Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Western Digital's Fourth Quarter Fiscal 2026 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Ambrish Srivastava, Vice President of Investor Relations. Please go ahead.

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 a continuing operations basis, unless stated 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. Lastly, I want to note that when we refer to we, us, our or similar terms, we are referring only to Western Digital 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?

Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Let me begin by reflecting on our first full fiscal year of WD as a focused pure-play HDD company. We drove strong year-on-year revenue growth of 36%, while expanding our gross and operating margins significantly. We doubled EPS and generated $3.5 billion in free cash flow and strengthened our balance sheet to a net positive cash position while continuing to make significant capital returns to shareholders. These strong financial results an outcome of meeting our customers' growing storage demand by focusing on innovation and driving operational excellence across the global WD organization. We enter fiscal year 2027, and with robust customer demand, increased visibility and continued confidence in the durability of demand as well as our ability to service this demand with our industry-leading products and technology road map. Demand for storage is being driven both by AI as well as our core cloud services. Within the AI infrastructure market, there is a key dynamic taking shape. While compute cycles can be reused, data compiled, training and inference workloads share and reuse compute resources over time, yet the data generated by these workloads, including model inputs, outputs, locks and retained contacts continues to accumulate. As AI usage scales, this creates a growing need for storage infrastructure capable of economically storing and managing this massive data sets. The inflection we have discussed in the past from AI training to inference to Agentic AI has only become more pronounced. Training models create significant initial data requirements, but inference generates and retains data continuously. Today, the largest AI platforms process tens of billions of tokens per minute, and billions of prompts per day, creating a rapidly expanding body of data that must be stored, managed and accessed over time. Recent disclosures show token volumes growing several full year-over-year underscoring the pace at which inference is scaling. Meanwhile, AI is moving rapidly from merely answering questions to agent AI that does the work coordinating task accessing data and operating continuously across multistep workflows. This transition creates a fundamentally more data-intensive workload and one that is increasingly persistent rather than transient. The storage implications are significant. Agents generate data at every step of the workflow, increasing both the volume of data created and the amount that must be stored over time. This is why we continue to view Agentic AI as a structural step function driver of capacity orientated storage demand. Beyond inference and Agentic AI, we are also seeing the emergence of physical AI, autonomous vehicles, robotics and industrial automation systems and humanoids, where the volume of real world data needed to train these systems is insufficient. Thereby requiring the generation and storage of synthetic data sets, creating another driver of storage demand. Infrastructure investment is important, but it's only the beginning. Training creates the initial data foundation. Inference generates data continuously. Agentic systems multiply the volume and frequency of that data and physical AI accelerates the cycle further. Together, these trends create a more durable demand environment for data storage, driven not just by building AI infrastructure, but by the continuous creation and retention of data once that infrastructure is deployed. As AI workloads move from deployment to sustained use, storage demand becomes less about a onetime infrastructure bill cycle and more about the compounding of data, that is the underlying secular demand growth driver for our business. Today, roughly 80% of data stored in hyperscaler data center resides on hard disk drives. That is likely to continue. That reflects what HDDs do exceptionally well, delivering the scale, economics and power efficiency required a long retention large-scale data storage. Let me now turn to why these secular growth drivers play to WD's strengths. WD's robust technology road map is based on the industry-leading are density per platter with a focus on innovation to meet our customers' capacity needs at scale, along with our growing ability to meet their requirements by providing cost-effective storage solutions in additional layers of the AI storage stack. We are on track to ship our 44 terabyte HAMR product in the first half of cal year 2027. Customer feedback on the qualification process continues to be very positive with the capacity, performance and reliability of our drives exceeding customer expectations. For our next-generation 40 terabyte ePMR drives, we commenced shipments in our June quarter, and are now entering volume production with two customers. We are currently ramping our out Ultra SMR technology with the third major customer. We expect that Ultra SMR will make up around 60% of our near line Exabyte shipments as we exit fiscal 2027. Since our last update, we have continued to broaden our customer engagement and qualification pipeline with additional hyperscaler and cloud customers advancing through qualification and deployment planning. Beyond capacity, we are also extending innovation into new layers of the AI storage stack. We are making progress on improving drive performance before high bandwidth drives and are now sampling with five customers, now getting up to 8x the throughput of today's drives without the corresponding increase in power drop, exactly the kind of performance the workloads require. In closing, the opportunity in front of us is real. And at WD, we are well positioned to capture it. Data creation isn't slowing. It's accelerating. And as the belly of data grows, does the infrastructure storage requirements to store, manage and protect it. That's a durable long-term tailwind for our business, and we intend to fully capitalize on it. Our technology road map is strong, our customer relationships are deep, and we have the operational discipline to translate this opportunity into sustained earnings and free cash flow growth and long-term shareholder value. With that, let me hand it over to Kris to walk you through the financials and our outlook for Q1.

Thank you, Irving, and good afternoon, everyone. Fiscal 2026 was an outstanding year for WD, driven by broadening demand, deepening customer engagements and disciplined execution. We grew revenue 36% to EUR 12.9 billion while expanding gross margins 970 basis points to 49.1% and increasing operating margins by 1,290 basis points to 37.3%. We more than doubled earnings per share to $10.22, and we generated $3.5 billion of free cash flow, delivering a robust 27% free cash flow margin. We returned $3.1 billion to shareholders, reflecting our confidence in the durability of the business and our commitment to long-term value creation. Let me now turn to our fourth quarter of fiscal '26. Revenue remained at $3.75 billion, up 44% year-over-year on the back of strong Exabyte growth and favorable pricing dynamics. Earnings per share grew 109% year-over-year to $3.56. Revenue, gross margin and EPS all came in at or above the high end of the guidance range. We delivered Exabytes to our customers, up 22% year-over-year. Nearline continued to drive our Exabyte growth, complemented by solid non-nearline Exabyte growth in the quarter. We began shipping the next-generation EPM drives with capacities up to 40 terabytes in our fiscal fourth quarter and expect a strong ramp over the next few quarters. Cloud represented 89% of total revenue at $3.3 billion, up 43% year-over-year as demand for our high cast nearline products was strong with a favorable pricing environment. Client represented 6% of total revenue at $225 million, up 61% year-over-year. Consumer represented 5% of revenue at EUR 187 million, up 38% year-over-year. Both segments benefited from improved pricing. Gross margin expanded 1,310 basis points year-over-year to 54.4%, resulting in strong year-over-year incremental gross margin. This was driven by a mix shift towards higher capacity drives, favorable pricing across our portfolio and disciplined execution in our manufacturing operations. During the quarter, the blended average year-over-year price increase per terabyte improved from high single digits last quarter to high teens this quarter, reflecting the impact of our predictable and sustainable pricing strategy as we deliver greater value to our customers. Operating expenses were $382 million or approximately 10% of revenue, a 170 basis point sequential improvement, demonstrating further operating leverage in the model. strong top line growth, expanding gross margins and leverage in the model drove operating income to EUR 1.66 billion, up 126% year-over-year, translating into a durable operating margin of 44.2%, up 1,610 basis points year-over-year. Interest and other expenses were $10 million, and our effective tax rate was $0.16. Taking into account the diluted share count of 388 million, earnings per share was $3.56, an increase of 109% year-over-year. Operating cash flow was $1.4 billion and CapEx was $108 million. This resulted in free cash flow generation of $1.3 billion for the quarter and a strong free cash flow margin of 34%. During the quarter, we completed the monetization of the remaining 1.7 million shares of SanDisk exchanging them for 4.8 million WD shares. Additionally, we repurchased 2.3 million shares of our common stock for a total of $1 billion. Our full year and fourth quarter repurchase numbers that we are describing on this call include $328 million to settle the conversion premium for some of our converts in cash rather than in stock, avoiding the issuance of roughly 773,000 new shares. We also did $54 million of dividend payments and we ended the quarter with $1.1 billion of debt and $1.6 billion of cash, resulting in a net positive cash position of $500 million. Lastly, the Board has declared a cash dividend of $0.15 per share of our common stock, which will be paid on September 17, 2026, to our shareholders of record as of September 8, 2026. I will now turn to the outlook for the first quarter of fiscal 2027. We continue to operate in a strong demand environment with improving longer-term visibility. And favorable pricing dynamics across our cloud, consumer and client end markets. We expect revenue to be $4.1 billion, plus/minus $100 million. At midpoint, this reflects a growth of 45% year-over-year. Gross margin is expected to be in the range of 55% to 56%. We anticipate operating expenses in the range of $390 million to $400 million. Interest and other expenses are expected to be $15 million. The tax rate is expected to be 17%. As a result, we expect diluted earnings per share to be $4, plus/minus $0.15 based on a non-GAAP diluted share count of 388 million shares. As we look ahead, we have high conviction in the drivers of demand, AI, cloud and the proliferation of data-intensive workloads continue to accelerate. On the supply side, our industry-leading technology and product road maps, combined with strong operational execution enabled us to deliver substantially more Exabytes to our customers. This does not require spending CapEx to add unit capacity, but we are making the necessary investments in our heads and media operations as well as an automation to increase our productivity. In summary, durable demand, disciplined supply and expanding margins position us to deliver sustained earnings growth, strong free cash flow and long-term shareholder value. With that, let's now begin the Q&A. Ambrish?

Thank you, Kris. 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. After which, we will give you an opportunity to ask one follow-up question.

[Operator Instructions] And our first question comes from CJ Muse from Cantor Fitzgerald.

It's hard not to compare your results with your main competitor, where they're seeing better sequential top line growth and targeting gross margin is nearly 200 bps higher than your September guide. So curious what you make of this? Is that due to their early ramp of HAMR, is it a difference in timing of contracts, perhaps you're selling fewer bits into the open market? Would love to hear your thoughts there and how you think about kind of gross margin acceleration from here? Do we need to kind of wait for HAMR in calendar '27? Or are there other drivers that can allow you to push higher?

Thanks for the question, C.J. there are always quarter-to-quarter variations in terms of gross margin because there's a whole range of factors that go into driving it. Obviously, timing of pricing in relation to the long-term agreement contracts is one. So there will always be timing differences on when existing LTAs expire and new LTAs kick in with different pricing regime. So that's one factor. Second will be the introduction of next-generation platforms. So we're very excited that we started shipping in Q4 up to 40 Terabyte ePMR drives. Right now, we are very much on track to hit 50% of nearline bids on that form by third quarter of year '27. So that will, again, will drive our ability to ship more higher capacity drives into the marketplace and provide some additional upside opportunity from pricing as well, and obviously, we continue to work on operational efficiencies like we normally do. So in short, there will always be quarter-to-quarter variations, but we feel very confident with the things that I mentioned in terms of the pricing structures that we have put in place with the introduction of our higher cap drives coming out in the second half of the year and our ongoing operational efficiencies that will lead to stronger Exabyte growth continuous top line growth and obviously ongoing margin expansion.

Do you have a quick follow-up, CJ, which wouldn't be a multipart question, please.

Yes, of course. Marvel hosted this session at Flash Memory Summit talking about the economically indispensable nature of HDDs in the AI data center. So curious with that as a backdrop, how is your visibility kind of improved? And how do you think it could improve further as you start signing contracts that renew.

Yes. Thanks for the question,. Look, I think we have strong visibility and increasingly strong visibility it's being customer driven to a large degree as well. The last time we reported on LTAs, we talked about having one LTA of a large customer all the way up to calendar year '29. But we're very much in the coals of discussions with customers to establish LTAs for calendar year '29, '30, and '31 as well. So visibility remains very strong. customer-driven demand for LTAs extending all the way out to '31 remains very strong. So we continue to work on them. I think we have very good line of sight in terms of the exabyte demand. What we're working through with them is more in terms of the pricing commercial construct of what those LTAs would look like going forward.

Our next question comes from Amit Daryanani from Evercore. .

I guess maybe the first one is exabyte shipments were up about 21%, I think, year-over-year to 21%, that's below the 30% exabyte growth you folks have had the last several quarters. Can you just talk about -- is this that can be pause related to timing or supply? Or does this sort of print a more normalized growth rate? And how do you think about exabyte growth through fiscal '27? .

Yes. I mean I think what we've guided to is a exabyte. We see demand growing at above 25%, right, 25% plus going forward. So we clearly have a road map that's designed to support that. That will, again, as I mentioned, similar to margins, we quarter-to-quarter fluctuations in terms of exabyte growth rates depending on the mix of products that we ship. And as we move into the second half of the year as we really ramp up the 40-terabyte shipments. As I mentioned, that will be over 50% of the nearline exabyte ship, we expect exabyte growth rate to accelerate. And then obviously, we have HAMR coming on in the second half of the year and in calendar '27 as well at a 44-terabyte level.

Yes. And just to add, I think in Q4, exabyte shipments were up 22% year-over-year and when you look at it on a full fiscal year '26, exabytes were up 25% year-over-year.

Do you have a follow-up, Amit? .

Just on the pricing side, right, price per provide went up pretty dramatically high teens year-over-year, Kris, I think you talked about this. Can you just talk about how do you think pricing is going to keep evolving from here? And maybe specifically the new LTA that you folks are signing, are they enabling this kind of high-teens pricing? Or is there more upside as we go forward? .

So I mean, I think we were beneficiaries of across-the-board pricing improvements, both in terms of our nearline products and obviously in the client consumer space as well. In terms of the near line, especially with our large customers, we've been very consistent in talking about predictable icing. And that's the strategy we continue to adopt. This will give them visibility to ensure that they can make long-term architectural decisions with the right economics underpin that. So -- but even then as we increase higher capacity drives, we provide better TCO value to them, that gives us an opportunity to increase pricing, but you'll see that on a very predictable basis going forward. . In terms of the non-nearline space, particularly in our client and consumer space, we saw a higher opportunity to increase pricing, predominantly driven by the pricing structures on alternative products that are flash based as well. So that resulted in a slightly higher pricing environment. Kris, do you want to -- anything you want to add to that?

No, I think you summarized it well. .

The next question comes from Aaron Rakers from Wells Fargo.

I guess in the building on the prior questions, it seems to me like you've got a product transition dynamic going on with the 40 terabyte ePMR drive. If I look at your cost structure, it looks like you saw a plus per terabyte that was more maybe flattish, down a little bit sequential. So I'm curious, as we move through this product transition, how should we think about cost per terabyte or cost of goods sold per terabyte progressing through '27? .

Yes. So Erin, the cost per terabyte in Q4 of fiscal '26, the quarter that we reported was down approximately 8% year-over-year. We've indicated before that cost per terabyte in the long-term will come down on or about 10% year-over-year. And the main driver, as Irving already explained, right, is the move to higher capacity drives better aerial density, which gives us a substantial reduction on a cost per terabyte. And as we execute in the near, mid and long-term, execute on our technology road map, execute on our product road map introduced the next-generation ePMR and introduce our HAMR products into the market, we will, over time, continue to see cost per terabyte coming down. follow-up.

Do you have a followup, Aaron.

I do. Maybe Kris, back to -- you've done a lot on the balance sheet, right? You've got a $1.1 billion left on kind of the debt. You've got $1.6 billion in cash. I'm just curious, how are you thinking about the capital structure from here? Is it pretty much 100% free cash flow return? Do you want to put more debt on the balance sheet? I'm just curious if any updated thoughts on that.

Yes. No change there to our strategy and our commitment to return the free cash flow back to the shareholders consistently with what we have been doing over the last 4 or 5 quarters through a combination of our dividend payments as well as our share repurchases. And so we're fully committed to those 2 programs.

Our next question comes from Wamsi Mohan from Bank of America.

I was wondering, Irving, just if you could maybe drill down a little bit on the mix comment that you made in the answer to one of the prior questions on the 22% exabyte growth because previously expected that those room deliver more exabytes in the quarter and the deceleration seems pretty strong. So I was hoping maybe you can double-click a little bit on your mix comment. At the same time, you're expecting obviously an acceleration here in your comments, both on a macro level as well as from your product cadence perspective. So anything you could give us in terms of what is changing in that mix very specifically, which caused maybe the slower growth in the quarter? I mean, 22% is pretty strong, but like definitely a deceleration and then further acceleration, like is there a near-term cap on that before you maybe start to ramp HARM?

Yes. So thanks for the question, Wamsi. A lot of it, as you know well, we have the large customers. And so different customers take different types of technology. So if there's a particular customer in a particular quarter, that takes a bit more CMR products, Obviously, that will mean we ship fewer bits into the marketplace for the number of units that we have, right? So in a different quarter where we have customers that are more ultra-smart heavy and for the same number of units, we're able to deliver much more exabytes into the marketplace. So there will always be variations quarter-to-quarter, and they don't buy on a very linear basis. It's a bit lumpy. So you will see sort of quarter-to-quarter variations within that. But from a medium- to long-term trajectory, we feel very confident about the ongoing exabyte growth, the ability to hit percentage growth trajectory that we shared, both in terms of the 40 Terabyte ePMR that we're ramping up very aggressively. Then obviously, we have the 44-Terabyte HAMR coming out in the first half of calendar '27, which we're ramping and obviously, we've indicated in our road map, we will have 50-Terabyte products coming out towards the second half of calendar '27.

And then if I could just follow up. When you look at your quarter-on-quarter gross margins from your guidance, not to beat a dead horse here, but year-on-year, you still are suggesting pretty strong incrementals. I get that. But is there anything specific within, again, mix and sort of pricing dynamic that is changing on a sequential basis? Or is the pricing dynamic something that should persist and it's more about just sort of the mix that's creating maybe not further upside to the gross margins? .

So definitely, again, quarter-to-quarter, there's going to be valuations. That's why I'm not really fixated on my sequential incremental gross margins. I look more on my incremental gross margins on a year-over-year basis. And just to put some numbers around that, right, in fiscal '25, on a full year basis, our incremental gross margin was 60% and in fiscal '26 -- the fiscal year that we just ended, incremental gross margins were 75% year-over-year, ending in Q4 with incremental gross margin year-over-year, 84%, 85%. And implied in the guide for Q1 is a year-over-year incremental gross margin of 80%, 81%. So I think we're executing really well on driving incremental gross margins, further improving the gross margins. I have high conviction that we will continue to improved gross margins for many quarters going forward based on everything what we've explained. There is very strong demand. We're moving to higher capacity drives that provides more value to our customers, and that enables us to increase our price per terabyte while at the same time driving down the cost per terabyte. And I think that's a great recipe for further gross margin improvements.

Our next question comes from Krish Sankar from TD Colin. .

My first one, Irving, clearly, your pricing is improving pretty well. You kind of mentioned customers asking for LTAs into 2029, '30, '31. I'm just wondering, with 90% of your bids going into cloud and most of them unto LTA extending longer, the velocity of price increases that you are seeing going from high single digits to high teens last quarter and probably 20% in September quarter, would that slow down because most are under LTA? Or do you think there's still flexibility where the velocity of price increases could still increase? .

Yes. Thanks for the question. As I pointed out, I think if you talk about the cloud business, as you pointed out, quite a significant amount of it is under LTA. Obviously, not every LTA starts sense at the same time. So we will see price adjustments from LTAs even as we go through the fiscal year depending on when the contracts kick in with the new pricing, and it's obviously dictated by some of the new platforms we introduced into the market. And to reiterate our whole pricing strategy there to make sure it's predictable, and we give a lot of visibility to our customer. Where we've seen a bit more ability to drive more rapid price increases has been in the non-nearline space. If we fast forward that to what we're looking at into what we're discussing with customers on '29, '30, '31, we've -- we're working through the specific commercial constructs of the LTAs, but we have a good line of sight and visibility to the volume requirements of our customers that sort of further strengthened our conviction on that 25% plus exabyte growth. What we're working through is the pricing regime of how we would effect that for those years going forward. In short, I think there's still a lot of opportunity for us to deliver more value to our customers, deliver better TCO and be able to benefit that through pricing as we've always stated we would do.

Do you have a follow-up, Krish? .