Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Western Digital Corp (WDC, Financial) reported strong fiscal fourth-quarter revenue of $3.8 billion, up 9% sequentially and 41% year-over-year.
- Non-GAAP gross margin for the quarter was 36.3%, exceeding the high end of the guidance range.
- The company introduced industry-leading products, including a high-performance PCIe Gen 5 SSD and a 64 terabyte SSD, demonstrating continued innovation.
- WDC's HDD business surpassed its target gross margin range, driven by strength in nearline demand and improved pricing.
- The company is well-positioned to capitalize on the AI data cycle, which is expected to be a significant growth driver for both Flash and HDD.
Negative Points
- WDC anticipates incurring separation dis-synergy costs in the second half of the calendar year, impacting operating expenses.
- Consumer revenue decreased by 7% sequentially due to lower flash and HDD bit shipments.
- Inventory levels increased to $3.3 billion, with days of inventory rising from 119 to 126 days, indicating potential overstocking.
- The company faces ongoing challenges in the more transactional markets such as consumer and channel, affecting product mix and profitability.
- WDC's gross debt outstanding was $7.5 billion at the end of the fiscal fourth quarter, indicating a significant debt burden.
Q & A Highlights
Q: Can you speak to your contracted supply today, your pricing visibility into the second half of the calendar year, and whether that extends into calendar '25? How should we think about the progression of HDD gross margins as we go into September, December, and beyond?
A: We have good supply-demand balance and visibility throughout the rest of the calendar year. We have moved up our request to customers for a 52-week lead time on HDDs, which aligns our investment with customer demand. We continue to innovate and deliver better TCO to our customers, which will drive margins higher. (David Goeckeler, CEO)
Q: Can you talk about the dynamic of weaker volume but good pricing in NAND, and what do you think happens over the back half of the year with supply and demand for NAND?
A: In negotiated markets, we still see good pricing increases, especially in enterprise SSD. In more transactional markets, pricing is more dynamic due to weaker consumer demand. We expect strong demand in enterprise SSD and improvement in the PC market throughout the year. We see demand outstripping supply through the second half of the year and into next calendar year. (David Goeckeler, CEO)
Q: How do you view the balance sheet and prioritize free cash flow generated between now and the separation? Any updated thoughts on the appropriate leverage for each of the two segments?
A: We focus on strengthening the balance sheet by paying down debt. As we prepare for the separation, we will host Capital Market Days to discuss the capital structure in more detail. Each segment's capital structure will reflect their profitability, cash generation, and market dynamics. (Wissam Jabre, CFO)
Q: Is the dis-synergy cost all in operating expenses, or is there anything in COGS? How should we think about NAND ASP trends in the September quarter?
A: The dis-synergy costs are all in operating expenses, with minimal impact on COGS. For NAND ASPs, we expect them to be slightly up in the low single-digit percentage range for the September quarter. (Wissam Jabre, CFO; David Goeckeler, CEO)
Q: Can you speak to the breadth of customer design wins you have on enterprise SSDs and their impact on your portfolio mix?
A: We have separate products for different parts of the AI data cycle, including a high-performance PCIe Gen 5 Enterprise SSD and a 64 terabyte SSD. Both products are seeing significant interest and qualification at hyperscalers. Our enterprise SSD portfolio is strong and well-targeted to where the demand is. (David Goeckeler, CEO)
Q: On nearline HDD, do you think your market share gains are tied to your peer's transition from PMR to HAMR, or specific customer exposure? Do you have the capacity to meet demand in fiscal '25?
A: Our market share gains are due to delivering the highest TCO products. We have a robust road map and strong customer relationships. We are getting 52-week forecasts from customers, which allows us to plan capacity effectively. We are confident in our ability to meet demand. (David Goeckeler, CEO)
Q: Are you sitting at close to peak performance on HDDs? How should we think about HDD gross margins assuming exabytes keep growing?
A: The key is to continue innovating and delivering better TCO. We have a road map to deliver higher capacity drives and better value propositions. We believe the current performance is durable and will continue to drive margins higher. (David Goeckeler, CEO)
Q: Can you level set where you think hard disk drive and NAND margins could get to?
A: We expect margins in both businesses to continue improving. In NAND, we focus on strategic introduction of new nodes and innovation within nodes. In HDD, we see a structurally changed business with sustained demand and better business practices. We expect margins to go higher in a structural way. (David Goeckeler, CEO)
Q: How do you protect yourself against customers being overzealous with orders and then disappointing you down the road?
A: We maintain close relationships with our customers and monitor ordering patterns. We expect rational behavior from our customers, given the current demand environment and the need for visibility to set our manufacturing infrastructure. (David Goeckeler, CEO)
Q: Can you talk about the industry structure changes and how it reflects in your cost declines across both Flash and HDD businesses?
A: In HDD, we have reset the manufacturing base and improved cost per unit. In NAND, we continue to drive cost down through technology innovation. We feel very good about our R&D teams' ability to continue driving cost declines. (David Goeckeler, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
