by oversupply in the broader NAN market.
David Goeckeler: Despite this recent softening, our external SSD drive shipments grew 50% sequentially.
David Goeckeler: Our efforts in bolstering consumer preference, expanding partnerships, and launching our new Creator Series at CES all provide SanDisk with the right foundation to drive organic demand and margin expansion.
Now turning to the flash outlook.
We believe that we are currently in a mid-cycle pause.
David Goeckeler: In the fiscal third quarter, we expect BIT shipments to be down, with stronger demand in data center and mobile, more than offset by lower BIT shipments in PCoEM and consumer.
David Goeckeler: Given the stronger-than-anticipated pricing headwinds, we are proactively managing production levels to respond to ongoing inventory adjustments and evolving demand dynamics across our end markets.
David Goeckeler: By optimizing utilization and total capacity, with a key focus on delivering premium nodes, we aim to accelerate stabilizing profitability in this dynamic market.
David Goeckeler: In this new era of NAND, with lower utilization and less intense CAPEX environment relative to historical periods,
David Goeckeler: We are seeing supply growth appropriately responding to the current short-term headwinds affecting demand, and we expect to see a recovery as we move through calendar year 2025.
David Goeckeler: Specifically, we expect Client Inventory Digestion to continue into the first half of Calendar Year 25, with normalization in the second half paving the way for a recovery that will enable the AI-driven PC RAM in the Windows refresh cycle to gain momentum.
David Goeckeler: In Datacenter, we project Cloud CapEx to continue to grow in calendar year 25, and we continue to make good progress qualifying our cloud products with customers to capture our fair share of this market.
David Goeckeler: Lastly, our consumer business continues to perform well, and while we expect seasonal weakness in BIT shipments, our premium brands are providing ASP support to the overall portfolio.
David Goeckeler: We look forward to discussing our views on the flash business at the SanDisk Investor Day on February 11.
David Goeckeler: The team and I will discuss why we believe that our markets are strong and growing, how rapid adoption of AI is creating new opportunities, what differentiates SanDisk and how the flash industry is evolving. We are very excited and believe you will be as well.
David Goeckeler: Our HDD business delivered another quarter of strong performance with data center revenue hitting an all-time high. This achievement underscores the strength of our near-line storage solutions and how well positioned we are to benefit from ongoing market tailwinds.
David Goeckeler: The HDD business also achieved record gross margins as customers continued to increase the adoption of our higher capacity drives and we shared in the TCO benefit provided by our innovative products.
David Goeckeler: We are operating in an environment where demand for a product exceeds supply.
to proactively manage this.
David Goeckeler: We continually work with our customers to get visibility into their future needs. In these tight conditions, we might see volatility in shipments from quarter to quarter, but over the longer term, we continue to progress toward a state of predictable business operations and sustainable, profitable growth.
Turning to the HTD Outlook.
David Goeckeler: In the fiscal third quarter, we anticipate continued momentum in data center to drive strong demand across our near-line portfolio. As I mentioned, our supply is now very tight, which is helping us get better visibility into long-term customer demand and enabling better planning for product deliveries in the coming quarters.
David Goeckeler: Our customers increasingly appreciate the complexity of the HED supply chain and the need for us to better anticipate future demand.
David Goeckeler: As we continue to broaden adoption of our Ultra-SMR portfolio at our largest customers and complete the qualification and ramp of our newest drives, we anticipate profitability will continue to improve in the coming quarters.
The HD business's positive structural transformation continues to gain momentum.
David Goeckeler: We remain focused on operational excellence, efficient cost structure, and a strong commitment to maintaining a balanced supply-demand dynamic.
David Goeckeler: We are well-positioned to continue delivering the most profitable and innovative product portfolio while establishing long-term industry leadership through our earnings potential.
David Goeckeler: During the upcoming WD Investor Day on February 12th, Irving and his team will provide a detailed overview of HED's strategic roadmap.
David Goeckeler: I want to take a moment to acknowledge the CFO transition announcement that we made two weeks ago.
David Goeckeler: After nearly three years with us, Wissam will be moving on to another opportunity. Wissam has been an outstanding partner and leader at Western Digital, helping us successfully navigate the company through the ups and downs of our end markets and build a strong financial profile at both HED and Flash.
David Goeckeler: On behalf of the board and everyone at Western Digital, I want to thank Wissam for his many contributions, including seeing us through the separation, and wish him the best of luck in his next role.
David Goeckeler: Let me now turn the call over to Wissam, who will discuss our fiscal second quarter results. Thank you, David, and good afternoon, everyone.
David Goeckeler: In the fiscal second quarter, Western Digital delivered results generally within the guidance ranges we gave in October, in the face of a challenging pricing environment in flash.
David Goeckeler: Total revenue for the quarter was $4.3 billion, up 5% sequentially, and 41% year-over-year. Non-GAAP earnings per share was $1.77.
Looking at end markets.
David Goeckeler: Cloud represented 55% of total revenue at $2.3 billion, up 6% sequentially, and more than doubling year-over-year. On a sequential basis, the growth was due to an increase in near-line HDD shipments while flash was down.
David Goeckeler: Client represented 27% of total revenue at $1.2 billion, down 3% sequentially, and up 4% year over year.
Compared to last quarter,
David Goeckeler: Flash revenue declined as bid shipment growth was offset by pricing pressure, while HED revenue was flat.
David Goeckeler: Year over year, an increase in flash revenue was primarily due to higher ASPs as bid shipments declined and was partially offset by lower HED revenue.
David Goeckeler: Consumer represented 18% of revenue at 0.8 billion dollars, up 14% sequentially and down 8% year-over-year.
David Goeckeler: Sequentially, both flash and HDD bit shipments grew and drove revenue growth while pricing was a headwind.
David Goeckeler: Year over year, the decrease was due to lower shipments in flash and HDD and pricing in flash.
David Goeckeler: Turning now to revenue by business unit. In the fiscal second quarter, flash revenue was $1.9 billion, flat from last quarter and up 13% year over year.
David Goeckeler: Sequentially, Flash ASPs decreased 13% on a like-for-like basis and 10% on a blended basis.
David Goeckeler: Bid shipments were up 9% from the previous quarter and down 2% compared to last year.
David Goeckeler: HDD revenue was $2.4 billion, up 9% sequentially, and 76% year-over-year.
David Goeckeler: Nearline bit shipments were at a record level of 154 exabytes.
David Goeckeler: Moving to the rest of the income statement, please note my comments will be related to non-GAAP results unless stated otherwise.
David Goeckeler: Gross margin for the fiscal second quarter was 35.9%, which was below our guidance range.
David Goeckeler: Sequentially, gross margin was down 2.6 percentage points and up 20.4 percentage points from a year ago.
David Goeckeler: Flash gross margin was 32.5%, down 6.4 percentage points sequentially, due to pricing pressure late in the quarter.
David Goeckeler: In HDD, strong demand for near-line drives resulted in gross margin improvement of half a percentage point on a sequential basis to 38.6%.
and 13.8 percentage points from a year ago.
David Goeckeler: Operating expenses were down sequentially at 674 million dollars, including the synergy expenses of 17 million dollars.
David Goeckeler: Lower-than-expected operating expenses were due to dis-synergy costs being lower than expectations, while progress towards executing the SanDisk spin remains on track.
David Goeckeler: In addition, variable compensation was lower than expectations, aligned with business performance.
David Goeckeler: Our results demonstrate continued focus on cost discipline while making progress towards the completion of the business separation.
David Goeckeler: Operating income was $864 million, down 2% sequentially, driven by lower gross margin, partially offset by lower operating expenses.
David Goeckeler: Income tax expense was $105 million and the effective tax rate was 14%.
Earnings per share was $1.77.
David Goeckeler: Operating cash flow for the fiscal second quarter was 403 million dollars and free cash flow generation was 335 million.
David Goeckeler: Cash capital expenditures, which include the purchase of property, plant and equipment, and activity related to flash joint ventures on the cash flow statement, represented a cash outflow of $68 million.
David Goeckeler: Fiscal second quarter inventory was largely flat at $3.4 billion, with days of inventory declining by 9 days to 112 days.
David Goeckeler: A decrease in HDD inventory was offset by an increase in flash inventory.
David Goeckeler: Gross debt outstanding was $7.4 billion at the end of fiscal second quarter.
David Goeckeler: Cash and cash equivalents were $2.3 billion and total liquidity was $4.5 billion, including undrawn revolver capacity.
David Goeckeler: During the fiscal second quarter, we successfully arranged financing for the upcoming separation of our business, which is a key milestone in the progress towards
The Spin of Sandisk
David Goeckeler: I'll now turn to the fiscal third quarter non-GAAP guidance for Western Digital on a combined basis.
David Goeckeler: We anticipate overall revenue to be in the range of $3.75 billion to $3.95 billion.
Gross margin is expected to be between 31.5% and 33.5%.
David Goeckeler: Interest and other expenses are anticipated to be approximately 100 million dollars.
David Goeckeler: We are looking forward to both of our Western Digital and SanDisk Investor Days in just a couple of weeks to discuss each business in more specific detail.
David Goeckeler: For now, I provide directional perspective on expectations from each business in the fiscal third quarter.
David Goeckeler: For Flash, we expect revenue to decline sequentially in the mid-teens percentage, and gross margin to decrease due to lower blended ASPs, higher cost per bit, and underutilization charges of $20 to $30 million as we manage our supply.
Flash bits are expected to decline sequentially by mid-single-digit percentage.
David Goeckeler: We also expect underutilization charges to continue in the June quarter.
David Goeckeler: For HDD, we expect revenue to decrease sequentially by mid to high single-digit percentage on lower volume, while gross margin expected to improve by approximately 50 basis points as average price per unit continues to trend higher.
David Goeckeler: We are focused on executing the final stages of the spin and navigating current market dynamics while continuing to deliver robust financial performance.
David Goeckeler: There is no doubt in my mind that both the HDD and Flash businesses are strong and resilient, and both will continue to provide industry-leading products to the marketplace while unlocking significant shareholder value for their respective shareholders.
David Goeckeler: With that, I'll now turn the call back over to David.
David Goeckeler: Thanks, Wissam. Our results this quarter reflect our efforts to actively manage near-term cyclicality across our end markets, knowing we have a solid foundation for future success that is underscored by our industry-leading product roadmap.
David Goeckeler: As we complete the separation, I am extremely confident in our respective teams' ability to drive shareholder value in both the HTD and Flash businesses.
David Goeckeler: Both companies will continue to be driven by the structural long-term tailwinds of the AI data cycle and our ability to consistently offer our customers the most compelling and innovative storage solutions.
David Goeckeler: Before we move to the Q&A session, I'd like to highlight that we will also be joined today by Irving Tan, who will step into the role of CEO at Western Digital, and Luis Fasoso, who will assume the position of CFO at SanDisk.
David Goeckeler: Thank you. 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 1 on your phone.
David Goeckeler: If you would like to withdraw your question, please press star 2. One moment, please, for the first question.
David Goeckeler: And today's first question comes from C.J. Mewes at Cantor Fitzgerald. Please go ahead.
David Goeckeler: Hey, CJ. Thanks for the question. I'm going to let Irving take that one. Thanks, David. Hi, CJ. Look, I think we've seen over five quarters of very strong positive growth in revenue, and the outlook for the business remains healthy.
David Goeckeler: There will be quarter-on-quarter variations as we support customers with the timing of their deployments and also balancing the supply-demand tightness that we have, so that's really what's driving the slight decline in Q3.
Speaker Change: Great, very helpful. And I guess, Dave, a question for you, two-part. First,
Speaker Change: Are there any other sort of technical regulatory things that we should be thinking about that are necessary to get that done in the next four weeks? Thank you very much.
Speaker Change: On the spin, you'll see more about that in the next couple days. We feel really good about that being on track. Wissam can go through some of the dates here in a minute.
Speaker Change: Look, on NAND, we're still seeing, you know, bits were up 9% this quarter. They're going to be down just mid-single digits next quarter. We're still seeing good volume.
Speaker Change: We think some of the demand that we expected to materialize in PC and smartphone has moved to the right a couple of quarters. I don't think that's any secret.
Speaker Change: oversupplied right now. So we saw some pricing headwinds, especially as we move through the quarter, which we talked about.
responsive to the demand signals we see in the market.
Speaker Change: and adjust our production, so we're going to go ahead and do that and take a little bit of supply out of the market as we move through 2025, and we think that will support
Weissam Jabre, David Goeckeler
Wissam Jabre, David Goeckeler
Speaker Change: And CJ, just to follow on David's comments around the spin and the timing, the record date for the distribution will be February 12th.
Speaker Change: and the date of the distribution will be on or about February 21st. And then the shares of SanDisk will be trading in the active markets shortly after.
Thanks so much. Thanks, CJ.
Speaker Change: Thank you. And our next question comes from Erin Rakers at Wells Fargo. Please go ahead.
Erin Rakers: I guess thinking about the demand gross margins, I'm wondering if you can unpack, if I think about the $20 to $30 million that you talked about as being underutilization charges.
Erin Rakers: in the current quarter. If I look back the last time that you took capacity out, that looks like that's around 10 or 15 percent of the underutilization charges you took, you know, a year or so ago. Is that how I think about how much capacity out you're taking? I think the other way of asking it is...
Erin Rakers: You know, I look at some of your competitors and the news is that they're taking 100 or so percent of their bit supply out. Is that a fair assessment of what you guys are doing?
Erin Rakers: Yeah, we're not going to go into exactly how much we're taking out. That's a dynamic decision we make, you know, week over week, month after month as we look at the business. I think unpacking the gross margin is an important discussion as we go into next quarter.
Erin Rakers: as we go forward over the next several years. But we had a very good start to the year in cost downs, and now we're going to see Q3 we're actually up low single digits. So that's a big impact on gross margin. You had underutilization charges on that.
and then some ASP headwinds.
Erin Rakers: as well. Like I said, as we sit here today, we see the ASB headwinds to be moderating versus what we saw this quarter, and then bits down mid-single digits. So that kind of gives you, unpacking a little bit, the gross margin number going forward.
Speaker Change: Yeah, that's very helpful. And just to kind of build on that, is there any way to frame how we should think about the underutilization impact into the fiscal fourth quarter? And just to be clear, is there any risk of inventory charges taken, you know, based on the current market dynamics? Thank you.
Speaker Change: I think you can, you know, you probably think about Q4. They'll come up just a, they'll come up a little bit from where we were in, in what we expect in Q3, you know, maybe think about it, maybe.
Thank you for your time.
Okay, thank you.
You're welcome.
Speaker Change: Thank you. And our next question today comes from Wabzi Mohab with Bank of America. Please go ahead.
Yes, thank you so much.
Wabzi Mohab: Can you help us unpack if that is just seasonality? Is there something beyond that? And how should we think about...
Speaker Change: You know, pricing as we think about 2025 and maybe the maximum amount of exabytes that you can ship given that supply is so tight at the current time. And I have a quick follow up.
Speaker Change: I'm going to let Irving talk about 25. I have enormous confidence in this business and enormous confidence in Irving driving it forward in the entire team. Yeah, going into the next quarter you're going to see some revenue, revenue down a little bit on volume.
We're going to continue to see margin improving.
Speaker Change: going into next quarter. So structurally, I think the business is just in a fantastic place. We're getting more visibility. We have increasing profitability.
Speaker Change: And, you know, we've got a lot of tailwinds from AI, more demand than supply. But let me let Irving talk about how he sees 25 playing out. Yeah, thanks, David. As I mentioned briefly, we see the outlook for 25 still being relatively robust going forward. And as David mentioned,
Irving Tan: Robust in terms of pricing as Wissam alluded to as well, we are looking at pricing to remain stable to slightly up for Q3.
Irving Tan: And in terms of exabytes, it's really a function of mix, and as we look forward to qualifying our new 32TB drives, that gives us more capacity to provide into the market from an exabyte perspective as well.
Speaker Change: Yeah, I mean, we think as we move through 25, you know, we're going to see, you know, by the time we get done with 25, we'll see PC units up, we'll see smartphone units up, you know, data center continues to remain strong.
Speaker Change: On the demand side, we see that mid-teens demand for the calendar year, we see the market slightly undersupplied to that, quite frankly, you didn't ask the question, but we see a bigger step up in demand in 26, but let's stay with 25 for now.
Speaker Change: So, you know, as I said earlier, we still see good volume in the business, discussions with customers are very good.
Speaker Change: We're just in a spot right now where some of that demand we thought was going to come in the PC and smartphone market.
Speaker Change: And we think we'll be good as we move throughout 25. We're very, very optimistic on where we're at from, you know, when we, again, we go back and we look at overall wafer spending in this market.
Speaker Change: We think that the market is set up in a very strong position. As I said earlier, we've had
Speaker Change: adjust supply much more quickly than we have in the past to respond to this and accelerate bringing the market back to more of an equilibrium to an undersupplied position.
Thank you so much.
Thanks, Fonzie.
Speaker Change: Thank you. And our next question comes from Tim Archery with UBS. Please go ahead.
Speaker Change: Hey guys, this is Ari Anon for Tim. Thanks for taking my question.
Speaker Change: You know, it is one thing when you and Seagate have excessive capacity, it seems like you really can't ship much if any more than the 13.5 million drives you're shipping are now passing above this 10-year trend line. I would think that maybe there's more urgency from the customers on getting in orders for BTO, so any change in behavior, and then I'd follow up.
Speaker Change: We haven't seen any change, so thanks for the question, we haven't seen any...
Speaker Change: Visibility on a 52-week time horizon so that we can better plan with our customers and ensure we have the right supply-demand balance and that's really ensuring that that's not in build-up of inventory within our customer environments.
Speaker Change: Thanks and then on the, my follow-up on the NAN side, the NAN cycle just got started and you know we turned capacity back on, now we're going to another correction on the consumer side and so what would you do once this is a standalone business?
Speaker Change: Are you still going to care at all about market share, or will you do more like what you did on the HDD and manage to driving margins higher with less regard for share?
Thank you.
Speaker Change: We'll have a lot to say about that here in another week and a half. But I think the way we're managing the business now is what you're going to see more of going forward. We were very clear, you know, we put out a pretty big webcast on the new era of NAND about how we thought about this business, how it's changed in the 3D era.
Speaker Change: how we, our belief and how it needs to be managed. And I think you're seeing that play out in real time here this quarter. And we'll talk about that in more detail here in a couple of weeks. And we'll hope to see you in New York.
Awesome. Thank you guys. Thank you. Appreciate it.
Speaker Change: Thank you. And as a reminder, ladies and gentlemen, to ask a question, please press star then 1. And we also ask that you do please limit yourself to one question per time in the queue.
Speaker Change: Today's next question comes from Joe Moore at Morgan Stanley. Please go ahead.
Joe Moore: Great, thank you. I wonder if you could give us an update on Enterprise Solid State Drives. I know there's been some choppiness in that segment, you know, are you still tracking your targets and just how are you doing there?
Joe Moore: Hey, Joe. Yeah, we're doing fine there. We're still tracking the targets. There is some, you know, I think I said during the quarter we're in for a couple choppy quarters, and I think that's what we're seeing. You know, that was a highlight last quarter, certainly from supporting pricing.
Joe Moore: We still feel good about our 15% plus, 15 to 20% of mix.
Joe Moore: as we're sitting here at the halfway point through the year. This is another thing we're going to have a lot to talk about our investor day, about kind of what our roadmap looks like in enterprise SSD, but we're still seeing strong demand there, Joe.
Speaker Change: Thank you. And our next question today comes from Thomas O'Malley of Barclays. Please go ahead.
Thomas O'malley: Hey, thanks for taking my question. I just wanted to ask about CapEx. You're starting a new calendar year here, and I'm sure you'll give us...
Thomas O'malley: A broader update at the end, we'll say, but given the reduction and utilization and just a broader pause, you're saying kind of a mid-cycle pause in the business. Any update on how you're thinking about spend on the flash side? You talked about technology transitions. It sounds like the SSE business is going through a couple of lumpy quarters. Just with all of those factors in, any additional color on how you think about spending on the NAN side of the business particularly? Thank you.
Thomas O'malley: We deploy the cash and capital for the company. Obviously, you know, probably the next thing over time will be just, at some point, ramping the next node.
Thomas O'malley: But from an overall perspective, there's no real change on the thinking. I'm pretty sure as we get to investor day, David and Luis will have much more to add on that as well.
Yep
Speaker Change: helpful and then pivoting to the HGD side. So Seagate has given us some framework for, you know, where they think their capacity kind of hits a wall on the HGD side that's about 160 exabytes on a quarterly basis. You guys have kind of gotten, I believe in this last quarter, to around 175 exabytes.
Speaker Change: Could you help us understand where you guys start running Intel Law in terms of capacity? You've talked about some capacity drawdown potentially into the March quarter, but is there a similar framework that you guys go by? Just historically, the market has been a little bit different than you guys being ahead in terms of the number of exabyte chips. So any kind of help with where you run Intel Law, or do you continue to grow there? Thank you.
Speaker Change: Yeah, I don't think we're going to make any comment on that. You know, we are quite focused on ensuring we have the right supply-demand balance and continuing to be very prudent and disciplined in our capital expenditure.
Speaker Change: Thank you. Thanks, John. That's all for tonight. Let's go show Carl Ackerman with the empty Perry Bar. Please go ahead.
Carl Ackerman: Yes, thank you gentlemen. The last quarter you launched the 32 terabyte SMR and 26 terabyte CMR with 11 disks and I think you noted you would complete qualifications in coming quarters.
Speaker Change: I think you have that beginning to ship at two hyperscalers now, and perhaps a third one is in the process of qualifying.
Speaker Change: I was hoping you could discuss the order rates and visibility you see for these high-capacity drives.
David Goeckeler, www.davidgoeckeler.com
Speaker Change: healthy as you've alluded to we expect the qualification for our new
David Goeckeler, CEO Alphabet and Google
Thank you.
Thanks, Carl.
Speaker Change: Thank you. And our next question today comes from Asia Merchant with Citigroup. Please go ahead.
Speaker Change: Yeah, thank you very much. One question we get, I understand the seasonality here in March and I understand, you know, a couple of, you know, a quarter where there is some variability.
but any visibility into the inventory levels here?
Speaker Change: and then just at the hyperscalers how you guys are thinking about it and then just the supply chain on the HDD side, you know How are you thinking about? The supply chain being able to meet the rising demand that you guys are thinking about. Thank you
Speaker Change: Yeah, thanks for the question. Look, when we talk about Q3 and what we guided is very much doesn't necessarily indicate lower visibility or higher visibility. We think we have good visibility of what the inventory is doing in our customers and where the orders look for the next few quarters. It's just a matter of timing of orders and so this is how sort of probably the best way to think of it.
inventories and orders look like.
Speaker Change: As many as many products as we can and would continue to operate
Thank you.
Thank you. You're welcome.
Speaker Change: Thank you. And our next question comes from D.J. Rakesh with Mizuno. Please go ahead.
D.J. Rakesh: Yeah, hi, just to follow up on the hard disk drive side, good numbers there, but I think as you move this capacitor to terabyte disks, I think you're going up to 11 disks. You see the need to kind of push on the aerial density side too, as your peer is moving on the hammer side.
Any thoughts there? I need a follow up.
Speaker Change: That's something we also get a major lift from our ultra-SMR capability and we think that's a huge competitive advantage and obviously our ultra-SMR capability will be extensible even as we transition from our ePMR portfolio eventually to our AMO portfolio as well.
Speaker Change: And then on the NAND side, I know you talked about what you're doing with CapEx data for the analyst day. Any thoughts on how you see the pricing, margin, kind of trend for the year? I know earlier you talked about that in this aspect.
Speaker Change: Yeah, we don't talk too much about that. I mean, I think what...
That's a good sign as we sit here today.
Speaker Change: Some adjustments here to make sure that we bring the market back into balance in a slightly undersupplied spot as quickly as possible to support pricing and margins in the business.
Thank you.
Speaker Change: Thank you. And our next question today comes from Ananda Baruja with Loop Capital. Please go ahead.
on sort of Flash, the role of Flash.
Speaker Change: and Hyperscale Storage, you know, the area that's been, you know, sort of overwhelmingly represented by Neal & Jock, there's a pretty public, there's a pretty big slash vendor, systems vendor that made it pretty public.
Speaker Change: Announcement December about having a hyperscale win and that's been a big topic of conversation Over the last few months here in both businesses So just love to get your your view on on dynamics in those in that market. That's it for me. Thanks
Speaker Change: All right. Yeah, this, you know, my position's been pretty stable here for quite some time. This is use case driven.
Speaker Change: have a very robust roadmap, as Irving talked about, very strong focus on aerial density, continue to drive cost downs there.
Tremendous innovations.
Speaker Change: into the cloud. So this is a very big at-scale business. There's always going to be use cases where, again, there's always going to be use cases in the hyperscale that come up that can be satisfied with Flash. We're very big fans of that. We're very bullish on Flash as well.
Speaker Change: It doesn't mean it's at the expense of hard drives. It's just, that's how we see the market. We've called that way for years and we continue to see that dynamic playing out. It's good for both businesses. I mean, look.
Speaker Change: Let's take it up a level. We've got all this AI demand. There's been a lot of conversation about AI in the last several days, as a matter of fact, some major innovations.
Speaker Change: in accelerating the adoption of AI. You know, it's an area where there's an incredible amount of investment going, which leads to amazing innovations.
which increases the amount of data that gets stored.
Speaker Change: So this is going to drive hard drives dramatically. As inference moves to the edge, remember, we talk a lot about enterprise SSDs. It's a very important, very big market.
But NAND is predominantly an edge business.
Thank you for all that, really appreciate it. Thank you.
Speaker Change: Thank you. And our final question today is from Mark Miller at the Benchmark Company. Please go ahead. Thank you for the question. I just was wondering, are you seeing across the board supply reductions by your NAND competitors? And if so, any estimate on how much they're reducing?
You know, I don't
Speaker Change: I think, you know, we don't really talk about what our competitors are doing. We're going to focus on talking about our business. I mean, we've been very clear about what we've been doing. You know, we see this little pause in the market. We were very, very open about how we're going to manage the business going forward in this new era of NAND. We talked a lot about that.
Speaker Change: just how big the market is now and how much productivity comes out of these nodal transitions. So that's the way we're managing the business. We continue to see...
Speaker Change: Good demand throughout this year. We continue to see, you know, a balanced to undersupplied market and we're going to take some actions just to make sure that's the case across our portfolio based on what we're seeing.
Thank you.
Speaker Change: Thank you. This concludes the question and answer session. I'd like to turn it back over to the management team for closing remarks.
Speaker Change: And we're right here on the doorstep of launching these as two separate companies. And we look forward to talking to all of you about that in great detail here in just another 10, 11 days. So we look forward to seeing you then. Thanks for joining us today.
Speaker Change: Thank you, everyone. This concludes today's conference call. We thank you all for joining. You may now disconnect your lines and have a wonderful day.
[music]
[inaudible]
[inaudible]
Music Plays
The
[inaudible]
The
[inaudible]
The
Speaker Change: Good afternoon, and thank you for standing by. Welcome to Western Digital's second quarter Fiscal 2025 conference call.
Speaker Change: Presently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.
Speaker Change: At that time, if you'd like to ask a question, you may press star 1 on your phone.
Speaker Change: As a reminder, this call is being recorded. Now, I will turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analysis and Investor Relations. You may begin, sir. Thank you and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer, and Wissam Jabre, Chief Financial Officer.
Speaker Change: Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on management's current assumptions and expectations.
and as such does include risks and uncertainties.
Speaker Change: These forward-looking statements include expectations for our product portfolio, our business plans and performance, the separation of our flash and HD businesses, ongoing market trends, and our future financial results.
We assume no obligation to update these statements.
Speaker Change: Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations.
We will also make references to non-GAAP financial measures today.
Speaker Change: 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.
David Goeckeler: With that, I will now turn the call over to David for introductory remarks.
Speaker Change: Thanks, Peter. Good afternoon, everyone, and thank you for joining the call to discuss our second-quarter fiscal year 2025 performance.
Speaker Change: As many of you know, with the completion of our separation later in the fiscal third quarter, I will become the CEO of SanDisk. As a result, this will be my last earnings call as the CEO of Western Digital.
Speaker Change: Before we dive into our second quarter results, I want to express my gratitude to our employees, customers, partners, and shareholders for their unwavering support throughout my tenure.
Speaker Change: It has been an honor and a privilege to serve as the CEO of Western Digital, and I'm immensely proud of what we've accomplished together to position both of our franchises for long-term success as standalone companies.
Now, on to the results.
Speaker Change: For the second fiscal quarter, Western Digital delivered revenue of $4.3 billion, non-GAAP gross margin of 35.9%, and non-GAAP earnings per share of $1.77.
Speaker Change: Our commitment to enduring quality and reliability, driven by our industry-leading innovation and diversified portfolio, has enabled us to navigate the current market dynamics effectively.
Speaker Change: While our HDD business is experiencing robust growth, particularly in high-capacity enterprise drives, our flash segment faces temporary headwinds due to pricing pressure.
Speaker Change: Despite these challenges, we are strategically well positioned to capitalize on growing long-term storage demand from the AI data cycle.
Speaker Change: Our HDD business continues to perform well, propelled by our cutting-edge Ultra-SMR technology. This innovation allows us to push the boundaries of storage capacity while maintaining the gold standard in reliability, quality, and performance.
Speaker Change: The market has responded to our products enthusiastically, driving our HDD revenues to a 12-quarter high with a record non-GAAP gross margin.
Speaker Change: We're seeing increasing adoption of our newer and higher density drives, underscoring their ability to meet the evolving demands of the storage market.
Speaker Change: I'm pleased to report that we're in the final stages of our plan to separate our flash and HDD businesses and expect this to be completed on schedule.
Speaker Change: During the second fiscal quarter, we achieved two crucial milestones, completing our Form 10 filing and finalizing key financing activities necessary for the separation.
Speaker Change: Thanks to the meticulous planning and dedication of our teams, we're ready to operate as independent entities.
Speaker Change: We invite you to join us for our upcoming investor days on February 11th for Sandisk and February 12th for Western Digital, where our respective management teams will share their strategic visions and demonstrate how each business will drive shareholder value as standalone entities.
Speaker Change: Turning to our business units update. In flash, revenue was stable and in line with expectations.
Speaker Change: Strengthened client and consumer resulted in better than expected bit shipments.
Speaker Change: However, increased pricing pressure due to short-term oversupply from increased utilization rates throughout calendar year 24, coupled with customers working down inventory, offset our bit shipment results.
Speaker Change: Cloud pricing was a positive given continued AI-driven demand. Taken together, the result was sequential decline in profitability.
Speaker Change: In fiscal year 2024, consumer experienced growth across revenue, units, and gross margins as the end market benefited from a market recovery.
Speaker Change: While revenue and units grew sequentially in the fiscal second quarter of 2025, gross margin declined due to pricing pressure caused by oversupply in the broader NAN market.
Speaker Change: Despite this recent softening, our external SSD drive shipments grew 50% sequentially.
Speaker Change: Our efforts in bolstering consumer preference, expanding partnerships, and launching our new Creator Series at CES all provide SanDisk with the right foundation to drive organic demand and margin expansion.
Now turning to the flash outlook.
We believe that we are currently in a mid-cycle pause.
Speaker Change: In the fiscal third quarter, we expect BIT shipments to be down, with stronger demand in data center and mobile, more than offset by lower BIT shipments in PCoEM and consumer.
Speaker Change: Given the stronger-than-anticipated pricing headwinds, we are proactively managing production levels to respond to ongoing inventory adjustments and evolving demand dynamics across our end markets.
Speaker Change: By optimizing utilization and total capacity, with a key focus on delivering premium nodes, we aim to accelerate stabilizing profitability in this dynamic market.
Speaker Change: In this new era of NAND, with lower utilization and less intense CAPEX environment relative to historical periods,
Speaker Change: We are seeing supply growth appropriately responding to the current short-term headwinds affecting demand, and we expect to see a recovery as we move through calendar year 2025.
Speaker Change: Specifically, we expect Client Inventory Digestion to continue into the first half of calendar year 25, with normalization in the second half paving the way for recovery that will enable the AI-driven PC RAM in the Windows refresh cycle to gain momentum.
Speaker Change: In Datacenter, we project Cloud CapEx to continue to grow in calendar year 25, and we continue to make good progress qualifying our cloud products with customers to capture our fair share of this market.
Speaker Change: Lastly, our consumer business continues to perform well, and while we expect seasonal weakness in BIT shipments, our premium brands are providing ASP support to the overall portfolio.
Speaker Change: We look forward to discussing our views on the flash business at the SanDisk Investor Day on February 11th.
Speaker Change: The team and I will discuss why we believe that our markets are strong and growing, how rapid adoption of AI is creating new opportunities, what differentiates SanDisk and how the flash industry is evolving. We are very excited and believe you will be as well.
Speaker Change: Our HDD business delivered another quarter of strong performance with data center revenue hitting an all-time high. This achievement underscores the strength of our near-line storage solutions and how well positioned we are to benefit from ongoing market tailwinds.
Speaker Change: The HDD business also achieved record gross margins as customers continued to increase the adoption of our higher capacity drives and we shared in the TCO benefit provided by our innovative products.
Speaker Change: We are operating in an environment where demand for a product exceeds supply.
to actively manage this. [inaudible]