Western Digital Corporation

Good day and welcome to the Western Digital first quarter fiscal 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Peter Andrews. Please go ahead.

Thank you, and good morning, everyone. Joining me today are David Geckler, Chief Executive Officer, and Wissam Jabri, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including product portfolio expectations, business plans and performance, demand and market trends, and financial outlook based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the investor relations section of our website. With that, I'll now turn the call over to David for introductory remarks.

Thank you, Peter. Good morning, everyone, and thank you for joining the call to discuss our 2023 first quarter results. I am pleased to see the Western digital team work together to deliver revenue at the upper half of the guidance range in the midst of an incredibly dynamic and challenging macro economic environment. We reported first quarter revenue of 3.7 billion and non gap operating income of 307 million. Our operating income performance was above the midpoint implied by our guidance and demonstrated our ability to actively respond and navigate this environment. Our non-GAAP earnings per share was 20 cents and included an approximately 30 cent impact due to higher than forecasted tax rate. Overall, the actions we have taken over the past few years are enabling us to manage through business cycle troughs more effectively and position the company to thrive as market conditions improve. These efforts have reinvigorated the Western digital innovation engine and strengthened our product portfolio. In particular, we are leading the transition to SMR-based hard drives alongside our cloud customers, showcasing our product leadership. In Flash, we have nearly tripled our bit shipments in the NVMe Enterprise SSD product category as compared to the last down cycle, adding another large and growing end market in which we can allocate our Flash bits. Our industry-leading innovation, diversified portfolio, and broad go-to-market strategy across cloud, client, and consumer end markets allow us to enjoy strong relationships with our customers and meet the full range of storage needs. The breadth of markets we address also offers us unique visibility into end market demand signals, which allowed us to recognize potential challenges to our business as they unfolded. We have proactively and effectively managed our business through weakening consumer demand by optimizing product mix and right-sizing our hard drive manufacturing footprint. As part of these efforts to manage through this part of the cycle, we are reducing our capital investments and operating expenses as we move to align our cash flow and cost structure with market conditions. Wissam will go over our efforts in more detail. As we closely monitor the macro environment, we are encouraged to see retail flash and channel demand leveling out and orders from PC customers stabilizing. a sign that consumer-led inventory correction is abating. We believe the long-term growth in flash demand, combined with reduced flash industry supply, will restore supply and demand balance in the next couple of quarters. Before I jump into updates on our ACD and flash businesses, I want to provide a short update on our strategic review process. The executive committee of our board, which I lead, continues its process, which I previously announced includes the participation of Elliott Management under a non-disclosure agreement. Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review today. We will provide updates as we have them. Now turning to our HCD business. During the first quarter, our HDD revenue declined modestly, as we had forecasted in August. Sequentially, total HDD and near-line exabyte shipments were both flat. Continued momentum with U.S. cloud customers and accelerated adoption of SMR hard drives were offset by softness in other capacity enterprise product channels and consumer HDD demand. Shipment of capacity enterprise drives based on SMR technologies exceeded 25% of this category, one quarter ahead of our expectations. We now expect SMR to represent over 40% of our capacity enterprise exabyte shipment exiting fiscal year 2023. SMR adoption drove a 19% sequential and 21% year-over-year increase in average capacity to 17 terabytes per capacity enterprise drive. And our 20 terabyte drive exabyte shipments increase more than 150% sequentially. We are deep into the process of qualifying our latest generation of hard drives, including our 26 terabyte ultra-SMR hard drives, at multiple US cloud and OEM customers. Interest in SMR from other hyperscalers worldwide is increasing, as the 20% capacity gain offers multi-generation TCO benefits to the most complex data centers worldwide. Looking ahead, our U.S. cloud customers have started sharply reducing their hard drive inventory alongside other components for their data center build-outs. This, along with continued subdued demand across markets in China, will impact near-term demand over the next few quarters. Despite these near-term corrections, it is clear from our conversations with these customers that HED products will be the foundational storage for their continued cloud build-out in the years to come. Our product leadership and innovation engine remain as strong as ever, and we are confident that Western Digital's hard drive business will thrive over the long term as demand improves and new products continue to ramp. Turning to Flash, Revenue was slightly ahead of our expectations. Thanks to our broad portfolio, diverse routes to market, and leading brands, including WD Black, SanDisk, and SanDisk Professional, that are recognized globally for their cutting-edge innovation, performance, and quality, I'm pleased to say that we exceeded our BIT shipment forecast this quarter. Our client SSD products for PCOEM, retail, and mobile drove the upside in BIT shipments. Average capacity per client SSD increased 24% sequentially and 54% year over year, driven by doubling of standard storage capacity for PCs sold by multiple OEMs. This is another reminder of the insatiable demand for data storage and the resilience of flash demand, as price elasticity drives increased consumption per device. On the technology front, BICS V accelerated to over two-thirds of our flash revenue in the September quarter, up from about half in the previous quarter. BICS VI yield and development of subsequent 3D NAND flash are both progressing well. For the December quarter, we expect flash shipments to increase sequentially, led by seasonal strength in retail and mobile. With the abrupt change in market conditions, we are acting decisively to adjust our supply trajectory to align with demand. We are pushing out BICS 6 transition to meaningfully reduce our capital expenditures for fiscal year 2023, which may offer us a potential opportunity to leapfrog to a future BICS technology node as demand normalizes. With that, let me now turn the call over to Wissam, who will discuss our first quarter results in greater detail and provide an outlook for the second quarter.