Western Digital Corporation

gap financial measures today. Reconciliations between the non-gap and comparable gap financial measures are included in the press release and other materials that are being posted in the investor relations section of our website. With that, I'll now turn the call over to David for his introductory comments.

Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our fourth quarter and fiscal year 2021 results. We reported solid fourth quarter results with revenue of 4.9 billion, non-GAAP gross margin of 33%, and non-GAAP earnings per share of $2.16, all above the guidance ranges we provided in April. The upside was primarily driven by record demand for our capacity enterprise hard drives. Fiscal year 2021 revenue totaled $16.9 billion, And we reported non-GAAP earnings per share of $4.55. Last March, I joined Western Digital with a strong conviction in the digital transformation that is reshaping every industry, every company, and every person's day-to-day life. At that time, we were in the early stages of the pandemic. Today, the accelerated digital transformation that has occurred during this period has created a world that is more technology-enabled and technology-dependent than ever before. The increasing value and importance of data is undeniable, and Western Digital will continue to capitalize on this opportunity as the only provider of both flash and hard drive solutions. Our ability to provide this diverse range of technologies enables us to drive innovation from endpoints to the edge to the cloud and, combined with our commitment to delivering the highest quality products, is ultimately what sets us apart and allows us to deliver strong results. As we reflect on this fiscal year, I'm very proud of what Western Digital has accomplished. particularly in light of the fact that the pandemic impacted various aspects of our company and the supply chain. As a team, we made the changes throughout the year necessary to improve our focus, sharpen execution, and lay out the right strategic goals to place Western Digital in a position of greater strength. To achieve these goals, we created separate business units for our Flash and HDD technologies, led by two widely respected technology leaders. As a result of this renewed focus, we accelerated our innovation roadmap, built momentum in our energy-assisted hard drives, and continued to successfully ramp our second-generation NVMe Enterprise SSDs while working hard to complete additional customer qualifications. We were also able to successfully navigate through the pandemic capitalize on opportunities, and continue providing dependable, industry-leading products that are the cornerstones of the data economy. We continue to believe that we have the right foundation for success, the right market-leading products, the right customer base, and the unique ability to address two large and growing markets. That foundation continues to underspin the strength of our results and is propelling the business forward today, even as we manage through some of the lingering impacts from COVID. And while we saw incremental demand due to the emergence of Chia, our standout performance this quarter was primarily attributable to increasing demand from our cloud customers and the beginning of a recovery in enterprise demand, the breadth and quality of our product line, and our many routes to market. we feel we are well positioned to capitalize on the large and growing opportunities in front of us. With that, I'll now provide a recap of our Flash and HDD businesses as it relates to our fourth quarter results. In the fourth quarter, demand for our Flash products was greater than we could supply in a number of end markets. In the face of both component and NAND shortages, we continue to strategically shift bits to meet customer needs while driving growth in both revenue and gross margin. Within data center devices and solutions, demand for our NVMe Enterprise SSDs came in above our expectations, achieving strong quarter-over-quarter revenue growth. We are pleased with our progress in Enterprise SSDs as we completed a qualification at another cloud titan and are ramping the product more broadly. Within client SSD, We experience revenue growth as demand remains strong for notebooks and Chromebooks. This remains a large, growing, and important end market for Western Digital across our OEM, channel, and retail routes to market. Within gaming, demand from the latest generation of game consoles and our WD Black product line was robust as gamers continue to prefer our expanding lineup of customized solutions. Within Embedded Flash, we also experience growth in smart home devices, VR, automotive, and industrial. As the BIX5 ramp picks up and we achieve bit crossover late this year, we expect to see increased bit growth. Today, BIX5 is our most capital efficient node in the 3D era, and the ramp across our product lines will contribute to profitable growth. We have had incredible success with BICS4 from across cost and bit growth perspective and look forward to experience those same benefits with BICS5, highlighting once again the successful and important partnership we have with Keoksha. In HDD, we had our highest organic sequential revenue growth in the last decade, driven by the successful ramp of our 18 terabyte energy-assisted hard drive growing cloud demand, a recovery in enterprise spending, and to a lesser extent, cryptocurrency driven by Chia. This impressive performance is a reflection of our data center customers' confidence in our innovation engine for capacity enterprise hard drives. Shipments for our 18-terabyte hard drive nearly tripled sequentially, highlighting our leadership in the latest capacity point and the leading-edge energy assist technology underpinning it. These drives are fully commercialized, and we expect the 18-terabyte hard drive to be the workhorse for the fiscal year. I'm excited to announce a record shipment of over 104 exabytes in capacity enterprise hard drives, a 49% increase sequentially. This is a significant achievement for the business, as we have all of our largest customers qualified and are well into ramping our energy-assisted hard drives. In addition, client demand for desktop and smart video has been strong throughout the quarter due to improving OEM demand. While we are actively managing supply constraints, we expect strength in OEM to continue in the fiscal first quarter. Within retail, HDD demand was above expectations as we saw consumer interest grow for both at-home HDD storage and for smart video applications. There was also increased demand for hard drives due to proof of space cryptocurrencies, such as Chia, which emerged as a new vertical market at the beginning of the quarter. We believe proof of space cryptocurrency presents a great opportunity for us in the industry, but we are closely monitoring the sustainability of demand. Looking ahead, we strongly believe the fundamental technology shift that I referenced earlier is a sustainable trend. At the center of this innovation are ever-increasing intelligent devices, which are fueling exponential industry-wide growth in demand, all powered by the cloud. The ability to harness the data in both the device and in the data center is critical, highlighting the importance of our full range of storage solutions. Moreover, we believe we have the right portfolio to enable us to capture these opportunities, in particular, And as Dr. Siva Sivaram, President of Technology and Strategy, discussed in a webcast on July 15th, Western Digital's unique ability to deliver both H-E-D and flash solutions drives meaningful synergies across the business in four key areas, market, manufacturing, technology, and customer. And our new operating structure gives us the focus we need to capture our full potential. While we remain optimistic, there are several factors we are closely monitoring. Most importantly, we are actively managing the continued impact of the pandemic. The disruptions to the supply chain have presented a challenge across the industry and we continue to see shortages of certain components. Additionally, logistics remain a challenge as different geographies are in various stages of reopening. This has been a major contributor to increased lead times and may pose challenges in the future. As a result of the supply disruptions, logistics challenges, and increased lead times, we continue to face additional cost pressures. Despite these obstacles, we are working diligent to continue delivering to our customers while maintaining a disciplined approach to pricing. I'll now turn the call over to Bob to share details on our financial results.

Thank you, and good afternoon, everyone. As Dave mentioned, overall results for the fiscal fourth quarter were above the upper end of the guidance ranges provided in April. Total revenue for the quarter was $4.9 billion, up 19% sequentially and up 15% year-over-year. Non-GAAP earnings per share was $2.16. For the full fiscal year, revenue was $16.9 billion, up 1% from fiscal 2020. and non-GAAP EPS was $4.55, up 50% from last year. Looking at our end markets, client devices revenue was $2.2 billion, up 8% sequentially and up 13% year over year. On a sequential basis, we experienced revenue growth in both hard drives and flash and across every major product category, client HDDs, client SSDs, automotive, gaming, smart video, and industrial. Mobile revenue was essentially flat on a sequential basis. Moving on to data center devices and solutions, revenue was $1.8 billion, up 44% sequentially and up 6% from a year ago. New product ramps in this end market drove more than double the revenue growth from just two quarters ago. Revenue generated from our latest generation energy-assisted hard drives and enterprise SSDs contributed to the growth. Our capacity enterprise hard drives grew 49% sequentially, and our enterprise SSDs grew 39% sequentially. Demand for 18 terabyte energy-assisted hard drives was particularly strong, comprising nearly half of our capacity enterprise exabyte shipments. Finally, Client solutions revenue was $977 million, up 10% sequentially and up 42% from a year ago. Once again, revenue growth was broad-based across both HTD and Flash and all major product categories. Turning to revenue by technology, Flash revenue was $2.4 billion, up 11% sequentially and up 8% year-over-year. Flash ASPs were up 7% sequentially on a blended basis and up 4% on a like-for-like basis. Flash bit shipments increased 4% sequentially. Hard drive revenue was $2.5 billion, up 28% sequentially and up 22% year-over-year. On a sequential basis, total hard drive exabyte shipments increased 34%, while the average price per hard drive increased 18 percent to $97. As we move to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fourth quarter was 32.9 percent, up 5.2 percentage points sequentially. This was above the upper end of the guidance range provided in April. Our broad routes to market and ability to proactively shift bits to the most attractive end markets enabled us to expand our gross margin by 5.5 percentage points sequentially to 35.5%. Our hard drive gross margin was 30.3% up 5.3 percentage points sequentially. This also includes a COVID related impact of $32 million or approximately 1.3 percentage points. Operating expenses were $790 million within our guidance range. Operating income was $828 million, representing a 101 percent increase from the prior quarter and a 57 percent increase year over year. With our improving profitability, our tax rate in the fiscal fourth quarter was 9.2 percent, and the tax rate was 13.4 percent for fiscal year 2021. Earnings per share was $2.16. Operating cash flow for the fourth quarter was $994 million, and free cash flow was $792 million. Capital expenditures, which include the purchase of property, plant and equipment, and activity related to our flash joint ventures on our cash flow statement, was an outflow of $202 million. We expect gross CapEx for the next fiscal year to be approximately $3 billion and cash CapEx to be around $2 billion. In the fiscal fourth quarter, we paid off $212 million in debt, including a discretionary debt payment of $150 million. For the full fiscal year, we paid down a total of $886 million. Our gross debt outstanding was $8.8 billion at the end of the fiscal quarter. Additionally, we have already made a discretionary debt payment of $150 million in the fiscal first quarter. Our adjusted EBITDA, as defined in our credit agreement, was $3.6 billion, resulting in a gross leverage ratio of 2.4 times compared to 2.8 a year ago. As a reminder, our credit agreement includes $1 billion in depreciation add-back associated with the joint ventures. This is not reflected in our cash flow statement. Please refer to the earnings presentation on the investor relations website for further details. Our liquidity position continues to be strong. At the end of the quarter, we have $3.4 billion in cash and cash equivalents. In addition, we have unused revolver capacity of $2.25 billion. Moving on to our outlook, our fiscal first quarter non-GAAP guidance is as follows. We expect revenue to be in the range of $4.9 to $5.1 billion. We expect gross margin to be between 33 and 35 percent. We expect hard drive gross margin to be relatively flat. and we expect flash gross margin to improve sequentially. We expect operating expenses to be between $755 million and $785 million. Interest and other expense is expected to be approximately $70 million. The tax rate is expected to be between 11 and 12 percent in the fiscal first quarter and the fiscal year. We expect earnings per share to be between $2.25 and $2.55 in the first quarter, assuming approximately 317 million fully diluted shares outstanding. I'll now turn the call back over to Dave.

Thanks, Bob. As we close out fiscal year 2021, I am very pleased with how the Western Digital team successfully navigated dynamic market conditions brought on by the pandemic. While it has been a challenging time for all, we will continue to focus on driving innovation. When you combine the ramp of new innovative products into two very large and growing markets with our newly adopted organization structure, I am confident that our increased focus on execution will continue to propel us forward as the market leaders. Our diverse technology portfolio is the foundation of the data economy. And our unique ability to see the entire storage market enables us to move across the technology landscape to meet customers' needs and be the solution for their evolving storage challenges. With careful consideration of the health and safety of our employees, we're also keeping a close eye on the status of COVID-19. In particular, there are certain parts of Asia seeing a spike in cases, and we are working diligently to support our employees through this time. While it is a difficult situation, we'll continue to navigate the complexities presented by the pandemic while we drive innovation for customers and value for shareholders. Let's begin the Q&A session.

Ladies and gentlemen, as a reminder, if you have a question, please press star 1 on your phone. If you would like to withdraw your question, please press the pound key. So that we may take as many questions as possible, we ask that you limit yourself to one question. One moment please for the first question. We have a question from Joe Moore from Morgan Stanley. Please go ahead.

Great, thank you. I wonder if you could talk about the tightness in NAND that you referenced. To what degree is that a NAND issue versus controllers and kind of other components that go into NAND products?

Hey, Joe. Good to hear from you. So it's both. There's no doubt there's a shortage in controllers, and I think what we're doing is mixing the portfolio to get the most out of the controllers we have. It's also a shortage in NAND as well. So, I mean, we're mixing to get the best result we can, but... there's more demand that we're able to satisfy on the NAND side. So it's really, we're juggling both and balancing them to get the best result we can.

Okay, and as you guide for the September quarter, is the assumption that you're still kind of supply constrained for the whole quarter?

Yeah, we're still juggling both of those things, right? We have customers looking for upside. We're juggling that. Mix is a little different from quarter to quarter as well. So, yeah, when you roll all that together is how we get to where we're at in Q1.

Great. Thank you very much.

Sure thing.

Thank you. We have a question from Aaron Reckers from Wells Fargo.

Yeah, thanks for taking the question, and congratulations on the solid results. I want to ask about the hard disk drive. This is 49% sequential growth in your near-line capacity shift. I'm curious if how are you thinking about the sustainability of that demand? I think last quarter you talked a little bit about longer-term purchase agreements. And then if you can, underneath that, also, you know, any thoughts on how significant CHIA was as far as a contribution this last quarter? Thank you.

Yeah, thanks, Aaron. So we did see very, very strong demand from the cloud, and I think the product has been very well received. As we talked about, Energy Assist is fully commercialized now. We saw a very strong sequential growth of the 18T product. We continue to see strong growth in the second half, working with our customers. We expect continued growth in the business. The long-term agreements, I think probably the best way to think about that is we're working through the first cohort of those, and we expect to talk about the second cohort in the second half. And they're becoming more and more important because, Getting visibility into demand is very important, especially going forward as we're thinking about how to invest in additional head capacity to support the growth of the business, just the Exabyte growth. Chia was maybe one way to think about that. It was hitting us kind of right where we were on the call was I think the first week of it last quarter, probably a couple hundred million dollars of upside there. in the quarter due to CHEO.

Thank you.

Thank you. The next question comes from CJ Muse from Evercore.

Yeah, good afternoon. Thank you for taking the question. I guess I'm having a hard time reconciling the strong demand trends outlined here on the call with revenues only guided up 2% sequentially. So can you walk through, I guess, where you're seeing supply constraints both HDD and NAND, and are you seeing one more so than the other? And then perhaps to help us understand your, I presume, improving visibility, did your backlog grow sequentially into the June quarter, and do you expect it to grow again exiting September? Thank you.

Yeah, so it was an exceptional quarter on growth, and there is tightness across both portfolios. There's no doubt about that. We were pushing the factories very, very hard to get every drive we could out of it because there was demand for it. So when you look at it sequentially, we had a strong quarter, and we were basically able to to find sales for everything that we could produce. So when you look at sequential growth, I guess it's not surprising that there's not a huge amount of top-line growth there. But throughout the markets, we continue to... So hard drives, we see strength in the cloud. We're seeing really good strength in kind of mid-cap as well. It's not just at the top of the market. And on the flash side, again, we've got... we've got more customers looking for upside than we do the opposite. So the demand environment is good, and we're doing the best we can to satisfy as much as we can with the components we have and with the NAND available.

Our next question comes from Toshiya Hardy from Goldman Sachs.

Hi, good afternoon. Thanks so much for taking the question and congrats on the very strong results. I had a question on NAND. I think costs in the quarter were up a little bit on a sequential basis. I realize cost downs on a quarterly basis can be very lumpy and you're coming off a multi-quarter stretch of very strong cost downs. But curious what you saw in the quarter from a cost perspective in NAND. And I think in your prepared remarks, Dave, you talked about you know, your expectations for BICS 4, BICS 5, I'm sorry, being similar to BICS 4 as you ramp BICS 5 over the next 12 months, if you can kind of set expectations and how we should think about cost downs as you make that transition, that would be super helpful. Thank you.

Hey, Tosha, it's Bob. So in terms of the cost takedowns, we actually look at them mostly year over year, and we're a little bit ahead of the 15% goal we have for year over year cost declines, and continue to feel good, about 15% is the long-term goal. We are starting the nodal transition. We did this past quarter to BICS 5, and we'll continue to ramp that hard through the second half. As Dave mentioned, we expect to get to crossover in the fourth calendar quarter. So I think, you know, in terms of costs, I think we're in a good place.

Thank you.

Thank you. The next question comes from Carl Ackerman from Cohen.

Yes, good afternoon, gentlemen. I know forecasting ASPs is difficult, but your implied outlook seems to suggest a decline in hard drive pricing, similar with what you saw last year. And I was wondering, should we assume that your assumption for hard drive gross margins is driven by less favorable mix of retail drives And as you address that question, could you discuss the mix of long-term agreements you have in place today for near-line drives and whether those are negotiated both on price and volume or just volume? Thank you.

Hi, Carl. It's Bob. I'll start, and then Dave can add in. But in terms of the guide on hard drives, we aren't actually guiding specifically by segment. We had really good gross margins on hard drives this quarter, above 30%, and we're expecting our gross margins to be above 30% again in Q1. We feel good about that. And as we said, we really want to continue to improve from here. We're going to be very judicious in terms of how we add capacity because we want to continue to improve our margins over time.

Yeah, Carl, in the long-term agreements, we kind of think about those as setting a baseline for volume and price. It doesn't mean it's going to be everything that goes into a certain customer, but It sets a baseline and gives us some visibility over multiple quarters. Like I said, we're kind of working our way through the first cohort of those, and we'll be looking at the second ones in the second half of the year. And as I said, I do think they're becoming more important to give us the visibility we need on demand to make sure we make the right investments to support the ex-spike growth.

Thank you.

Hilda, can we get the next question, please?

Thank you. The next question comes from Mehdi Hosseini from SIG.

Yes, thanks for taking my question. The first one is for David. Over the past few quarters, you have exceeded your guide by 40%, 50%. And I understand there is the supply chain disruption and you want to be prudent, but perhaps there is also some level of conservatism That goes into your guide. And then on the, for Bob, I understand exit by shipment is improving into September quarter, but I do understand is why is gross margin guided sladdish? Thank you.

Yeah, I mean, there's always some natural conservatism, I think, in anything we do, but We also, you know, there's a fair amount of leverage in the model. In this quarter, we saw when we overachieved on the top line and we get benefit from the tax rate. And we also had a better pricing environment on drives than we expected, which was great. We took advantage of it. I think we had a market situation that was very, very dynamic. And the team really did a good job of managing through that and getting the most out of it we possibly could. So it was a very dynamic quarter. And also, we're still managing through COVID, which is, you know, there's still a lot of supply chain issues we're working through. I mean, we've been working through these for a long time now. and we're very good at managing that, but there is still some risk out there because of that, and so we want to be prudent around the whole business. But we feel good about where we're at. We're very happy with the quarter. Like I said, I think we got the most out of a good situation and, you know, really, really driven by strong demand on the cloud and bringing innovation to market. I mean, I think that's the way I think about this situation. We brought energy assist to market. You know, we've been talking about it for many quarters now. We've been giving a lot of visibility into the qualification process because it is new technology that's been worked on for a very, very long time. And I think our customers are responding very strongly to that, and we saw that in the results. And the sequential capacity enterprise exabyte shipments up 49%. to really a record level. So we feel really good about where the portfolio is at and customers are really responding to it.

So, Mehdi, on gross margin, I mean, first of all, we're really pleased with the 5.2 percentage point increase we had in gross margin going from Q3 to Q4. And if you look at the guidance for Q1, it's a range of 33% to 35%. So at the midpoint, we're still expecting to see improving gross margin. As I mentioned a few minutes ago, we're expecting hard drive gross margin to be above 30% again. And in terms of the flash side, it'll obviously improve. But the mix is different each quarter. And we're going to improve our gross margins and probably don't have quite as healthy a mix as we had in Q4. But again, still feel really good about the guidance range. And I think we'll deliver very good margin and very good profitability.

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

Yes, thank you and congrats on the really strong results. I was hoping maybe, I'm sorry if I missed this, but can you help handicap the magnitude of impact to top line and margins from the ongoing supply chain issues in the best way possible and also for the guide? Is there a way to handicap that? And Dave, you mentioned the couple of hundred million benefit in the quarter from CHIA. I was wondering, do you think that that sustains at some level as you look into your guide? Do you have any expectation baked in the guide as well? Thank you.

That that sustains from CHIA? You know, I think where CHIA had a big impact on the channel and inventory and You know, it's going to take a little while for that all to normalize, so I think you have a lingering impact there. We're certainly watching overall demand, but it's tapered off from where it was, let's say, mid-quarter. But clearly a space we're watching very closely. I'll ask Bob to comment as well. It's a little hard to handicap what I think you're asking, which is how much upside is there if we had all the components we could possibly get. I do think what we do is with what we have, we – We change the mix in the portfolio to get the best we can and put the product at the best route to market, whether it's in a channel or into retail or somewhere else where we can get the best return for that product. that particular component. But I don't know, Bob, do you have any way, not to put you on the spot, but do you have any way to handicap that from a numbers perspective?

No, it's really hard to say. I mean, as Dave said, I mean, particularly on the channel side, we shift a lot during the quarter. So our inventory levels are low there. You know, if you really force us to guess on the fourth quarter, maybe we missed out on $50 to $100 million in revenue. But it's very hard to quantify what we would have been able to do had we had all the controllers that we wanted. And as we look at Q1, I mean, we're expecting to be able to manage through the supply chain challenges like we have the last few quarters, and I don't really know. It's hard to quantify before we even get into the quarter what the supply issues may be, but we're going to work, and it'll be a very dynamic environment, and we feel good about the revenue guidance we gave.

Thanks, guys. If I could just quickly follow up. I was wondering just on the margin impact on the guide, right? So clearly there are a lot of moving pieces over here, but if you were to think about what impact, you know, COVID, Delta variant, some of the things that are happening in Asia, like how are you handicapping that in your margin impact on the guide? Thank you.

Well, certainly on the hard drive side, I'm expecting we're going to have the same logistics challenges we've had for the last year or so. So you're going to have something in the neighborhood of 1.2, 1.3 percentage points of headwind on the hard drive side. And we have to continue to work through the COVID situation from a factory perspective and supply chain perspective. And as Dave said, we've been doing it for a lot of quarters now, but the situation is not good in Asia, and we need to really, really make sure we're careful in terms of how we work through that.

Thank you.

Thank you. The next question comes from Jim Suva from Citigroup.

Thank you very much. With NAND pricing going higher, spot and contract and such, can you talk to us a little bit about your leverage or flow through to operating margins? Because I believe your costs should keep coming lower. Shipping costs, why high? It's hard to see them getting worse in the next few months ahead. So maybe if you can walk us through the model of Normally, you have annual price declines, and with ASPs going higher, is there more investment needed or more fix-it things? Or talk to us about the flow-through or what we consider operating margin leverage.

Well, we have a lot of operating leverage in our model, and I think you saw that come into play this quarter. I mean, I think it was a really impressive improvement in terms of gross margin sequentially, and a lot of what we saw on the pricing side did flow through. As we said, we saw a lot of demand on the channel driven by Chia in most cases, but across the board we saw a good environment and I think the team did a good job of reacting dynamically and trying to properly price the products as we went through the quarter. So we're going to continue to do that same kind of thing as we move forward. And we are going to see cost takedowns. We had very good cost takedowns in Q4 on both the hard drive side and on the flash side. And as we keep price flat or even increase price, then that's obviously going to only help in terms of operating leverage.

Thank you.

Thank you. Our next question comes from Patrick O from Stifel.

Thank you very much. Dave, in terms of the activity you're doing with cloud and hyperscale and the pickup you're seeing there, can you talk about any qualitatively new customer wins, whether it's cloud, hyperscale, or data centers? With the new 18 terabyte drives, can you at least qualitatively talk about the adoption rate and whether you're seeing greater adoption from existing customers who are transitioning or even new customers that weren't previously on your mass capacity storage drives?

So at this point, I think it's where they're at in the architectural evolution of their data center of how they're adopting the technology as far as qualification. So first of all, I mean, if you're building a cloud, you're most likely our customer. Hard drives are the lion's share of storage in the cloud. But we're seeing, you know, we're seeing wide adoption, I guess is the only way I can say it. I mean, it's our customers, different customers will be at different stages of their architectural evolution. Some are going to 18 as fast as they can. Some are working through a 14 transition, let's say in the second half of the year, and then we'll move to 18. Some are going through 16. So At this point, it's just a question of how they're all transitioning their data centers. Again, we saw really strong growth throughout the quarter. As Bob said, it's nearly half of our Exabyte ship, capacity enterprise Exabyte shipments were on 18, so we feel really good about where the product is. And, you know, like I said, the innovation of Energy Assist has been fully commercialized and has been well received by our customers.

Great. Thank you very much.

Sure thing.

Thank you. Our next question comes from Harlan Suhr from JP Morgan.

Good afternoon. Thanks for taking my question. In addition to the SSD controller shortages, we've heard of tight HDD controller and preamp chip supply as your ASIC semiconductor partners are pretty constrained and lead times are pretty stretched. If the team had more HDD controller and preamp supply, would you be able to ship more HDDs here in the September quarter? Or is more of the HDD shipment constraints in September being driven by other component constraints or media and head manufacturing or just potential pandemic-related operations disruptions?

Harlan, this is Bob. We're basically running at full capacity in the September quarter on the hard drive side. So it's not easy to get the parts. That's definitely true. But in the September quarter, I don't see it as a big factor. We'll see how that plays out as we get to the December quarter and beyond.

Yeah, Harlan, I was going to say the same thing. I mean, we've got folks in the factories working overtime and to get every drive we can out. I mean, the team is obviously balancing the supply chain issues to get all the components we need, but we've got that covered in September. And so keeping, again, these are in places where COVID is a big deal, and we've been really good about managing through that, but something we got our eye on, but we're really pushing very hard to get all the components we can, all the drives we can.

I appreciate the insights. Thank you.

Sure thing. Thank you.

The next question comes from Tom O'Malley from Barclays.

Hey, guys. Thanks for taking my question. I just want to circle up on a comment you made earlier. You said that Chia had a big impact on the channel. I'm looking at inventory. Inventory days are flat on a dollars basis, down on a days basis. Can you kind of comment on the mix of inventory? I would assume with some of the HDD activity you saw during the quarter, the channel has kind of been wound down a bit. Is there any color you can give on the mix of businesses within the inventory that you have this quarter?

Yeah, in terms of our inventory, the turns are up quite a bit on the hard drive side, and I'd say relatively flat, maybe even slightly worse on the flash side. And that's, you know, we're going to a nodal transition. It's not a big surprise there. So, and the flow through, as you saw, was up significantly during the quarter. Thanks, guys. Sure. Thank you.

Thank you. The next question comes from Sidney Ho from Doisha Bank.

Great. Thanks for taking my question. My question is on capital intensity. You talk about gross capex for fiscal 22 being $3.1 billion, and that would be roughly 15% of fiscal first quarter revenue run rates. Is that the right capital intensity we should be thinking about? Maybe you can comment on both HDD and NAND. That would be great. And what kind of assumptions are you expecting in terms of bid growth coming out of the NAND side of things? Thanks.

Yeah, so a few questions in there. So first of all, in terms of CapEx, we exited FY21 around $3 billion in gross CapEx, and that's what we're expecting again in FY22. We are well on our way in terms of the ramp on VIX5 in terms of the capital investment, and we'll have to obviously continue to invest in both businesses. We've got two growing businesses here, And they are going to require capital going forward. On the hard drive side, we're at the point where we can no longer transition assets from the client side of the business to the capacity enterprise business. And So that means we have to be pretty cautious in terms of investments we make. That's part of why we've done some of these long-term agreements. And we're going to continue to be very careful in terms of capacity we've put in place. And on the flash side, the goal, as we've been saying, is to really grow BITS at the rate that the market's growing. And we think over the long term we'll be able to do that. Thanks. Sure. Thank you.

Thank you. The next question comes from Shannon Cross from Cross Research.

Thank you very much. I have maybe a bigger picture question. I'm just wondering, how are you thinking about the inflationary environment? Are you hearing from any customers that there's some pushback because of elasticity of demand given price increases? And then just internally, how are you thinking about managing higher costs and not necessarily next quarter, but just in general as we face more inflation? Thank you.

Yeah, it's a good question, Shannon. And we're definitely facing inflationary pressures across the board. We've talked about the semiconductor components already on this call, and we're seeing lead times extend out. We're seeing challenges on the cost side as well. And we think we're going to face that across a number of different commodities. And that's a discussion we need to have with our customers as well. And I think most of them are also facing inflationary pressures. So It's not something that you can work out in a single quarter, but I think over time we've got to make sure we're getting obviously an adequate return on the investments we're making from a CapEx standpoint and the costs that we have in each of the products.

Okay, thank you.

Sure.

Thank you. Our next question comes from Nick Todorov from Longbow Research.

Yeah, good afternoon, guys, and congrats on great results for me as well. Thank you. Dave, I think you, can you hear me?

Oh, yeah, please, go ahead.

Yeah, yeah, yeah. You talked about more customers looking for upsides on the NAND side in the September quarter, and it sounds like you're pretty constrained. But if I look at your guide, it implies at best a modest low single-digit NAND ASP increase. I wonder why you're not able to get better pricing leverage on the NAND. I think you talked about mix changing in the September quarter. If that's the big driver, can you please give us more detail? How do you see the mix shifting on the NAND? Is there any lumpiness in the enterprises as you mix in the September quarter? Thanks.

Yeah, no, I think you got it. I mean, again, we're running a portfolio across... you know, four or five major pillars, enterprise SSD, mobile, consumer, and the anchor of the portfolio, client SSD, and then, of course, positions in gaming, IoT, automotive. But every quarter of the mix is going to be different across that. And obviously the pricing is changing at different rates across those markets. We're clearly trying to shift as much as we can into the higher margin markets. but every quarter the mix is going to be a little bit different. And, you know, depending on what our commitments are, you know, we have commitments to customers as to how much we're going to supply in any given quarter. So when you put that all together, the mix is a little different in Q1, and I think that's where you've got some of the difference coming from and the way you're thinking about it.

Got it. Thanks. Good luck, guys.

Thank you.

Thank you. The next question comes from Ananda Barua from Loop Capital.

Hey, thanks for taking the question, guys, and congrats on the strong results. I guess the question really is around the margins and structural margins on both sides of the business. Do you think over time, structurally, the margins can move higher from here And what would be sort of the pushes and pulls, you know, or sort of the dynamics? Like what would things have to look like? What would have to get done for on both sides of the business for that to happen? And kind of structurally higher, you know, meaningfully, nicely structurally higher. Thanks a lot.

So I think the answer to that is – I don't think the answer to that is yes. Let's go through each business. On the drive side, we saw a big step up this quarter driven by a number of things. We've been talking about the 18-terabyte – So capacity point is much better for us for a number of quarters now, and we saw that play out. We obviously got some benefit from CHIA as well, but predominantly innovation-led story from my perspective. But we believe this business inside our company needs to be more profitable. We've talked about it several times on this call. We're now looking at this transition from client capacity to capacity enterprise, near-liner enterprise drives. That era is coming to an end. It's been a long one. It's taken a decade to go through that transition. But when we look at the exabyte growth going forward... that's going to take investment, and we want that investment to be fully justified. And again, it's no surprise to me that now we're talking about these more longer-term agreements, and again, we're early days in those, but those are the conversations with customers. I remember when I came in this business, whatever, five quarters ago, everything was transacted on a quarterly or even within the quarter basis, and now we're moving to in parts of the business, multi-quarter basis, and I think that will continue because we need more visibility into demand to make sure we can continue to fuel the growth of the cloud. I think the cloud is an incredible technology, the seminal technology of our era, as I like to say, and continuing to fuel the growth of that is very important, and 35% exabyte growth is going to take investment, and I think that's going to take, you know, we're going to want to see uh, the internals of our business be able to support that. So, and on the flash side, we're going to, and just one final comment on that. We were also continuing to innovate in hard drives and drive cost down, um, as well. I think we taught, we think about cost downs more in the, in the flash business, but we, we also continue to drive them in the drive business. Uh, so we have that dynamic working as well. And on flash, um, You know, we all know about how dynamic the pricing environment is. We feel very good about our technology roadmap. We've talked about that. We're at the transition point to BIX 5. We feel good about that node as we transition to that over the next couple of quarters. We'll see our BIT growth accelerate. And that foundational investment with Keoksha, I think, puts us in a very good position to have the technology roadmap just structurally support margins in the business. Clearly a better pricing environment as we're seeing helps margins in that business. We expect it to be better next quarter. That's the way we're guiding. And, you know, as we look even beyond the second half and we look into next year, we continue to see a strong demand environment. That's getting out there pretty far, but, you know, from what our customers are telling us of what they think the demand is going to be for their products, like I said, we're all more technology dependent than ever. We continue to hear good things about what they're going to be asking for next year. So structurally, we think with the technology demand With the innovation we're driving in both portfolios, that puts us in a good position to continue to drive profitability in these businesses. That's helpful.

Yeah, thanks a lot. I appreciate that.

Thank you. Our next question comes from Srini Pajuri from SMBC, NICO Securities.

Thank you. David, on the enterprise SSD front, I think you said it grew 39% quarter-on-quarter, obviously a very strong quarter. I'm just curious if it's driven primarily by end demand and if there were any new customer ramps as well, and also if you could talk about if there was any contribution from Chia on the SSD side as well. I think that would be helpful. Thank you.

Yeah, the first one, just quickly, a very minimal contribution from Chia in the enterprise SSD market. Yeah, we are happy with the sequential growth of the product, and we did complete a qualification at another cloud titan, which is something we've had our eyes on for a while and we've talked about. We haven't started ramping there yet, but we'll see that in the second half of the year. We also saw good demand in the channel. on Enterprise SSD. So we qualified with one of the very big players and we see continued growth there. We're seeing good acceptance in the channel and growth there and now we're layering in additional major customers as we go into the second half of the year. So we feel good about how the product is being accepted. Again, a lot of innovation in our product. We've been talking about that for many quarters, again, giving visibility into the qualification process, and now we're well into the ramp and feel good about where we're at and where it's going and how it's being accepted by our customers.

Thanks, David.

Thank you. Our next question comes from Mark Miller from the Benchmark Company.

Just was wondering, the SSD space, do you feel you're picking up share?

I suspect we're picking up share, yeah, as we grow. I don't think the market grew sequentially 39%. You know, again, we're focused on profitable share gains, but this has been a focus for us to to get that product introduced. It's a very attractive market and get it qualified in as many places as we can. But, yeah, we're going to continue driving for growth quarter over quarter.

Thank you. Thank you. And the last question comes from Tristan Guerra from Baird.

Hi, good afternoon. You've given some, put some takes about gross margin criteria for harvest-wise. How should we look at the potential for gross margin longer term? You've mentioned you're already at full capacity. Can you go higher given new customer mix and given the purchasing power that some of your large data center customers have? Without COVID expenses, is a longer term 35% outlook possible? If you could just provide a bit more color on what you think the calendar is going forward.

Yeah, I mean, I think as we've talked about, we're in this period in the hard drive business where it's been transitioning for a long time from a business that was client dominated to a business that is cloud dominated is, I guess, one way to think about it. And if we look at the utilization of our of our factories, you can see that very clearly year over year, the percentage of drives that were headed for the cloud versus the ones that are headed for client has been steadily shifting over a decade. And now we're at the point where we're looking at investments in both in heads and also, you know, when you build a bigger drive, it takes longer to test, all those kinds of things, testing capacity in the factory. So, yeah, as we go through those conversations, it's really important to understand from our customers what their growth is going to be. We see 30% to 35% Exabyte growth in the cloud for the foreseeable future. We want to make sure that they see that same amount. And as we... As we align on that growth and we invest in our business to support it, I think that's where this idea of long-term agreements come in place and to help drive the profitability for the business. We think the innovation is delivering – I mean, it starts with delivering a product that – is very, you know, solves a customer's problem. And we're delivering a very strong TCO model with every generation of this product that we build. We're driving a lot of innovation. You know, we talked about it here with Energy Assist, which is something that we've been working on for quite some time. And quite frankly, it's a good accomplishment for the team, a great accomplishment. It feels good to take something that was an idea many, many years ago and now turn it into something where the largest customers in the world are betting their business and their data center on that innovation. And so to continue to fuel that innovation engine, we've got many, many innovations lined up to continue to drive the portfolio and making sure we can invest in that and meet the growth of our customers, getting the economics of that right is very important.

Great. Thanks for the additional color.

Sure thing. Thank you. All right, everybody, thanks for your time today. We really appreciate it. We'll be seeing you throughout the quarter. Thanks very much. Yeah, thanks, everybody.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.