Q3 2026 Western Digital Corp Earnings Call

April 30, 2026

Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's Q3 fiscal 2026 Conference Call. Presently, all participants are in listen-only mode. Later, we will conduct a question and answer session. At that time, if you would like to ask a question, you may press star one on your phone. As a reminder, this call is being recorded. Now I'll turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin.

Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's Q3 Fiscal 2026 Conference Call. Presently, all participants are in listen-only mode. Later, we will conduct a question and answer session. At that time, if you would like to ask a question, you may press star one on your phone. As a reminder, this call is being recorded. Now I'll turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin.

Speaker #1: Good afternoon, and thank you for standing by. Welcome to Western Digital's third quarter fiscal 2026 conference call. Presently, all participants are in listen-only mode.

Speaker #1: Later, we will conduct a question-and-answer session. At that time, if you would like to ask a question, you may press star 1 on your phone.

Speaker #1: As a reminder, this call is being recorded. Now I'll turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin.

Speaker #2: Thank you and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer, and Kris Sennesael, WD's Chief Financial Officer. Before we begin, please contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties.

Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer, and Kris Sennesael, WD's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual 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. In our prepared remarks, our comments will be related to non-GAAP results on the continuing operations basis unless stated otherwise.

Speaker #2: These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results, we assume no obligation to update these statements.

Speaker #2: Please defer to our most recent annual 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 defer materially from expectations.

Speaker #2: In our prepared remarks, our comments will be related to non-GAAP results on the continuing operations basis unlisted otherwise. 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 at investor.wdc.com.

Ambrish Srivastava: 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 at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to WD as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving?

Speaker #2: Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to WD as a company and not speaking on behalf of the industry.

Speaker #2: With that, I will now turn the call over to Irving for introductory remarks. Irving?

Speaker #3: Thanks, Ambrish, and good afternoon, everyone, and thank you for joining us today. WD started calendar year 2026 with great execution. Driving strong sequential and year-over-year revenue growth in our cloud, consumer, and client businesses, while expanding gross and operating margins.

Irving Tan: Thanks, Ambrish, good afternoon, everyone, and thank you for joining us today. WD started calendar year 2026 with great execution, driving strong sequential and year-over-year revenue growth in our cloud, consumer, and client businesses, while expanding gross and operating margins. Gross margin exceeded 50%, driven by our continued innovation and focus on improving total cost of ownership for our customers through higher capacity drives and increased adoption of our UltraSMR products. With strong operating leverage, lower interest expense, and efficient tax structure, these efforts resulted in nearly doubling of our EPS compared to last year. These results underscore our commitment to leading-edge innovation and strong execution. This is an exciting time to be part of WD, a focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy.

Speaker #3: Gross margin exceeded 50%, driven by our continued innovation and focus on improving total cost of ownership for our customers through higher capacity drives and increased adoption of our ultra-SMR products.

Speaker #3: With strong operating leverage, lower interest expense, and an efficient tax structure, these efforts resulted in nearly doubling our EPS compared to last year. These results underscore our commitment to leading-edge innovation and strong execution.

Speaker #3: It is an exciting time to be part of WD. A focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy.

Speaker #3: We are well positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand. Looking at the bigger picture, it is clear that data, and data storage, are becoming more critical and valuable.

Irving Tan: We're well-positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand. Looking at the bigger picture, it is clear that data and data storage are becoming more critical and valuable. As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly 2/3 of all AI compute. This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage. The scale of what is happening is also considerable. One leading hyperscaler's LLM processes over 16 billion tokens per minute via direct API used by their customers, while another AI company processes over 2.5 billion prompts every single day from 900 million active users.

Speaker #3: As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly two-thirds of all AI compute.

Speaker #3: This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage. The scale of what is happening is also considerable.

Speaker #3: One leading hyperscaler's LLM processes over 16 billion tokens per minute via direct API used by their customers. While another AI company processes over 2.5 billion prompts every single day from 900 million active users.

Speaker #3: While the resources that are used to create tokens are recycled, the data that is being created must be stored. Every token, every prompt, and every query answered and checkpoint saved creates data that requires persistent, scalable, and cost-efficient storage.

Irving Tan: While the resources that are used to create tokens are recycled, the data that is being created must be stored. Every token, every prompt, and every query answered and checkpoint saved creates data that requires persistent, scalable, and cost-efficient storage, and the majority of this data is stored on hard disk drives. As we look ahead, we see the rise of agentic AI, the next wave and arguably the biggest yet. What we are seeing with agentic AI frameworks represents a structural shift from AI that answers questions to AI that continuously executes workflows. That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored. As a result, we expect agentic AI to drive a step function increase in capacity-orientated storage demand, particularly in cloud and enterprise environments.

Speaker #3: And the majority of this data is stored on hard disk drives. As we look ahead, we see the rise of agentic AI. The next wave and arguably the biggest yet what we are seeing with agentic AI frameworks represents a structural shift from AI that answers questions to AI that continuously executes workflows.

Speaker #3: That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored.

Speaker #3: As a result, we expect agentic AI to drive a step-function increase in capacity-oriented storage demand, particularly in cloud and enterprise environments. Beyond agentic AI, two more waves are building simultaneously: synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world inputs that seeded.

Irving Tan: Beyond agentic AI, two more waves are building simultaneously. Synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world input step seeders. Across industries, physical AI data factory frameworks are being designed to transform limited training data into larger synthetic datasets at scale for robotics, autonomous vehicles, and vision AI. Physical AI itself, robots, industrial systems, autonomous fleets, generates continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops. These forces are not additive. They are a compounding loop. Inference creates data, agents consume and generate more data. Physical AI creates data and trains synthetic models that create more data, and ultimately the loop accelerates. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high capacity, reliable, and high-performance storage on HDDs.

Speaker #3: Across industries, physical AI data factory frameworks are being designed to transform limited training data into larger synthetic data sets. At scale, for robotics, autonomous vehicles, and vision AI.

Speaker #3: And physical AI itself—robots, industrial systems, autonomous fleets—generates continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops.

Speaker #3: These forces are not additive. They are a compounding loop. Inference creates data; agents consume and generate more data. Physical AI creates data and trains synthetic models that create more data.

Speaker #3: And ultimately, the loop accelerates. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high-capacity, reliable, and high-performance storage on HDDs.

Speaker #3: This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. WD's technology and product roadmap are purpose-built to meet this growing demand.

Irving Tan: This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. WD's technology and product roadmap is purpose-built to meet this growing demand. As we shared on our Innovation Day in February, we continue to innovate to meet our customers' needs through a combination of capacity leadership and performance innovation. Our high-capacity drive roadmap now extends from our 44 terabyte HAMR and 40 terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes. On HAMR, we are accelerating our development, and we are now in qualification with 4 customers. We are qualifying our 40 terabyte EPMR drives with 3 customers and are on track to start volume production in H2 of calendar year 2026. With UltraSMR technology, which works across both EPMR and HAMR drives, we are expanding our customer base significantly.

Speaker #3: As we shared at our Innovation Day in February, we continue to innovate to meet our customers' needs through a combination of capacity leadership and performance innovation.

Speaker #3: Our high-capacity drive roadmap now extends from our 44-terabyte Hammer and 40-terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes.

Speaker #3: On HAMR, we are accelerating our development, and we are now in qualification with four customers. We are qualifying our 40-terabyte EPMR drives with three customers.

Speaker #3: And are on track to start volume production in the second half of calendar year year 2026. With ultra-SMR technology, which works across both EPMR and Hammer drives, we are expanding our customer-based significantly.

Speaker #3: Three of our largest customers now have adopted the technology. Two are already meeting nearly all of their exabyte demand with ultra-SMR, while the third is rapidly ramping in that direction.

Irving Tan: Three of our largest customers now have adopted the technology. Two are already meeting nearly all of their exabyte demand with UltraSMR, while the third is rapidly ramping in that direction. We plan to have all of our major customers qualified on UltraSMR by the end of calendar year 2027. We are delivering on major areal density improvements, along with a focus on performance innovation with our high-bandwidth drives. Customer response to our innovation has been very positive. Our high-bandwidth drives are currently sampling with two hyperscale customers, with an additional customer scheduled to start this quarter. Our Dual Pivot technology is being built specifically for new AI workloads, with an open API approach aimed at simplifying deployment at scale. Based on our industry-leading technology and product roadmap, we are well-positioned to support growing customer capacity, demand, and address their AI workload needs.

Speaker #3: We plan to have all of our major customers qualified on ultra-SMR by the end of calendar year 2027. We are delivering on major aerial density improvements, along with a focus on performance innovation with our high-bandwidth drives.

Speaker #3: Customer response to our innovation has been very positive. Our high-bandwidth drives are currently sampling with two hyperscale customers with an additional customer scheduled to start this quarter.

Speaker #3: Our dual pivot technology is being built specifically for new AI workloads, with an open API approach aimed at simplifying deployment at scale. Based on our industry-leading technology and product roadmap, we are well positioned to support growing customer capacity, demand, and address their AI workload needs.

Speaker #3: Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029. We continue to see strong demand from across our client-consumer and OEM enterprise customers as well.

Irving Tan: Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029. We continue to see strong demand from across our client consumer and OEM enterprise customers as well. In summary, the tailwinds shaping our industry today are both exciting and dynamic. At WD, we remain focused on meeting our customers' needs while enhancing the value proposition and delivering long-term shareholder value to our investors. With that, let me now hand it over to Kris to share our Q2 results and outlook for Q4.

Speaker #3: In summary, the tailwinds shaping our industry today are both exciting and dynamic. And at WD, we remain focused on meeting our customers' needs while enhancing the value proposition and delivering long-term shareholder value to our investors.

Speaker #3: With that, let me now hand it over to Chris to share our Q3 results, and outlook for Q4.

Speaker #1: Thank you, Irving. And good afternoon, everyone. The WD team delivered strong results, making solid progress against our strategic priorities with continued focus on innovation and disciplined execution.

Kris Sennesael: Thank you, Irving. Good afternoon, everyone. The WD team delivered strong results, making solid progress against our strategic priorities with continued focus on innovation and disciplined execution, while advancing key initiatives and remaining tightly aligned with our customers' growing exabyte demand. As we move forward, we are encouraged by our momentum and remain confident in our ability to deliver sustainable revenue growth, expand gross and operating margins, and create long-term value for our shareholders. During Q3 of fiscal 2026, revenue was $3.3 billion, up 45% year over year, driven by strong demand across all our end markets and an improved pricing environment. Earnings per share was $2.72, almost double compared to a year ago. Revenue, gross margin, and earnings per share were all above the high end of the guidance range.

Speaker #1: While advancing key initiatives and remaining tightly aligned with our customers' growing exabyte demand. As we move forward, we are encouraged by our momentum and remain confident in our ability to deliver sustainable revenue growth, expand gross and operating margins, and create long-term value for our shareholders.

Speaker #1: During the third quarter of fiscal 2026, revenue was $3.3 billion, up 45% year over year, driven by strong demand across all our end markets.

Speaker #1: And an improved pricing environment. Earnings per share was $2.72, almost double compared to a year ago. Revenue gross margin and earnings per share were all above the high end of the guidance range.

Speaker #1: We delivered $222 exabytes to our customers, up 34% year over year. This includes over $4.1 million drives, or $118 exabytes, of our latest generation EPMR, with capacity points up to 32 terabytes.

Kris Sennesael: We delivered 222 exabytes to our customers, up 34% year-over-year. This includes over 4.1 million drives or 118 exabytes of our latest generation EPMR with capacity points up to 32 terabytes. Demonstrating our ability to quickly ramp new technologies and products in support of strong customer demand growth. Cloud represented 89% of total revenue at $3 billion, up 48% year-over-year, driven by strong demand for our higher capacity nearline product portfolio and a stronger pricing environment. Consumer represented 6% of revenue at $186 million, up 24% year-over-year. Client represented 5% of total revenue at $179 million, up 31% year-over-year. Both client and consumer segments saw strong year-over-year exabyte growth and improved pricing. Gross margin for the fiscal Q3 expanded to 50.5%.

Speaker #1: Demonstrating our ability to quickly ramp new technologies and products in support of strong customer demand growth. Cloud represented 89% of total revenue at $3 billion, up 48% year over year, driven by strong demand for our higher-capacity nearline product portfolio and a stronger pricing environment.

Speaker #1: Consumer represented 6% of revenue at $186 million, up 24% year over year. Client represented 5% of total revenue at $179 million, up 31% year over year.

Speaker #1: Both client and consumer segments saw strong year-over-year exabyte growth and improved pricing. Gross margin for the fiscal third quarter expanded to 50.5%. Gross margin improved 1,040 basis points year over year, and 440 basis points sequentially.

Kris Sennesael: Gross margin improved 1,040 basis points year-over-year and 440 basis points sequentially. The drivers of strong gross margin performance include continued mix shift towards higher capacity drives, along with ongoing execution of our pricing strategy and tight cost control. Operating expenses were $397 million, or 11.9% to revenue, a 40 basis point sequential improvement, demonstrating further operating leverage in the model. The sequential increase of operating expenses was driven by the acceleration of R&D project expenses as we continue to expand our HAMR qualifications with more customers. Strong top-line growth, expanding gross margin, and leverage in the model drove operating income to $1.3 billion, up 116% year-over-year, translating into a strong operating margin of 38.6%, up 1,260 basis points year-over-year.

Speaker #1: The drivers of strong gross margin performance include continued makeshift towards higher capacity drives, along with ongoing execution of our pricing strategy, and tight cost control.

Speaker #1: Operating expenses were $397 million, or $11.9% to revenue, a 40 basis points sequential improvement demonstrating further operating leverage in the model. The sequential increase of operating expenses was driven by the acceleration of R&D project expenses, as we continue to expand our Hammer qualifications with more customers.

Speaker #1: Strong top-line growth, expanding gross margin, and leverage in the model drove operating income to $1.3 billion, up 116% year over year. Translating into a strong operating margin of 38.6%, up 1,260 basis points year over year.

Speaker #1: Interest in other expenses were $24 million, and our effective tax rate in the fiscal third quarter was 16%. Taking into account the diluted share count of 385 million shares, earnings per share was $2.72, an increase of 97% year over year.

Kris Sennesael: Interest and other expenses were $24 million. Our effective tax rate in the fiscal Q3 was 16%. Taking into account the diluted share count of 385 million shares, earnings per share was $2.72, an increase of 97% year-over-year. During the fiscal Q3, we significantly strengthened our balance sheet by monetizing 5.8 million shares of SanDisk, which led to a $3.1 billion reduction in our debt. As a result, only $1.6 billion of convertible debt remains outstanding. With $2 billion in cash and cash equivalents, we ended the quarter in a net positive cash position of $450 million. At quarter end, we still owned 1.7 million shares of SanDisk. Additionally, during the quarter, we received an upgrade from Standard and Poor's and Fitch to investment-grade level.

Speaker #1: During the third fiscal quarter, we significantly strengthened our balance sheet, by monetizing $5.8 million shares of SanDisk, which led to a $3.1 billion reduction in our debt.

Speaker #1: As a result, only $1.6 billion of convertible debt remains outstanding, and with $2 billion in cash and cash equivalents, we ended the quarter in a net positive cash position of $450 million.

Speaker #1: At quarter end, we still owned $1.7 million shares of SanDisk. Additionally, during the quarter, we received an upgrade from Standard & Poor's and Fitch to investment-grade level.

Speaker #1: Operating cash flow for the third fiscal quarter was $1.1 billion. And in combination with a disciplined approach to capital expenditures, with CapEx of $145 million, this resulted in strong free cash flow generation of $978 million for the quarter.

Kris Sennesael: Operating cash flow for the Q3 fiscal quarter was $1.1 billion. In combination with a disciplined approach to capital expenditures with CapEx of $145 million, this resulted in strong free cash flow generation of $978 million for the quarter and a free cash flow margin of 29%. During the quarter, we made $43 million of dividend payments and increased our share repurchases to $752 million, repurchasing 2.9 million shares of common stock. Since the launch of our capital return program in the Q4 of fiscal 2025, we have returned $2.2 billion to our shareholders by way of share repurchases and dividend payments.

Speaker #1: And a free cash flow margin of 29%. During the quarter, we made $43 million of dividend payments, and increased our share repurchases to $752 million.

Speaker #1: Repurchasing 2.9 million shares of common stock. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned $2.2 billion to our shareholders by way of share repurchases and dividend payments.

Speaker #1: Also, given the board and management confidence in the business, the board has approved a 20% increase of the cash dividend from $12.5 cents per share of the company's common stock to $15 cents per share.

Kris Sennesael: Also, given the board and management confidence in the business, the board has approved a 20% increase of the cash dividend from $0.125 per share of the company's common stock to $0.15 per share, payable on 17 June 2026 to shareholders of record as of 5 June 2026. I will now turn to the outlook for the Q4 of fiscal 2026. As we continue to operate in a strong demand and pricing environment with longer-term visibility across our cloud, consumer, and client businesses, we anticipate revenue to be $3.65 billion ± $100 million. At midpoint, this reflects a growth of 40% year-over-year. Gross margin is expected to be in the range of 51% to 52%.

Speaker #1: Payable on June 17, 2026, to shareholders of record as of June 5, 2026. I will now turn to the outlook for the fourth quarter of fiscal 2026.

Speaker #1: As we continue to operate in a strong demand and pricing environment, with longer-term visibility across our cloud, consumer, and client businesses, we anticipate revenue to be $3.65 billion, plus minus $100 million.

Speaker #1: At midpoint, this reflects a growth of 40% year over year. Gross margin is expected to be in the range of 51% to 52%. We expect operating expenses in the range of $385 million to $395 million.

Kris Sennesael: We expect OpEx in the range of $385 to 395 million. Interest and other expenses are anticipated to be $10 million. The tax rate is expected to be 16%. As a result, we expect diluted EPS to be $3.25 ±$0.15 based on a non-GAAP diluted share count of 385 million shares. In summary, this quarter's results and outlook highlight our commitment to disciplined execution, focus on innovation, and deep customer engagements. Our strengthened balance sheet and robust free cash flow empower us to invest with confidence in the business. With strong momentum and a clear capital allocation framework, we are well-positioned to drive durable earnings and free cash flow growth and create long-term shareholder value. With that, let's now begin the Q&A. Ambrish?

Speaker #1: Interest in other expenses are anticipated to be $10 million. The tax rate is expected to be 16%. As a result, we expect diluted earnings per share to be $3.25, plus minus $15 cents, based on a non-GAAP diluted share count of 385 million shares.

Speaker #1: In summary, this quarter's results and outlook highlight our commitment to disciplined execution, focus on innovation, and deep customer engagements. Our strengthened balance sheet and robust free cash flow empower us to invest with confidence in the business.

Speaker #1: With strong momentum and a clear capital allocation framework, we are well positioned to drive durable earnings and free cash flow growth, and create long-term shareholder value.

Speaker #1: With that, let's now begin the Q&A. Ambrish?

Speaker #2: Thank you, Chris. Operator, you can now open the line to questions, please. And to ensure that we hear from as many analysts as possible, please ask one question at a time.

Ambrish Srivastava: Thank you, Kris. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator?

Speaker #2: After we respond, we will give you an opportunity to ask one follow-up question. Operator?

Speaker #3: Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. If you have a question, please press *1 on your phone.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. If you have a question, please press star one on your phone. If you would like to withdraw your question, please press star two. One moment please for the first question. Today's first question comes from Erik Woodring at Morgan Stanley. Please go ahead.

Speaker #3: If you would like to withdraw your question, please press *2. One moment, please, for the first question. And today's first question comes from Eric Woodring at Morgan Stanley.

Speaker #3: Please go ahead.

Speaker #4: Great, guys. Thank you so much for taking my question. And Irving, congrats on the really nice results. I would love if you could maybe go into a bit more detail on the specific tailwinds that HDDs and Western Digital are seeing from Agentic AI.

Erik Woodring: Great, guys. Thank you so much for taking my question. Irving, congrats on the really nice results. I would love if you could maybe go into a bit more detail on the specific tailwinds that HDDs in Western Digital are seeing from agentic AI. Meaning exactly what parts of the workflow in agentic are ripe for HDDs. Again, just tying that back to your comment on greater than 25% long-term exabyte growth. You know, where does that go as a result of agentic AI? Thank you so much.

Speaker #4: Meaning exactly what parts of the workflow in Agentic are ripe for HDDs, and again, just tying that back to your comment on greater than 25% long-term exabyte growth.

Speaker #4: Where does that go as a result of Agentic AI? Thank you so much.

Speaker #3: Thanks, Eric, for the question. We really see three core drivers of HDD growth going forward. One that we've seen for quite a while right now, which is the ongoing storage requirements that's associated with training.

Irving Tan: Thanks, Erik, for the question. We really see three core drivers of HDD growth going forward. One that we've seen for quite a while right now, which is the ongoing storage requirements that's associated to training. That's not gonna end. Training will continue. Relearning, reinforcement, retraining is gonna happen. What we are seeing from our customers as they retrain and reinforce learning with these models, the quality of the model results that they get are improving. They continue to store all the data they're generating to enable improved quality of the model. That's one continued driver that we see. The second driver that we're seeing is obviously the rise of agentic AI and inferencing. With every inference that happens, new data is getting generated.

Speaker #3: So that's not going to end. Training will continue relearning, reinforcement, retraining is going to happen. And what we are seeing from our customers as they retrain and reinforce learning with these models, the quality of the model results that they get are improving.

Speaker #3: So they continue to store all the data they're generating to enable improved quality of the model. So that's one continued driver that we see.

Speaker #3: The second driver that we're seeing is obviously the rise of Agentic AI and inferencing. With every inference that happens, new data is getting generated.

Speaker #3: And what's happening is that all that new data that's getting generated is getting stored as well. To both feed back into training models and be stored to support future inference references as well.

Irving Tan: What's happening is that all that new data that's getting generated is getting stored as well to both feed back into training models, and be stored to support future inference references as well. That's the second key driver of what we're seeing, both in terms of agentic AI, and inferencing. The third driver that we see, for data storage for HDDs is obviously physical AI. As we've highlighted before, physical AI, with the limited data sets that it has, whether it's autonomous vehicles or robotics, is using AI to generate a lot of synthetic data to further train and enable, physical AI as well. Obviously, any data that's generated out of it gets stored and feeds that whole training and synthetic data development loop as well.

Speaker #3: So that's the second key driver of what we're seeing, both in terms of Agentic AI and inferencing. The third driver that we see for data storage for HDDs is obviously physical AI.

Speaker #3: As we've highlighted before, physical AI with the limited data sets that it has, whether it's autonomous vehicles or robotics, is using AI to generate a lot of synthetic data, to further train and enable physical AI as well.

Speaker #3: And, obviously, any data that's generated out of that gets stored and feeds that whole training and synthetic data development loop as well.

Speaker #3: So those are the three big drivers of growth that we see going forward, Eric. That's why we have the confidence to see exabyte growth going beyond 25% CACA going forward.

Irving Tan: Those are the three big drivers of growth that we see going forward, Erik. That's why we have the confidence to see exabyte growth growing beyond 25% CAGR going forward.

Speaker #2: Thank you, Eric. And did you have a follow-up?

Operator: Thank you, Erik. Did you have a follow-up?

Ambrish Srivastava: Thank you, Erik. Did you have a follow-up?

Speaker #4: Yeah, just a quick follow-up, Chris, for you. Over the last four quarters, you guys have really shown a lot of gross margin expansion. I think it's 260 basis points on average over the last four quarters.

Erik Woodring: Just a quick follow-up, Kris Sennesael, for you. You know, over the last 4 quarters, you guys have really shown a lot of gross margin expansion. I think it's 260 basis points on average over the last 4 quarters, and you just did 4.5 points of gross margin expansion. For the Q2, you know, guidance implies about 100 basis points of gross margin expansion. Just curious if there's conservatism baked into that forecast or if there are any emerging headwinds we need to consider, just given you should, you know, be accelerating cost downs and you're seeing really nice pricing growth. Just wanna get some context around the Q2 gross margin, please. Thanks so much, guys.

Speaker #4: And you just did 4.5 points of gross margin expansion. For the June quarter, guidance implies about 100 basis points of gross margin expansion. So just curious if there's conservatism baked into that forecast, or if there are any emerging headwinds we need to consider, just given you should be accelerating cost downs and you're seeing really nice pricing growth.

Speaker #4: So just want to get some context around the June quarter gross margin, please. And thanks so much, guys.

Speaker #3: Yes, Eric. First of all, I'm really pleased that we delivered strong gross margin in the third quarter and breaking into the 50% gross margin range with 50.5.

Kris Sennesael: Yes, Erik. First of all, I'm really pleased that we delivered strong gross margin in Q3 and breaking into the 50% gross margin range that with 50.5%. For Q4, we are guiding to 51% to 52%. Some further good improvement in the gross margins. If you look at the incremental gross margins on a year-over-year or quarter-over-quarter basis, for 3 quarters in a row now, and including a Q4, the quarter that we guided to, you see very strong incremental gross margins in the +70%, +75% range on a year-over-year and quarter-over-quarter basis. We believe that we will be able to continue to further improve gross margins.

Speaker #3: Four Q4, we are guiding to 51% to 52%. So some further good improvement in the gross margins if you look at the incremental gross margins, on a year-over-year or quarter-over-quarter basis, for three quarters in a row now, and including a fourth quarter, the quarter that we guided to, you see very strong incremental gross margins in the plus 70%, plus 75% range on a year-over-year and quarter-over-quarter basis.

Speaker #3: And so we believe that we will be able to continue to further improve gross margins. Obviously, we're only guiding one quarter at a time, but we definitely based on the strong pricing environment that we operate in, which is based on more and more value that we provide to our customers, as well as a better mix as we move to higher capacity drives with EPMR and later on, of course, moving to hammer drives, as well as more and more moving and driving adoption of ultra-SMR will give us further gross margin uplift and then, of course, we continue to execute well from an operations point of view.

Kris Sennesael: Obviously, we're only guiding one quarter at a time, we definitely, based on the strong pricing environment that we operate in, which is based on more and more value that we provide to our customers, right? As well as a better mix as we move to higher capacity drives with EPMR and later on, of course, moving to HAMR drives, as well as more and more moving and driving adoption of UltraSMR, will give us further gross margin uplift. Of course, we continue to execute well from an operations point of view. When you put it all together, very pleased with the gross margin and the gross margin trends going forward.

Speaker #3: And so when you put it all together, very pleased with the gross margin and the gross margin trends going forward.

Speaker #2: Operator, next question, please.

Operator: Operator, next question please. Thank you. Our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Ambrish Srivastava: Operator, next question please.

Speaker #3: Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Operator: Thank you. Our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Speaker #4: Yep. Thanks for taking my question and congratulations. Nice set of numbers here. I guess my first question is just on the pricing side. And I think on a per-terabyte basis, pricing was up like 8%, 9%, high single digits in March.

Amit Daryanani: Yep. Thanks for taking my question, and congrats on a nice set of numbers here. I guess my first question is just on the pricing side. I think, you know, on a per terabyte basis, pricing was up like 8%, 9%, high single digits in March. It's a big step up from the flattish trends I think we've seen in the last few quarters. Could you just help us understand what is sort of enabling this step up, and is it reflective of some of these LTA contracts that you have engaged in? Just trying to get a sense on, you know, really, Irving, if this is the new normal on pricing as we go forward.

Speaker #4: It's a big step up from the flattish trends I think we've seen the last few quarters. So, could you just help us understand what is enabling this step up?

Speaker #4: And is it reflective of some of these LTA contracts that you have engaged in? Just trying to get a sense on it really Irving, if this is the new normal on pricing as we go forward.

Speaker #3: Yeah. So Amit, thanks for the yeah, pricing was up 9% year on year. It reflects a couple of things. Obviously, the ongoing value that we're creating for our customers better TCO value as we sit our whole pricing philosophy is to be able to enable better TCO value for our customers and to be able to share in that value creation.

Irving Tan: Amit, thanks for that. Pricing was up 9% year-on-year. It reflects a couple of things. Obviously, the ongoing value that we're creating for our customers, better TCO value. As we said, our whole pricing philosophy is to be able to enable better TCO value for our customers and to be able to share in that value creation through pricing. As we highlighted at Innovation Day, as Kris highlighted also, we said that, as we move forward towards the latter part of calendar 2026, we would see pricing increase more towards the high single digit range. That's what you're seeing from us. That's really reflective of the timing of new LTAs coming on board.

Speaker #3: Through pricing, as we highlighted at Innovation Day, as Chris highlighted also, we said that as we move forward towards the latter part of calendar year '26, we would see pricing increase more towards the high single-digit range.

Speaker #3: And so that's what you're seeing from us, and that's really reflective of the timing of new LTAs coming on board, as well as, as we move forward to new periods of LTAs.

Irving Tan: As far as we move forward to new periods of LTAs, obviously we are about to deliver our next generation of ePMR in H2 of this calendar year. That will be a step up in capacity point that will deliver more TCO value. Therefore, we are able to share in better pricing as a result of that as well.

Speaker #3: Obviously, we're about to deliver our next generation of EPMR in the second half of this calendar year that will be a step up in capacity point that will deliver more TCO value so therefore we'll be able to share in a better pricing as a result of that as well.

Speaker #2: Yeah, follow-up, Amit?

Ambrish Srivastava: You have a follow-up, Amit?

Amit Daryanani: I do. Thank you, Ambrish. Maybe just on the other side of this, you know, cost per exabyte, I think, was down again 10%, give or take, in the quarter. Can you just talk about what is the right framework for us to think about cost per exabyte declines? Should we expect a bigger step down as you transition towards the higher density next gen ePMR end of this year? Thank you.

Speaker #4: I do. Thank you, Ambrish. Maybe just on the other side of this, cost per exabyte, I think, was down, again, 10%, give or take, in the quarter.

Speaker #4: Can you talk about what is the right framework for us to think about cost per exabyte declines? And should we expect a bigger step down as you transition towards the higher density next-gen EPMR at the end of this year?

Speaker #4: Thank you.

Speaker #3: Yeah, I think if you look at the cost down we delivered 10% year on year, and that's probably the right way to look at it.

Irving Tan: Yeah, I think if you look at the cost down, we delivered 10% year-on-year, that's probably the right way to look at it. Going forward, you know, we continue to be focused on delivering higher areal density. That's a big cost driver. As I mentioned, we will be introducing and wrapping up our next gen ePMR in H2 of the year. We also have a increasing uptake of customers on UltraSMR, which is a good cost driver for us as well. Obviously, we get a 20% uplift on capacity without the associated cost. By the end of fiscal year 2027, close to about 60% of all the exabytes that we ship will be on UltraSMR.

Speaker #3: Going forward, we continue to be focused on delivering higher aerial density. So that's a big cost driver, as I mentioned. We will be introducing and ramping up our next-gen EPMR in the second half of the year.

Speaker #3: We also have an increasing uptake of customers on ultra-SMR, which is a good cost driver for us as well. Obviously, we get 20% uplift on capacity without the associated cost by the end of fiscal year 27, close to about 60% of all the exabytes that we ship will be on ultra-SMR, our teams continue to work on platforming the products to drive further cost downs and also ongoing value engineering to see how we can further reduce elements high-cost elements of our bill of materials.

Irving Tan: Our teams continue to work on platforming the products to drive further cost downs and also ongoing value engineering to see how we can further reduce, you know, elements, high-cost elements of our bill of materials. Obviously the ongoing just supply chain efficiency that we have both from our procurement and manufacturing operations. If you put that all together, we feel confident that we can continue to sort of deliver the trend that we've just mentioned.

Speaker #3: And obviously, the ongoing just supply chain efficiency that we have both from our procurement and manufacturing operations if you put that all together, we feel confident that we can continue to sort of deliver the trend that we've just mentioned.

Speaker #2: Thank you, Amit. We can go to the next question, please.

Kris Sennesael: Thank you, Amit. We can go to the next question, please.

Ambrish Srivastava: Thank you, Amit. We can go to the next question, please.

Speaker #3: Absolutely. Our next question today comes from Aaron Reekers at Wells Fargo. Please go ahead.

Operator: Absolutely. Our next question today comes from Aaron Rakers at Wells Fargo. Please go ahead.

Speaker #5: Yeah, thanks for taking the question and congrats on the results. I want to go back to the 25% growth rate and think about as you see agentic AI drive incremental structural demand, maybe you can help us appreciate how you're thinking about the capacity to fulfill that demand.

Aaron Rakers: Yeah, thanks for taking the question and congrats on the results. I wanna go back to the 25% growth rate and think about, you know, as you see agentic AI drive incremental, you know, structural demand, maybe you can help us appreciate how you're thinking about the capacity to fulfill that demand. Is it a continued ability to just mix higher or is there a point in time where, you know, some capacity investment might have to play itself out?

Speaker #5: Is it a continued ability to just mix higher, or is there a point in time where some capacity investment might have to play itself out?

Speaker #3: Yeah, thanks for the question, Aaron. So maybe just to hit history on at this juncture, we still do not see any need to increase unit capacity.

Irving Tan: Yeah, thanks for the question, Aaron. Maybe, just to hit it straight on, you know, at this juncture, we still do not see any need to increase unit capacity, so we have no plans for that. Our focus is really to continue to improve areal density. As we introduce our next gen EPMR, which is a 40 TB drive, that'll be a 25% step up already from our current drives which are at the 32 TB capacity range. There's this opportunity to further mix up our customers as we've highlighted in the past as well. We've seen a acceleration of mixing up, and as we introduce the high capacity drives in the next 2 quarters, we'll see an acceleration of that going forward as well.

Speaker #3: So, we have no plans for that. Our focus is really to continue to improve aerial density. So as we introduce our next-gen EPMR, which is a 40-terabyte drive, that'll be a 25% step up already from our current drives, which are at the 32-terabyte capacity range.

Speaker #3: And then there's this opportunity to further mix up our customers as we've highlighted in the past as well. So we've seen an acceleration of mixing up.

Speaker #3: And as we introduce the high-capacity drives in the next two quarters, we'll see an acceleration of that going forward as well.

Speaker #2: Follow-up, Aaron?

Ambrish Srivastava: Follow-up, Aaron?

Speaker #5: Yeah, I do. Thanks, Ambrish. Maybe on the capital structure now with the debt for equity, transfer behind you, you've still got 1.7 million shares of SanDisk.

Aaron Rakers: Yeah, I do. Thanks, Ambrish. You know, maybe on the capital structure now with the debt for equity transfer behind you've still got 1.7 million shares of SanDisk. And I know that you increased your dividend, I think it was 20%, with this release. Kris, I'm kind of curious, you know, any updated thoughts how you're thinking about capital return, you know, building cash in a balance sheet versus maybe just returning what appears to be, you know, very strong free cash flow generation going forward. Thank you.

Speaker #5: And I know that you increased your dividend. I think it was 20% with this release. Chris, I'm kind of curious any updated thoughts how you're thinking about capital return building cash in a balance sheet versus maybe just returning what appears to be very strong free cash flow generation going forward.

Speaker #5: Thank you.

Speaker #3: Yes, Aaron, and I agree with you. We do have a very strong free cash flow and free cash flow margin. The free cash flow margin last quarter was 29%.

Kris Sennesael: Aaron, I agree with you. We do have a very strong free cash flow and free cash flow margin. The free cash flow margin last quarter was 29%, we're approaching our +30% or above 30% free cash flow margin. In terms of capital allocation and capital return to our shareholders, we're not changing our policy or our framework here. We are returning all the excess free cash flow back to the shareholders through a combination of our dividend program and share buyback program. As you have seen what we've done last quarter, we will continue to do so going forward. We are making an increase to the dividend with a 20% increase to $0.15 per quarter, we will continue to execute on our share buyback program.

Speaker #3: And so we're approaching our plus-30, or above 30%, free cash flow margin. In terms of capital allocation and capital return to our shareholders, we're not changing our policy or our framework here.

Speaker #3: We are returning all the excess free cash flow back to the shareholders through a combination of our dividend program and share buyback program as you have seen what we've done last quarter.

Speaker #3: We will continue to do so going forward. We are making an increase to the dividend with a 20% increase to $0.15 per quarter.

Speaker #3: And we will continue to execute on our share buyback program.

Speaker #2: Thank you, Aaron.

Ambrish Srivastava: Thank you, Aaron.

Speaker #3: Our next question today comes from Tom O'Malley at Barclays. Please go ahead.

Operator: Our next question today comes from Tom O'Malley at Barclays. Please go ahead.

Speaker #6: Hey, guys. Thanks for taking my question. Congrats on the good results. So I'm looking at SanDisk results which are out tonight too, and I'm seeing over 100% sequential pricing increases.

Tom O'Malley: Hey, guys. Thanks for taking my question. Congrats on the good results. I'm looking at SanDisk results which are out tonight, too, and I'm seeing, you know, over 100% sequential pricing increases. I know you guys got actual pricing already and it's sensitive, but just from a 30,000 foot view, maybe you could talk about, you know, with the gap kind of exploding between NAND and some of the hard drive players, you know, how much appetite do customers have to keep on taking pricing increases? What's your strategy there about how much you could push given the gap is moving higher? Then secondarily, you're hearing about some in the industry potentially doing Long-Term Agreements where you have upfront.

Speaker #6: I know you guys got asked on pricing already, and it's sensitive. But just from a 30,000-foot view, maybe you could talk about with the gap kind of exploding between NAND and some of the hard disk drive, players, how much appetite do customers have to keep on taking pricing increases?

Speaker #6: And what's your strategy there about how much you could push given the gap is moving higher? And then secondarily, you're hearing about some of the industry potentially doing long-term agreements where you have prepaid upfront.

Speaker #6: Could you maybe talk about your appetite to do that and what that would mean for the industry if you saw some of that? Thank you.

Tom O'Malley: Could you maybe talk about your appetite to do that and what that would mean for the industry if you saw some of that? Thank you.

Speaker #3: Thanks, Tom, for the question. So in terms of pricing, our pricing philosophy is really to provide predictable pricing. To our customers. The one thing that they appreciate and want to avoid is volatility in terms of pricing.

Irving Tan: Thanks, Tom, for the question. In terms of pricing, you know, our pricing philosophy is really to provide predictable pricing to our customers. The one thing that they appreciate and want to avoid is volatility in terms of pricing. Our whole focus is really to provide predictable pricing. As we said, as we deliver higher, more value to a better TCO, to higher capacity drives, as we deliver no-more innovation in terms of performance, whether it's throughput or bandwidth enhancements as we laid out in Innovation Day, that gives us the opportunity to create more value for our customers to be able to share in that through better pricing. Our whole philosophy is to ensure that we do that in a very predictable way. Why do we wanna do that? Predictable pricing enables our customers to make long-term architectural decisions.

Speaker #3: So our whole focus is really to provide predictable pricing as we said as we deliver higher more value to a better TCO to higher capacity drives as we deliver more innovation in terms of performance, whether it's throughput or bandwidth enhancements as we laid out in innovation day.

Speaker #3: That gives us the opportunity to create more value for our customers, to be able to share in that through better pricing. Our whole philosophy is to ensure that we do that in a very predictable way. Why do we want to do that?

Speaker #3: Because predictable pricing enables our customers to make long-term architectural decisions. And that's really our focus. And that gives us the confidence of why we are putting forward the roadmap that we have, why we're making the investments that we're making.

Irving Tan: That's really our focus, and that gives us the confidence of why we are putting forward the roadmap that we have, why we're making the investments that we're making. We're not looking at, for it to be, you know, optimistic from a pricing standpoint, but really provide that predictability of pricing, enable our customers to make those long-term architectural decisions that supports the structural change in the hard drive industry that we've been talking about going forward. To your question around LTAs, we continue to make progress in LTAs. We now have LTAs that extend into calendar year 2029 as well. Obviously, as we've shared in the past, those LTAs are exabyte based with a degree of pricing associated with it.

Speaker #3: So we're not looking at for it to be optimistic from a pricing standpoint, but really provide that predictability of pricing, enable our customers to make those long-term architectural decisions that supports the structural change in the hard drive industry that we've been talking about going forward.

Speaker #3: To your question around LTAs, we continue to make progress in LTAs. We now have LTAs that extend into calendar year '29. As well, obviously, as we shared in the past, those LTAs are exabyte-based with a degree of pricing associated with it.

Speaker #3: Obviously, the LTA volume that we are putting together for our customers does not meet the full requirement that they want. And anything that we can deliver above and beyond what we call the base volume requirement that we've agreed for our customers, that's subject to a different pricing regime that gives us an opportunity to drive some incremental upside from pricing as well.

Irving Tan: Obviously, the LTA volume that we are putting together for our customers does not meet the full requirement that they want, and anything that we can deliver above and beyond what we call the base volume requirement that we've agreed for our customers, that's subject to a different pricing regime that gives us an opportunity to drive some incremental upside from pricing as well.

Speaker #2: All right. No follow-up from Mr. O'Malley. We'll go to the next caller, please, operator. Thank you.

Ambrish Srivastava: All right. No follow-up from Mr. O'Malley. We'll go to the next caller, please, operator. Thank you.

Speaker #3: Absolutely. Our next question today comes from Asia Merchant with Citi. Please go ahead.

Operator: Absolutely. Our next question today comes from Asiya Merchant with Citigroup. Please go ahead.

Mike Cadiz: Hi, good afternoon. This is Mike Cadiz for Asiya Merchant at Citigroup. Congratulations on the quarter. My first question is, would you be able to provide any color or additional color on yields and reliability? As a result, are there any implications to the cost for the declines that we can think of?

Speaker #7: Hi. Good afternoon. This is Mike Qadir for Asia Merchant at Citi. Congratulations on the quarter. So my first question is, would you be able to provide any color or additional color on yields and reliability?

Speaker #7: And as a result, are there any implications to the cost per bit declines that we can think of?

Speaker #3: Sure. I mean, if you look at our EPMR products that we're shipping today and what we're anticipating as we go into volume realm in the second half of the year of our next generation EPMR, they continue to be in the 90% range, right?

Irving Tan: Sure. I mean, if you look at our EPMR products that we're shipping today and what we are anticipating as we go into volume ramp in the second half of the year for our next generation EPMR, they continue to be in the 90% range, right? Quality also, which has been one of our key considerations, remains very high. This is the hallmark of who we are as a company, high yields, known quality products, and that's something we'll continue to focus on, both in our EPMR products and in our HAMR products, which is the focus of our HAMR qualification right now to ensure we have the right reliability, we have the right quality, we have the right manufacturing yields as well. That remains constant.

Speaker #3: Quality also, which has been one of our key considerations, remains very high. This is the hallmark of who we are as a company—high yields, known quality, products.

Speaker #3: And that's something we will continue to focus on both in our EPMR products, which is and in our Hammer products, which is the focus of our Hammer qualification.

Speaker #3: Right now, to ensure we have the right reliability, we have the right quality, we have the right manufacturing yields as well. So that remains constant.

Irving Tan: Immediately in terms of current yields and quality, we don't see any changes.

Speaker #3: And immediately in terms of current yields and quality, we don't see any changes.

Speaker #2: Yeah. Follow-up, Michael?

Ambrish Srivastava: Follow-up, Mike?

Speaker #7: Yeah. I do think. So given the price differential currently between hard disk drive and flash, would you be able to attribute the strengths in HDD demand because of that?

Mike Cadiz: Yeah, I do. Thanks. Given the price differential currently between hard disk and flash, would you be able to attribute the strength in HDD demand because of that? Are you seeing any architectures changing, which I think you said at this point is not?

Speaker #7: And are you seeing any architectures changing which I think you said at this point is not?

Speaker #3: Yeah. Look, I think flash is a great technology. It has a specific role in the storage stack. We both play in slightly different spaces, right?

Irving Tan: Yeah, look, I think, you know, flash is a great technology. It has a specific role in the storage stack. We both play in slightly different spaces, right? If you look at large scale object storage, which requires long-term retention, that's where HDD really comes to the fore. That's 80% of all data that's stored within a hyperscale data center. If you look at workloads that require high IOPs, high throughput, that's where flash really comes to the fore. Even in inferencing, right, we saw a symbiotic relationship. The new data that's created from inferencing typically will get stored on HDDs. The vectoring data that's required for inferencing, that's actually stored on flash. It's a very symbiotic relationship. Obviously, some of the new innovations that we are delivering are high bandwidth drives.

Speaker #3: If you look at large-scale object storage, which requires long-term retention, that's where HDD really comes to the fore. That's 80% of all data that's stored within a hyperscale data center.

Speaker #3: If you look at workloads, that require high IOPS, high throughput, that's where flash really comes to the fore. And even in inferencing, right? It saw a symbiotic relationship.

Speaker #3: The new data that's created from inferencing typically will get stored on HDDs. The vectoring data that's required for inferencing, that's actually stored on flash.

Speaker #3: So it's a very symbiotic relationship. Obviously, some of the new innovations that we are delivering—our high-bandwidth drives, as an example, and our dual-pivot technology that will improve throughput and bandwidth—will continue to improve the performance of our HDDs and continue to deliver more value to our customers going forward.

Irving Tan: As an example, our Dual Pivot technology that will improve throughput and bandwidth, will continue to improve the performance of our HDDs and continue to deliver more value to our customers going forward. We don't see any, at this point, any major structural changes to architecture. That's why, again, we want to make sure there's predictability in the pricing we provide, so customers can make decisions not 1 year out, but they're making architectural decisions 2, 3 years, 5 years out as well.

Speaker #3: But we don't see, at this point, any major structural changes to architecture. But that's why, again, we want to make sure there's predictability in the pricing we provide, so customers can make decisions not one year out, but they're making architectural decisions two, three years, five years out as well.

Speaker #2: Thank you, Michael.

Ambrish Srivastava: Thank you, Mike.

Speaker #7: Thank you, Tim.

Mike Cadiz: Thank you.

Speaker #3: Thank you. Our next question today comes from Samek Chatterjee with JPMorgan. Please go ahead.

Operator: Thank you. Our next question today comes from Samik Chatterjee with J.P. Morgan. Please go ahead.

Speaker #8: Hi, thanks for taking my question. Maybe for the first one, if I can just ask you about the quarter—you obviously had a strong set of numbers, including both on revenue and gross margins coming in above the high end of your guide.

Samik Chatterjee: Hi. Thanks for taking my question. Maybe for the first one, if I can just ask you about the quarter. You obviously had a strong set of numbers here, including both on revenue and gross margins coming in above the high end of your guide. When I look at it, the outperformance on gross margin was a lot more relative to the outperformance on the high end of the revenue. Is there something more specifically going on with gross margins, maybe in terms of like cost reduction? What really outperformed rate of your expectations is probably where, what I'm trying to get to in terms of the magnitude of the outperformance is on those two metrics. Thank you.

Speaker #8: But when I look at it, the outperformance on gross margin was a lot more relative to the outperformance on the high end of the revenue.

Speaker #8: Is there something more specifically going on with gross margins? Maybe in terms of cost reduction? What really outperformed relative to your own expectations is probably where what I'm trying to get to in terms of the magnitude of the outperformances on those two metrics.

Speaker #8: Thank you.

Speaker #3: Yeah. And again, on gross margins, there are three major drivers. The first one is pricing and the pricing environment. That obviously continues to be very strong and was a little bit better during the quarter than we expected when we provided the guidance.

Kris Sennesael: Again, on gross margins, there's three major drivers. The first one is pricing and the pricing environment, that obviously continues to be very strong, and was a little bit better during the quarter than we expected when we provided the guidance. As we've indicated, not all the pricing going into the quarter is locked, we do have some opportunities, by the way, not only in our cloud business, but also in our client and consumer business, where we see further continued opportunities in terms of pricing. Secondly, mix, and there again, we're making good progress driving to higher capacity drives and more adoption of UltraSMR, that's playing out really well.

Speaker #3: As we've indicated, not all the pricing going into the quarter is locked, and so we do have some opportunities. By the way, not only in our Cloud business, but also in our Client and Consumer business, where we see further continued opportunities in terms of pricing.

Speaker #3: Secondly, mix and there again, we're making good progress driving to higher capacity drives and more adoption of ultra-SMR, and that's playing out really well.

Speaker #3: And then the teams continue to execute really well on driving down cost across the board throughout the supply chain. And so great execution during the quarter.

Kris Sennesael: The teams continue to execute really well on driving down costs across the board throughout the supply chain. Great execution during the quarter and I expect going forward similar levels of execution.

Speaker #3: And I expect going forward similar levels of execution.

Speaker #2: Yeah. Follow-up, Samek?

Ambrish Srivastava: You have a follow-up, Samik?

Speaker #8: Yes, please. So maybe just sort of then looking at the cost per exabyte and sort of a follow-up to Amit's question earlier, you're doing this sort of 10% decline in cost per exabyte right now.

Samik Chatterjee: Yes, please. Maybe just sort of looking at the cost per exabyte and sort of a follow-up to Amit's question earlier. You're doing this sort of 10% decline in cost per exabyte right now. As you start shipping the 40 terabyte EPMR and then eventually the HAMR drive, why shouldn't we expect that cost per exabyte to maybe declines to X rate? I'm just trying to think about the trajectory and as you ship those, sort of lower cost, over profiles, why shouldn't that trend sort of accelerate from where it is today? Thank you.

Speaker #8: As you start shipping the 40 terabyte EPMR and then eventually the Hammer drives, why shouldn't we expect that cost per exabyte to maybe decline to X rate?

Speaker #8: I'm just trying to think about the trajectory and as you ship those, sort of lower cost overall profiles, why shouldn't that trend sort of accelerate from where it is today?

Speaker #8: Thank you.

Speaker #3: Yeah. So we're first of all, we're only guiding one quarter at a time. But I have confidence that the teams will, again, continue to execute on those three levers that we have that I discussed.

Kris Sennesael: Yeah. First of all, we only guiding one quarter at a time. I have confidence that the teams will again continue to execute on those three levers that we have that I discussed just a moment ago. We're ramping the next generation EPMR in H2 of calendar year 2026. That's not that far out. As Irving already talked about that, we're feeling good about that ramp, the manufacturability and the yields there. The HAMR ramp, we're making really good progress on the qualifications. Now with 4 customers, getting really good feedback from the customers. We expect to ramp that in 2027.

Speaker #3: Just a moment ago, we're our ramping the next generation EPMR in the second half of calendar year 26. So that's not that far out.

Speaker #3: As Irving already talked about that, we're feeling good about that ramp. The manufacturability and the yields there. The Hammer ramp, we're making really good progress on the qualifications.

Speaker #3: Now we're four customers getting really good feedback from the customers. And we expect to ramp that in 2027. Still a little bit of work to be done in terms of yield and reliability and quality.

Kris Sennesael: Still a little bit of work to be done in terms of yield and reliability and quality, good progress being made by the operations teams. There is going to be an adoption curve, right? We're not switching overnight to those new products that are being launched, so the improvements will be phased in over us, over the ramp period.

Speaker #3: But good progress being made by the operations teams. There is going to be an adoption curve, right? We're not switching overnight to those new products that are being launched.

Speaker #3: And so the improvements will be phased in over the ramp period.

Speaker #2: Thank you, Samek.

Ambrish Srivastava: Thank you, Samik.

Ambrish Srivastava: Thank you.

Samik Chatterjee: Thank you.

Speaker #7: Thank you.

Operator: Our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Speaker #3: And our next question today comes from Wannsee Mohan with Bank of America. Please go ahead.

Operator: Our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Ashling Grenninger: Hi, this is Ashling Grenninger on for Wamsi. Congrats on the results. Just one question from me. You mentioned the UltraSMR JBOD platform as a way to broaden adoption beyond your current target base. Can you just talk about whether that primarily expands your reach into tier 2 CSP customers or enterprise customers? Just how material could this opportunity become over the next 1 to 2 years? Thanks.

Aisling Grueninger: Hi, this is Ashling Grenninger on for Wamsi. Congrats on the results. Just one question from me. You mentioned the UltraSMR JBOD platform as a way to broaden adoption beyond your current target base. Can you just talk about whether that primarily expands your reach into tier 2 CSP customers or enterprise customers? Just how material could this opportunity become over the next 1 to 2 years? Thanks.

Speaker #9: Hi. This is Ashley Gruninger, on for Wannsee. Congrats on the results and just one question from me. You mentioned the ultra-SMR JBOD platform as a way to broaden adoption beyond your current target base.

Speaker #9: Can you just talk about whether that primarily expands your reach into Tier 2 CSP customers or enterprise customers? And just how material could this opportunity become over the next one to two years?

Speaker #9: Thanks.

Speaker #3: Yeah. We definitely see it as an opportunity to expand our reach into Tier 2 CSPs, even some of the hyperscalers in the Asia. Region as well.

Irving Tan: We definitely see it as an opportunity to expand our reach into, you know, tier 2 hyper CSPs, even some of the hyperscalers in the Asia region as well. That's one of the enablers where we are forecasting by the time we get to end of calendar 2027, the vast majority of our key customers will all be on UltraSMR, either fully adopted or materially underway in terms of qualification. That gives us also the confidence, as I mentioned, by as we get to the end of fiscal 2027, close to 60% of the exabytes that we ship will be on UltraSMR.

Speaker #3: And that's one of the enablers where we are forecasting by the time we get to end of calendar year year 2027. The vast majority of our key customers will all be on ultra-SMR, either fully adopted or materially underway in terms of qualification.

Speaker #3: And that gives us also the confidence, as I mentioned, but as we get to the end of fiscal 27, close to 60% of the exabytes that we ship will be on ultra-SMR.

Speaker #2: Thank you, Ashley.

Ambrish Srivastava: Thank you, Ashling.

Speaker #3: Thank you. And our next question today comes from CJ Mews at Cantor Fitzgerald. Please go ahead.

Operator: Thank you. Our next question today comes from C.J. Muse at Cantor Fitzgerald. Please go ahead.

Speaker #10: Yeah. Good afternoon. Thank you for taking the question. Curious on the agreements, particularly as they extend out into 27, 28. And beyond, how should we think about pricing and what is embedded inside there?

C.J. Muse: Yeah, good afternoon. Thank you for taking the question. Curious, on the agreements, particularly, you know, as they extend out into 2027, 2028 and beyond, how should we think about pricing and what is embedded inside there? Is there a fixed kind of variable, different percentages or what?

CJ Muse: Yeah, good afternoon. Thank you for taking the question. Curious, on the agreements, particularly, you know, as they extend out into 2027, 2028 and beyond, how should we think about pricing and what is embedded inside there? Is there a fixed kind of variable, different percentages or what?

Speaker #10: Is there a fixed kind of variable kind of different percentages? Or what?

Speaker #3: Yeah. So CJ, thanks for the question. So the construct of the LT is broadly obviously, there's an exabyte volume tied to it. There's a pricing tied to it depending on the duration.

Irving Tan: Yeah. CJ, thanks for the question. The construct of the LTAs broadly are obviously there's an exabyte volume tied to it. There's pricing tied to it, depending on the duration. There may be periods of pricing adjustment as we introduce new capacity points, as we introduce new capabilities, that gives us the opportunity to adjust pricing going forward.

Speaker #3: There may be periods of pricing adjustment as we introduce new capacity points, as we introduce new capabilities. That gives us the opportunity to adjust pricing going forward.

Speaker #2: The follow-up, CJ?

Ambrish Srivastava: A follow-up, CJ?

C.J. Muse: Yes. Curious on the remaining SanDisk position, now that it's beyond 12 months, is that something that is now taxable? Any sort of implications of beyond that window? How are you thinking about, you know, timeframe in terms of monetization?

CJ Muse: Yes. Curious on the remaining SanDisk position, now that it's beyond 12 months, is that something that is now taxable? Any sort of implications of beyond that window? How are you thinking about, you know, timeframe in terms of monetization?

Speaker #10: Curious on the remaining SanDisk position, now that it's beyond 12 months, is that something that is now taxable? And any sort of implications of beyond that window?

Speaker #10: And how are you thinking about timeframe in terms of modernization?

Speaker #3: Yeah, so we still have 1.7 million SanDisk shares after we did the debt-for-equity monetization in Q3 of fiscal '26. It's our intention to monetize the remaining 1.7 million shares in an equity-for-equity transaction.

Kris Sennesael: Yeah. We still have 1.7 million SanDisk shares after we did the debt for equity monetization in Q3 of fiscal 2026. It's our intention to monetize the remaining 1.7 million shares in an equity for equity transaction. We've indicated it's our intention to do that before the end of calendar year 2026, and this will be in a tax-free manner.

Speaker #3: We've indicated it's our intention to do that before the end of calendar year '26, and this will be in a tax-free manner.

Speaker #2: Thank you, CJ.

Ambrish Srivastava: Thank you, CJ.

Speaker #3: Thank you. And our next question today comes from Carl Ackerman at BNP Paribas. Please go ahead.

Operator: Thank you. Our next question today comes from Karl Ackerman at BNP Paribas. Please go ahead.

Speaker #11: Yes. Thank you. I have one for Irving and one for Chris if I may, but I'll ask Irving first. Irving, when would Western Digital consider adding internal heads of media capacity to support these multi-year commitments from customers?

Karl Ackerman: Yes, thank you. I have one for Irving Tan and one for Kris Sennesael, if I may, but I'll ask Irving Tan first. Irving Tan, when would Western Digital consider adding internal head and media capacity to support these multi-year commitments from customers? For example, have you had discussions regarding prepayments for future capacity adds?

Speaker #11: For example, have you had discussions regarding prepayments for future capacity adds?

Speaker #3: Yeah. We definitely are looking at head and media investments as we said in the past. We're not adding we're not making any investments in terms of adding unit capacity.

Irving Tan: Yeah. We definitely are looking at head and media investments. As we've said in the past, we're not making any investments in terms of adding unit capacity. When we talk about areal density improvements or increasing the capacity per drive, that does involve technology investments to support new media recipes, new media substrate, new head designs as well, and the potential to increase disks over time as we've highlighted in our Innovation Day, where we are able to get to 14 disks over time. Now, our number 1 focus is to increase the terabytes per disk to make sure that it's very competitive within the industry. Then, beyond that, we will able to be able to add more platters to the drive as well. That's the most cost-effective way to deliver incremental capacity to our customers.

Speaker #3: But when we talk about aerial density improvements or increasing the capacity per drive, that does involve technology investments to support new media recipes, new media substrate, new head designs.

Speaker #3: As well, the potential to increase this over time as we've highlighted in our innovation day where we are able to get to 14 discs over time.

Speaker #3: Now, our number one focus is to increase the terabytes per disc to make sure that it's very competitive within the industry. And then beyond that, we were able to be able to add more platters to the drive as well.

Speaker #3: So that's the most cost-effective way to deliver incremental capacity to our customers. So we're definitely looking and if it makes economic sense, we'll look to add head and media capacity.

Irving Tan: We're definitely looking, and if it makes economic sense, we'll look to add head and media capacity in terms of investments, but not unit capacity investments.

Speaker #3: In terms of investments, but not unit capacity investments.

Speaker #2: Carl, you had a follow-up for Chris?

Ambrish Srivastava: Karl, you had a follow-up for Kris?

Speaker #11: Yes, I may. Chris, when you note that you have agreements extending into 2028 and 2029 with your major customers, could you delineate that with respect to build-to-order and LTAs?

Karl Ackerman: Yes, I may. Chris, when you note that you have agreements extending into 2028 and 2029 with your major customers, could you delineate that with respect to build to order and LTAs? For example, do you have build to order contracts addressing much of your nearline capacity this year or does it extend into 2027 as well? Thank you.

Speaker #11: For example, do you have build-to-order contracts addressing much of your nearline capacity this year? Or does it extend into 2027 as well? Thank you.

Speaker #3: Yeah. And so the manufacturing lead times is on or about a year. And so most of the purchase orders are being placed a year in advance.

Kris Sennesael: Yeah. The manufacturing lead times is around about a year, most of the purchase orders are being placed a year in advance. If you look beyond the first year, we are going into those LTA frameworks that has been explained by Irving before. There is still a little bit more variability beyond the first year.

Speaker #3: And then if you look beyond the first year, we are going into those LTA frameworks that has been explained by Irving before. So there is still a little bit more variability beyond the first year.

Speaker #2: Thank you. We'll go to the next question, please.

Ambrish Srivastava: Thank you. We'll go to the next question, please.

Speaker #3: Absolutely. Our next question today comes from Chris Sankar with TD Cowan. Please go ahead.

Operator: Absolutely. Our next question today comes from Krish Sankar with TD Cowen. Please go ahead.

Speaker #12: Hey, guys. This is Eddie for Chris. Irving, when you look across your four largest hyperscale customers, are you seeing demand patterns that are broadly similar?

[Analyst] (TD Cowen): Hey, guys. This is Eddie for Krish. Irving, when you look across your four largest hyperscale customers, are you seeing demand patterns that are broadly similar, or is there a meaningful divergence in how aggressively different customers are scaling based on their AI roadmaps? I'm just wondering if there's anything specific outside overall CapEx growing that is driving demand for HDDs.

Speaker #12: Or is there a meaningful divergence in how aggressively different customers are scaling based on their AI roadmaps? I'm just wondering if there's anything specific, outside overall CapEx growing, that is driving demand for HDDs.

Speaker #3: No, I would say in general, the profile is quite similar obviously as I've highlighted. The demand for storage is increasing because storage is persistent, right?

Irving Tan: No, I would say, in general, the profile is quite similar. Obviously, as I've highlighted, you know, the demand for storage is increasing because storage is persistent, right? If you look at it, if you talk about inferencing, the resources that are used in inferencing, whether it's compute or whether it's memory, they can get recycled. The data that's getting generated for inferencing is not being recycled. All that data that is getting generated is getting stored. That storage, the data that's being stored, is persistent. That is consistent with what we see with all our top four customers. Whether their business model is in search, or whether their business model is in advertising, or in the enterprise software space, it's pretty consistent.

Speaker #3: If you look at it, if you talk about inferencing, the resources that are used in inferencing, whether it's compute or whether it's memory, they can get recycled.

Speaker #3: But the data that's getting generated for inferencing is not being recycled. All that data is getting generated is getting stored. And that storage, that data, that's being stored is persistent.

Speaker #3: And that is consistent with what we see with all our top four customers. Whether they are business model is in search or whether their business model is in advertising, or in the enterprise software space, it's pretty consistent.

Speaker #3: It's really this ongoing data storage requirements to support training, improvements in training, to support the demands of inference, and to support synthetic data being driven by physical AI.

Irving Tan: It's really this ongoing data storage requirements to support training, improvements in training, to support the demands of inference, and to support synthetic data being driven by physical AI.

Speaker #2: Thank you, Eddie. Operator, we'll go to our last caller, please.

Ambrish Srivastava: Thank you, Eddie. Operator, we go to our last caller, please.

Speaker #3: Absolutely. Our last question for today comes from Jim Schneider at Goldman Sachs. Please go ahead.

Operator: Absolutely. Our last question for today comes from Jim Schneider at Goldman Sachs. Please go ahead.

Speaker #13: Good afternoon. Thanks for taking my question. I was wondering if you'd maybe talk about at some point in time in the future, let's say at the end of calendar 27, when you what level of coverage you would expect to be shipping in terms of hammer-on in terms of expedite shipments.

Jim Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe talk about, you know, at some point in time in the future, let's say at the end of calendar 2027, when you know, what level of coverage you would expect to be shipping in terms of HAMR on, in terms of exabyte shipments.

Speaker #3: Yeah. We don't have a number that we are putting out there right now, Jim. Obviously, our focus has been to, as we stated repeatedly, is to ensure we de-risk the transition for customers to hammer.

Irving Tan: Yeah, we don't have a number that we are putting out there right now, Jim Schneider. Obviously, our focus has been to, as we stated repeatedly, is to ensure we de-risk the transition for customers to HAMR. We have taken a slightly different path, where we have a dual-track process. We continue to deliver areal density improvement and high-capacity EPMR drives even as we introduce HAMR. That gives the customers both the confidence in the transition, but at the same time to be able to enjoy better TCO through the higher areal density. When we get to the right reliability, we get to the right yields, we'll make that transition accordingly to HAMR to make it the mainstream of exabytes that we ship.

Speaker #3: We have taken a slightly different path where we have a dual-track process. We continue to deliver aerial density improvement and high-capacity EPMR drives even as we introduce hammer.

Speaker #3: And that gives the customers both the confidence in the transition, but at the same time, to be able to enjoy better TCO through the higher aerial density.

Speaker #3: And when we get to the right reliability, we get to the right yields, we'll make that transition accordingly to hammer to become to make it the mainstream of exabytes that we ship.

Speaker #3: Yeah. And just to add there, we indicated we have now four customers in qualification with hammer. We are somewhat ahead of schedule. Compared to our initial plan, the feedback that we are getting from all our customers is very positive.

Kris Sennesael: Yeah, just to add there, we indicated we have now four customers in qualification with HAMR. We are somewhat ahead of schedule compared to our initial plan. The feedback that we are getting from all our customers is very positive, our HAMR development is going really well.

Speaker #3: And so our hammer development is going really well.

Speaker #2: Thank you, Jim.

Ambrish Srivastava: Thank you, Jim.

Speaker #3: Thank you. And that concludes our question and answer session. I'd like to turn the conference back over to Mr. Tan for any closing remarks.

Operator: Thank you. That concludes our question and answer session. I'd like to turn the conference back over to Mr. Tan for any closing remarks.

Speaker #13: Thank you. As we shared today, we're really excited about the opportunity ahead of us. And the roadmap that we've put forward in WD really positions us well to address our customer needs and the demands that they have going forward.

Irving Tan: Thank you. As we shared today, we, you know, we are really excited about the opportunity ahead of us. The roadmap that we've put forward in WD really positions us well to address our customer needs and the demands that they have going forward. I wanna take this moment to really thank all our WD drivers, our business partners for their commitment to our customers and all that they do for WD. Thank you again for joining us here today and hope all of you have a great rest of the day.

Speaker #13: I want to take this moment to really thank all of WD drivers, our business partners, for their commitment to our customers and all that they do for WD.

Speaker #13: So thank you again for joining us here today. And hope all of you have a great rest of the day.

Operator: Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect your lines.

Q3 2026 Western Digital Corp Earnings Call

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