Western Digital Corporation

Good afternoon and thank you for standing by. Welcome to the Western Digital physical second quarter 2023 conference call. Presently all participants are in a 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 then one on your phone. And as a reminder this call is being recorded. Now I will turn the call over to Mr. Peter Andrew.

You may begin. Thank you and good afternoon everyone. Joining me today are David Dechler, Chief Executive Officer, and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including expectations for a product portfolio, cost reductions, business plans and performance, demand and market trends, and financial results 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, followed 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 will now turn the call over to David for introductory remarks.

Thank you, Peter. Good afternoon and thank you for joining the call to discuss our 2023 second quarter results. The Western Digital team worked diligently within a dynamic market and delivered revenue at the high end of the guidance range we provided in October. We reported second quarter revenue of $3.1 billion and non-GAAP operating loss of $119 million. Our non-GAAP loss per share was 42 cents. Our ongoing efforts to control expenses, optimize working capital, and deploy capital judiciously helped us manage cash flow amidst a challenging flash pricing environment and larger than expected ACD underutilization that pressured gross margins. Before we discuss the details of our second quarter results, I wanted to cover two other announcements that we are making today. First, we disclose that Western Digital has entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments totaling $900 million. In connection with the agreement, Reed Raymond, a partner at Apollo, will join our board starting immediately. On behalf of the Board, I am pleased to welcome Reid, a leading technology investor who will provide us with additional financial and strategic expertise, which will be critical as we continue to execute on our business strategy and complete our strategic review. Second, on January 25th, we secured access to $875 million of financing through a delayed draw term loan. When combined with the actions we undertook to structurally lower our cost structure, these financings provide valuable financial optionality and flexibility to Western Digital as we continue our strategic review. Regardless of the outcome of the strategic review, our goal is to ensure the business is in a solid financial position to invest in innovation and create long-term shareholder value. Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review process or making comments on market rumors. We will provide updates as we have them. Over the past three years, we have worked continuously to reinvigorate innovation and bolster business agility for both our FLASH and HDD organizations, which enable the Western Digital team to stay ahead of the market. Over this same period, we paid down $2.7 billion in debt and arranged for settlement of a longstanding tax dispute. Since the beginning of fiscal year 2023, we have taken additional actions to reset the business in response to the post-pandemic environment. These actions include, first, we have further reduced our capital expenditures across FLASH and HDD to moderate our supply. As a result, our projected cash capital expenditure for fiscal 2023 has declined nearly 40% from six months ago. Second, we have decreased supply bid growth across both FLASH and HDD. In FLASH, we reduced wafer starts by 30% in January. In HDD, during the fiscal first quarter, we consolidated production lines across our manufacturing facilities and idled certain media production lines in Asia, reducing client hard drive capacity by approximately 40%. During the fiscal second quarter, we continued to optimize our capacity enterprise manufacturing footprint to align our supply with the new demand environment. We have reduced our quarterly non-GAAP operating expense by over $100 million since the close of fiscal year 2022, driven by lower headcount, discretionary spending, and variable compensation. We are targeting to reduce quarterly non-GAAP operating expense level to below $600 million by the time we exit the fiscal year. And lastly, In December, we successfully executed an amendment to the existing financial covenants under our credit agreement. Turning to end market demand during the fiscal second quarter, demand for consumer-oriented products stabilized, as we discussed in October. In consumer, we experienced a seasonal uptick across both FLASH and HDD. In client, channel demand for both SSD and HDD have improved, However, commercial PCs are now being impacted by tightening budgets and spending across corporations, which is negatively affecting client SSD shipments. In cloud, we experienced a decline in near-line shipments as our customers were undergoing inventory digestion and ongoing subdued China demand. I'll now turn to business updates, starting with HDD. During the fiscal second quarter, our HDD revenue declined significantly as cloud inventory digestion intensified, while demand for retail and client HDD improved. We continued to successfully execute on our product roadmap as we completed qualifications and commenced shipments of our latest generation 22 terabyte CMR hard drives at multiple cloud and major OEM customers last quarter. We are aggressively ramping this 22 terabyte CMR product this quarter and expect this drive along with its SMR variants to be our growth engine going forward. Qualifications of our 26 terabyte ultra SMR drives are also progressing well. Our major customers remain committed to adopting SMR drives as the 20% capacity gain that UltraSMR drives over CMR offers multi-generation TCO benefits to the most complex data centers worldwide. We expect sequential growth in revenue and margin into our fiscal third quarter and continued recovery as we move through calendar year 2023. Turning to FLASH, Thanks to our broad portfolio, diverse routes to market, and leading retail franchise, combined with strong seasonal demand, BITS shipments increased 20% sequentially, exceeding our forecast. While we continue to experience pricing pressure in the market, our premium brands, including Sandisk, Sandisk Professional, and WD Black, continue to deliver strong share and profitability to support the business. Our premium WD Black client SSD, which is optimized for gaming, continues to be well received in the marketplace. It achieved a record in exabyte shipments, unit shipments, and average capacity per drive, resulting in exabyte shipment increase of 73% sequentially and 41% year over year for this product. On the technology front, BIX 5 represented 70% of our flash revenue in the December quarter, while BIX 6 will reach cost crossover in the fiscal third quarter. Our next generation 3D NAND node, BIX 8, has entered productization phase. BICS 8 incorporates several groundbreaking 3D NAN architectural innovations to deliver a major leap in performance and cost-effective solutions to a broad range of exciting products, demonstrating the benefits of Western Digital's strong partnership with Keoksha and our innovation leadership in 3D NAN architecture. As we look into the fiscal third quarter, in hard drives, overall demand in cloud has stabilized and we expect modest improvement in nearline to offset a seasonal decline in client and consumer hard drives. We expect stronger improvements in the second half of this calendar year, led by the aggressive ramp of our 22 and 26 terabyte hard drives. In flash, we expect enterprise SSD product demand for the fiscal third quarter to be sharply reduced as certain large cloud customers have entered a digestion period. In addition, a reduction in commercial PC demand is expected to impact client SSD shipments in the near term. Driven by the lower customer demand forecast in enterprise and client SSDs, we anticipate BIT shipments to decline in the fiscal third quarter and return to growth in the fiscal fourth quarter. As I mentioned earlier, Western Digital lowered wafer starts in January, and we remain flexible in adjusting the magnitude and duration to restore our flash supply and demand balance. As noted, for calendar year 2023, we expect reduced capital investment and lower utilization in response to the new demand environment. Our initial estimate is for flash demand bid growth to be in the low 20% range, with production bid growth to be well below that of demand. With that, let me turn the call over to Issam, who will discuss our second quarter results in greater detail and provide an outlook for the third quarter.