Western Digital Corporation

Good afternoon and thank you for standing by. Welcome to the Western Digital's fiscal fourth quarter and fiscal 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 1-1 on your telephone. As a reminder, this call is being recorded. Now, I would like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analyst in Investor Relations. You may begin.

Thank you and good afternoon, everyone.

Joining me today are David Geckler, 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 our product portfolio, spending and cost reductions, business plans and performance, 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 and or other filings 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 afternoon, and thank you for joining the call to discuss our fourth quarter and fiscal year 2023 results. Western Digital's fiscal fourth quarter revenue exceeded expectations as our access to broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end markets, reaffirming our strength in a challenging market environment. We reported fourth quarter revenue of $2.7 billion and non-GAAP gross margin of 3.9%. Non-GAAP loss per share was $1.98. Before diving into the specifics of the quarter and the full fiscal year, I would like to take a moment to reflect on our accomplishments in fiscal year 2023. Importantly, we continued to optimize our operations and successfully executed our innovative product roadmap, priming ourselves for greater profitability when demand rebounds across hard drives and flash. Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility. In HDD, we have successfully qualified our latest family of capacity enterprise hard drives at all major customers and are shipping our 26-terabyte ultra-SMR drive in high volume. In Flash, we pioneered the use of wafer bonding in advanced 3D NAND manufacturing and introduced the groundbreaking technology in BIX 8, which sets the foundation for future 3D NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce quarterly operating expense while continuing to deliver innovative products and technologies that address customers' growing storage needs. Further, we reduced our cash capital expenditure run rate by over 50% in the fiscal second half and consolidated our hard drive manufacturing footprint. These efforts enabled Western Digital to preserve capital while effectively executing on product strategies and aligning our supply with post-pandemic demand environment. Notably, we reduced our inventory by nearly $300 million sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro dynamics. In summary, we continued to proactively take action to bolster our agility, enhance our liquidity position, optimize our inventory levels across HCD and Flash, and strengthened our position as an industry and market leader. We exited fiscal year 2023 well-positioned to capitalize on improving market conditions and capture long-term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing. We continue to make progress on this process and will provide updates as appropriate. Turning to the fiscal fourth quarter, Revenue in both client and consumer end markets returned to sequential growth, led by normalized end market demand and higher average capacity per unit in flash. In consumer, retail flash exceeded our expectations across all major product categories. We saw similar results in client, with upside in both HDD and flash, and across almost all major product categories, including client SSD, gaming console, embedded flash, and client hard drives. In cloud, demand for both hard drive and flash products remains subdued. I'll now turn to business updates, starting with HDD. In the fiscal fourth quarter, ongoing cloud weakness drove the overall decline in HDD revenue. However, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end of the fiscal fourth quarter, we have successfully qualified all variants of our 22 terabyte CMR and 26 terabyte ultra SMR hard drive platforms at all major cloud customers, setting the stage to improve shipments and profitability. In addition, We are about to begin product sampling of our 28 terabyte UltraSMR drive. This cutting edge product is built upon the success of our ePMR and UltraSMR technologies with features and reliability trusted by our customers worldwide. We are staging this product for quick qualification and ramp as demand improves. Turning to Flash, revenue increased sequentially led by growth in both client and consumer flash bit shipments, which exceeded our expectations with total bit shipments returning to year-over-year growth. The stronger-than-expected bit growth is attributable to normalizing PC and consumer demand, as well as content growth. Average capacity per consumer and client SSD increased over 40% and 20% year-over-year, respectively. Moving to technology developments, we continue to aggressively productize BICS-8 based on a chip bonded to array architecture. BICS-8 solidifies Western Digital and Keoksha's leadership in cost, capital efficiency, and IO performance into the future. Before I turn it over to Wisam, I wanted to share some perspective on our outlook. In HGD, as we look to the fiscal first quarter, we expect overall demand to remain stable. Beyond the fiscal first quarter, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability. In Flash, we are encouraged by several indicators signaling improving market dynamics. Notably, our two largest end markets, client and consumer, are returning to growth, inventories are normalizing, content per unit is increasing, and price declines have been moderating. With that, I'll turn it over to Issam.

Thanks, David, and good afternoon, everyone. As David mentioned, fiscal fourth quarter revenue exceeded our expectations. Total revenue for the quarter was $2.7 billion, down 5% sequentially and 41% year over year. Non-GAAP loss per share was $1.98. Looking at end markets for the fiscal fourth quarter, cloud represented 37% of total revenue at $1 billion, down 18% sequentially, and 53% year over year. Sequentially, the decline was primarily due to a decrease in capacity enterprise drive shipments. Near-line bit shipments were 59 exabytes, down 26% sequentially, driven by ongoing weakness at cloud customers. The year-over-year decrease was primarily due to declines in both hard drive and flash product shipments. Client represented 39% of total revenue at $1 billion, up 6% sequentially and down 37% year-over-year. Sequentially, the increase was driven by growth in bit shipments for gaming consoles. The year-over-year decrease was due to declines in flash pricing and lower client SSD and hard drive unit shipments for PC applications. Consumer represented 24% of total revenue at $0.6 billion, up 3% sequentially and down 19% year-over-year. Sequentially, the increase was primarily due to higher retail SSD shipments. The year-over-year decrease was driven by price declines in flash and lower retail hard drive shipments. For the fiscal year, revenue was $12.3 billion, down 34% from fiscal 2022. Nungap gross margin declined 17.2 percentage points to 15.7%, and Nungap operating margin decreased 21.8 percentage points to negative 4.8%. Nungap loss per share was $3.59. Looking at end markets for fiscal year 2023, cloud revenue decreased 34% year over year, primarily due to reduced shipments of capacity enterprise hard drives and enterprise SSDs. Client revenue decreased 39% year over year, primarily due to declines in flash pricing, as well as lower client SSD and hard drive unit shipments for PC applications. Lastly, consumer revenue decreased 26% for the year as growth in retail SSD bit shipments was more than offset by broad-based flash price decline and lower consumer hard drive shipments. Turning now to revenue by segment. In the fiscal fourth quarter, HED revenue was $1.3 billion, down 13% sequentially and 39% year over year. Sequentially, Total HDD exabyte shipments decreased 18%, and average price per unit decreased 9% to $99. On a year-over-year basis, HDD exabyte shipments decreased 38%, and average price per unit decreased 17%. Flash revenue was $1.4 billion, up 5% sequentially, and down 43% year-over-year. Sequentially, flash ASPs decreased 6% on a blended basis and 9% on a like-for-like basis. Flash bid shipments increased 15% sequentially and 7% year-over-year. Moving to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal fourth quarter was 3.9%, down 6.7 percentage points sequentially, and 28.4 percentage points year over year. This includes $272 million in costs or 10.2 percentage points for manufacturing underutilization, flash inventory write-downs, and other items. HDD gross margin was 20.7%, down 3.6 percentage points sequentially and 7.5 percentage points year-over-year. Sequentially, the decrease was primarily due to lower capacity enterprise volume as well as higher underutilization related charges. Underutilization charges were 76 million or 5.9 percentage points. Flash gross margin was negative 11.9%, down 6.9 percentage points sequentially, and 47.8 percentage points year-over-year. Underutilization charges due to the reduced manufacturing volumes were 135 million, and inventory write-downs were 27 million, resulting in an 11.8 percentage point reduction. We continue to tightly manage our operating expenses of $582 million for the quarter, down $20 million sequentially and $178 million year over year. Operating loss in the quarter was $478 million, driven mainly by underutilization charges, inventory write-downs, and other items totaling $272 million. Income tax expense was $57 million for fiscal fourth quarter and $237 million for fiscal year 2023. Despite a consolidated loss, we continue to have taxable income in certain geographies, resulting in taxes payable in those areas. Fiscal fourth quarter loss per share was $1.98 inclusive of $15 million dividend associated with the convertible preferred equity. Operating cash flow for the fourth quarter was an outflow of $68 million, and free cash flow was an outflow of $219 million. Cash capital expenditures, which include the purchase of property, planning, and equipment, and activity related to our flash joint ventures on the cash flow statement, were $151 million. Gross debt outstanding was $7.1 billion at the end of fiscal fourth quarter. Trading 12-month adjusted EBITDA at the end of the fourth quarter, as defined in our credit agreement, was $1.6 billion, resulting in a gross leverage ratio of 4.5 times compared to 2.8 times in the fiscal third quarter. As a reminder, the credit agreement includes $0.7 billion in depreciation add-back associated with the flash joint ventures. This is not reflected in the cash flow statement. Please refer to the earnings presentation on the investor relations website for further details. During the fiscal fourth quarter, we executed amendments to our credit agreements. These amendments include modifications to the leverage ratio requirements applicable through the fourth quarter of fiscal year 2025, which provide additional financial flexibility in the near term. We also extended the commitment under the delayed draw term loan agreement to August 14, 2023. Please refer to our earnings presentation for details. At the end of the quarter, total liquidity was $4.9 billion, including cash and cash equivalents of $2 billion undrawn revolver capacity of $2.25 billion, and an unused delayed draw term loan facility of $600 million. Before I cover guidance for the fiscal first quarter, I'll discuss our business outlook. For fiscal first quarter, sequentially, we expect both HDD and flash revenue to be relatively stable. In fiscal first quarter, we are continuing to adjust production to better match demand and anticipate underutilization charges to impact both HDD and flash gross margins, along with product mix pressures on flash ASP. Beyond the fiscal first quarter, we anticipate both HDD and flash revenue to improve through the remainder of fiscal year 2024, driven by normalizing demand in storage, as well as higher average content per unit in flash. Gross margin is expected to gradually improve driven by higher HDD volume and lower underutilization charges in both FLASH and HDD. We will continue to tightly manage our cost structure and expenses as we navigate the challenging environment. For fiscal year 2024, we expect capital expenditures to decline significantly. I will now turn to guidance. For the fiscal first quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $2.55 to $2.75 billion. We expect gross margin to be between 2.5% and 4.5%, which includes underutilization charges across FLASH and HDD totaling $200 to $220 million. We expect operating expenses to be between $570 to $590 million. Interest and other expenses are expected to be approximately $90 million. We expect income tax expense to be between $30 and $40 million for the fiscal first quarter and $130 to $170 million for fiscal year 2024. We expect the loss per share of $1.80 to $2.10, assuming approximately 323 million shares outstanding. I will now turn the call back over to David.

Thanks, Visam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress in strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater profitability as demand inevitably rebounds across hard drives and flash. As we move forward, we remain confident in our ability to capitalize on emerging opportunities and deliver continued success. Before opening up for Q&A, I would like to take a moment to recognize Siva Sivaram, our esteemed President of Technology and Strategy. Siva will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain. Seba has made significant contributions to Western Digital and SanDisk over the past 10 years, and he is a wonderful friend. We wish him all the best going forward.

Peter, let's start the Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star 11 on your telephone. If you would like to withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead.

Great, thank you. I wonder if you could talk to NAND in the current quarter. It looks like the underutilization charges are similar. Does that mean your utilization is unchanged, and I guess it seems like you were able to make some inventory progress. Does that mean that you can at some point have line of sight to bring that back up?

Yeah, hey, Joe. Thanks for the question. NAND in the current quarter, as we said, you know, we saw good, I guess, good market reaction in consumer and in the client business. Both returned to growth on an exabyte basis. They both were sequential growers, so we saw incremental upside there. So we were happy about that. We are still underutilizing the FAB. I'll let Wissam talk about that in a little bit more detail. We do plan to underutilize for another couple quarters, but we feel good about the overall, you know, the signs in the overall market. Price declines are moderating. Our inventory is down. Bid shipments are up. We expect bid shipments to be up again, double digits next quarter. So we're Not quite where we want to be yet, but the market is stabilizing, and we see a lot of good things, a lot of metrics going in the right direction.

Yeah, Joe, and with respect to underutilization, we saw similar type of underutilization charges in fiscal Q4 versus Q3. for the flash side. And when you look at HDD, we had a bit more unutilization. But sticking with the flash, also in our guidance, we've noted similar levels into fiscal Q1. Albeit, if you look at sort of the range of 200 to 220, I would say it is split 70% flash, 30% HDD. And also, if I think of, let's say, the fiscal Q2, I anticipate more or less similar levels of underutilization from where we stand today.

Great. Thank you. And if I could just show up, in terms of the uses of cash in the next few quarters, I know you've got the convert that comes due early next year. I think there's still some issues about a potential tax payment. Can you just update us there and sort of, you know, do you need to raise money to pay those out?

So with respect to uses of cash, as you noted, we do have the convert that matures in February 24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up and we expect also this payment to be very likely this quarter. But with respect to liquidity exiting fiscal Q4, we had approximately $4.9 billion of liquidity. And so if you recall, the delayed drop term loan was put in place in the event we need to address the IRS settlement. So that will be drawn down to take care of the IRS settlement when it happens. And with respect to the convert I mentioned, we'll address it in the coming two cores.

Thank you very much.

Thanks, Joe. You're welcome.

Thank you. And one moment, please, for our next question. Our next question is going to come from the line of CJ Muse with Evercore ISI. Your line is open. Please go ahead.

Good afternoon. I guess this question, from a supply perspective, we haven't seen the shutdown of digitalization. How do you think about a return to supply-demand normalization over the next six, nine, ten months?

Okay, hey, that was CJ, right?

CJ, that was very, it was a little tough to hear you there, but I think we got the gist of the question, which was supply-demand normalization. Is that right in Flash?

Yes.

No, that's all right. Okay, so look, I think, as I said, a number of things we saw in the market this quarter, we saw sequential bid growth overall. We saw client and consumer returning to exabyte growth on a year-over-year basis. Consumer SSD content up 40%. Client SSD up 20%. We saw our inventory down. We think in the consumer and client markets, PC markets, basically shipping to demand at this point. We expect our For the fiscal year, we saw our bids about flat year over year. For the calendar year, we see them down low single digits. We probably see the industry down a little lower than that. So, you know, we're taking the actions to bring supply and demand better into balance, and I think we're seeing that across our markets. Cloud is still – you know, there's still a couple quarters to go there. That's a larger story. But, you know, in our two biggest markets for flash, we're seeing – we're seeing that supply-demand balance start to move closer together, put it that way. Thank you.

And my second question, from a strategic review, you know, you announced fairly late, so I think there was an hope that maybe there might be some underlying causes underneath that that, you know, do away with that. So I guess I actually would be thinking about training and hearing about an update there.

okay i think that was a strategic review and timing uh cj uh so like the process is active um you know we look forward to talking more about it when we reach a conclusion thank you thank you thank you in one moment for our next question please our next question is going to come from the line of aaron rakers with

Wells Fargo, your line is open. Please go ahead.

Thank you, guys. This is Michael on behalf of Aaron. I wanted to ask, how are you guys thinking with the recent uptick in AI investment in the data center? How do you think that impacts the mix of flash relative to HDD capacity being deployed or maybe how that will impact you going forward? And then kind of related to that, can you guys just give us an update on where you stand with your enterprise SSD qualifications? Thank you.

Yeah, I've been thinking a lot about generative AI. It's clearly a big topic these days, and obviously a lot of spend going on to build out the infrastructure in the cloud, which I think, quite frankly, is a great thing. The cloud distribution model of new technology is something that is pretty amazing that's been built out over the last decade, so we all get access to this technology very rapidly. And when I think about this in the storage domain, you know, clearly the compute infrastructure is being built out now, but what we're all going to be enabled with are, like, incredible tools to automate data creation at many different levels, whether it's text data, video data, whatever it happens to be. I think that we're essentially going to really accelerate our ability, all of us, to... create information that needs to be stored. So I see this as kind of a catalyst for just a profound increase in the amount of data creation. I think that once those tools get distributed and we all start using them, I think that drives incremental growth across SSDs and hard drives. I mean, hard drives are the foundational storage in the cloud. It's going to be that way for a very long time. So While Gen AI may have some disruptions on the business in the near term as the compute infrastructure gets built out, very optimistic that this is a, as I said, I think it's a profound, it's a catalyst for a profound increase in the rate of data creation. So quite excited about that. We don't know exactly how you model that just yet, except that there's new innovation drives new data creation, which drives the need for storage. So we look forward as this infrastructure gets built out and rapidly adopted, the impact it's going to have on our business. Now, on Enterprise SSD, we still have the qualifications. We've recently qualified BICS-5 in some of these places. That market, along with Nearline HDD or Capacity Enterprise HDD, is depressed right now or subdued. So we're not seeing a lot of growth in that. But we fully expect that when that market comes back and that part of cloud infrastructure spending comes back, that we'll be in a good position. You know, we're still investing in the products and feel good about the position we have with the major cloud vendors.

I appreciate that. Thank you. Thank you.

Thank you. And one moment for our next question. Our next question is going to come from the line of Tom O'Malley with Barclays. Your line is open. Please go ahead.

Hey, good afternoon, guys, and thanks for taking my question. I wanted to narrow in on the HDD side. There's been a variance of timing of recovery across the industry. Could you just give us your latest on when you think the cloud portion of your HDD business is going to recover? I know you previously have said the fourth quarter. Has there been any push out in that expectation? And could you also just comment on the health? I know it's down this quarter, but just the health of that HDD business as you're seeing it today. So just the timing of the recovery and how it's turning today.

Yeah, I think as we move to, you know, so first of all, you know, we think we're going to see sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but it's going to be towards the end of the year into the first quarter where we start You know, we start to get line of sight to all of the customers coming back. I think we're having discussions across all of our customers about what they're – we always have conversations. But, you know, some of the big ones have been in inventory digestion for quite a while, so we're getting better line of sight to the end of that. But I think we still have a couple quarters to go, but improving – I think next quarter things will be stable. There will be a bit of mixed impact there. We expect client to be a little bit more challenged than this quarter. But I think as we move throughout the year, things will get better. And I think your timing of a couple more quarters of getting through this phase and as we get into early next year, we expect things to look better.

Helpful. And then also in the HCD visit, your competitor kind of talked about being more aggressive in certain areas on pricing. Have you guys also looked to be more aggressive on pricing and any comments that you have on just your strategy with clients on the pricing side? Thank you.

Yeah, pricing really starts with innovation. I mean, I think that's where, you know, we're staging our 28T Ultra SMR product. You know, we're really, really happy with where Ultra SMR is at. EPM are opting in and we're already staging our next product for growth there. That's the underpinnings of where we're able to bring a better TCO proposition to our customers. And as we do that, we're able to share in the benefits of that as those drives get deployed. The rest of the market is more market-driven pricing. You know, we have a lot of different channels, a lot of different markets we sell into. And, you know, that type of pricing is just more what you would typically think in any big market around supply and demand.

Thank you.

Thanks, Tom.

Thank you. And one moment for our next question. Our next question comes from the line of Chris Vankar with Cowan. Your line is open. Please go ahead.

Yeah, hi. Thanks for taking my question.

I told them, first and foremost, in June, we announced a certain sequence, and then what appears, just spoke that pricing should improve after, or revenue should improve after December. Is that a function of overall non-pricing getting better, or your specific exposure to retail and PCs without PU. I'm going to follow up.

I missed the first part of the question.

Yeah, sorry. Sorry, Chris. Could you please repeat?

Yeah, we didn't have a great... There was a little bit of static on the line.

I apologize. I was just trying to figure out that, you know, the right thing was not added. We spoke about revenues improving after... Is it a function of manpower? I think improving... because your targeted curriculum is going to get better.

Okay, I think I got it that time. So NAN pricing, so first of all, in the last quarter, NAN price, you know, you saw like-for-like pricing down nine, blended down six, so moderating from the quarter before. Next quarter, we expect volume to pick up, which will drive, you know, volume to pick up, margin to be impacted a little bit more from where it is today. So continue to moderate by volume picking up. Does that help answer your question? I don't know. I didn't get all of your question, Chris, so I'm sorry if I'm not answering it.

No, no, I think it does. I was just trying to figure out, you know, specific and vertical, which is species and retail.

Oh, yeah, well, I got you. Yeah.

So, you know, as we said, we saw the client and consumer markets return to growth, exabyte growth, and sequential revenue growth. So we see those markets have kind of threw their inventory digestion and more shipping to end demand. So, you know, we expect that to continue as we go forward.

Got it. Thanks, David. And then a quick follow-up on hard drive. You said that you're sampling the 28-terabyte ETMR. Is the 32-terabyte ETMR still on your roadmap? And are you doing that by increasing the number of disks per drive? And how do you think about the gross margin 22 terabytes?

Okay, so let me, again, I think I got most of the questions. So we're not adding more disks. I mean, UltraSMR is a, you know, it's a combination of our ePMR, OptiNAND, and UltraSMR technology. It's the next step on the roadmap. You know, I think we've talked a lot over the last year plus about this, you know, driving from 20 to 30 plus with a set of technologies around ePMR, OptiNAND, and Ultra SMR. And this is the next step in that roadmap. We still have a couple more steps to go. So we'll announce the products one at a time. But we're happy with where we are and continue to drive innovation. And as demand comes back, we'll be ramping into a great set of products. And these are products that can be staged quickly and ramp in volumes very quickly, very established technology. And the 26T drive is ultra SMR drive, we really, you know, that sold at scale this quarter, and we expect a significant growth in that in the next quarter as well.

Awesome. Very helpful. Thank you.

Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Wang Zai Mohan with Bank of America. Your line is open. Please go ahead.

Yes, thank you so much. So we've had a few head fakes on recovery on the cloud side, particularly in HDDs. And wondering, as you think through sort of this improvement starting in fiscal 2Q, what's underpinning some of the confidence you know to demand recovery? Are you seeing particular signs from customers that are pointing to that? And your primary competitor also noted taking some changes, including a bill-to-order philosophy. Curious if you guys are contemplating any such changes. And I will follow up.

Hey, Wamsi. So first of all, yeah, I mean, you hit it. I mean, we have ongoing and very significant conversations with our customers on a, you know, many quarters out. So that's what gives us, you know, that's what, underpins the view we have. To your point, things can change, but that's the current view, and the conversations are productive and positive. On the build-to-order comment, look, I think the industry is going to come out of the – well, let me speak about us. So Western Digital will come out of this downturn. It's a pretty severe downturn in a cyclical industry, but We've done a lot of things that I think the business is going to be different on the other side of this. First of all, we've taken significant amount of capacity out of the system. We've talked about the shift from client to capacity enterprise, at least as long as I've been here and it's been going on for many, many years before that. I think that transition is going to be essentially done. There's a long tail on any technology, but if you look on the unit basis, we'll come out of this with significant less spending on our infrastructure. We'll have the lowest fixed costs we've had in a decade plus in our HED infrastructure, and we'll really be focused exclusively on that client enterprise business going forward. We'll still have a client business. Don't get me wrong. It's still going to be there. Like I said, there's a long tail of technology, but... I think as part of that, the industry will come out, we will come out of this as more of a build the order, if you will, as opposed to a build to forecast. So that's why we're having these conversations with our customers because it is a long build time on an HDD and we want to make sure that we've got the infrastructure in place, we've got the components in place, and we're running the right process to deliver what our customers need at the right time. So I think that maybe the short answer to your question is yes, Western Digital is going to more of that kind of process.

Okay, thanks, Dave. And just a clarification on the underutilization charges, which look roughly flattish quarter on quarter. Are those charges roughly similar in Flash and HDDS this past quarter, or are there different moving pieces underlying that for September? Thank you.

Sure, Wamsi. So when you look at the September quarter, the guide had 200 to 220 million of underutilization charges, and they're split roughly 70% FLASH, 30% HDD. And I would, just to clarify also to add with respect probably to the following quarter, I expect underutilization related charges to be let's say 5 to 10% down and most of the, if not all of the decrease would be coming from HDD.

Thank you.

You're welcome.

Thanks, Wamsi.

One moment for our next question, please. Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

Thank you. I want to ask about the cloud weakness again. I understand the cloud things could be lumpy, but curious about your conversations with the large hyperscale guys. How has that changed from a quarter ago? Are they giving you signals about when inventory will start stabilizing? Are they worried about supply in the second half, given production cuts by all the suppliers? And are they more receptive to purchase commitments?

Yeah. What I would say is it's always a very robust conversation given the amount of business we do with the hyperscalers. It's clear that some of them have been in a very severe inventory digestion phase and kind of took a pause on buying anything, but we're back to having conversations with those customers. I mean, they're still growing and you know, storage is still being created and growing. So, you know, we expect those conversations and those businesses to, you know, the buying will reemerge and we're having the conversations on when that will happen and in what magnitude just to make sure that we've got all of our capacity aligned to deliver that. I think we're getting very good reception on the product roadmap as we talked about Our 22, 24, 26 terabyte platform and products have now been qualified by all of the major cloud vendors. We expect to ramp those significantly, especially the 26T next quarter. That's really becoming a major capacity point for some of the biggest cloud builders. And right on the back of that, we're launching a 28T Ultra SMR drive. So the conversations are strong, and it's about making sure we have clear alignment on what their requirements are going to be and that we get the proper manufacturing in place to deliver on that.

Okay, thanks. Maybe a quick follow-up on the hot drive side. Clearly, you guys have been better than the competitor last quarter, I just want to hone in on the SMR drives, which you said have qualified at all major cloud customers. Can you give us an idea what SMR adoption is today and where you think it will be in the few quarters from now? Thanks.

SMR, you know, it's very idiosyncratic, right? I mean, the intersection of adoption and inventory digestion makes it, you know, very lumpy if you look at the current quarter or last quarter. But I can say going forward that several of the major cloud providers are standardizing on an SMR deployment, ultra-SMR for us. And we expect to have a significant ramp of that technology over the next several quarters.

Okay, thank you.

Thank you, Sydney.

Thank you. And one moment for our next question, please. And our next question comes from the line of Toshia Hari with Goldman Sachs. Your line is open. Please go ahead.

Hi, guys. Good afternoon. Thank you so much for taking the question. I had one clarification, then a question. David, on NAND ASPs for the current quarter, I guess you talked about bids being up double digits sequentially, and you're kind of guiding revenue to flat sequentially. So I guess the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is the... the sharper price decline in September that's implied in guidance or embedded in guidance primarily a function of mix, or am I missing something there?

Yeah, it's maybe a little bit, sequentially maybe a little bit lower than what you're modeling, so I think that's where it is. So, Shia, we can follow up with you on kind of more details, but I think that's probably the clarification.

Okay, got it. Thank you. And then as my follow-up, maybe one for WESOM, you mentioned that for fiscal 24, you plan to cut CapEx significantly. I'm curious if it's purely impacting your capacity decisions in NAND, or are there any changes or shifts to how you think about the roadmap? And related to that, I think on a bit shipment, David, you mentioned for calendar 24, You guys are going to be, I think, down low single digits, but how should we think about bit production in calendar 24, given the CapEx and production cuts that you're going through right now? Thank you.

Well, maybe let me start with the first part of the question on CapEx, Toshiya. The comment on CapEx is, you know, well, when you look at fiscal 23, we've taken quite a bit of CapEx out from our plans as we continue to preserve cash. I mean, you can see that we've spent, I think year on year, we're down roughly 30% to 35%. It's almost a billion dollars lower than, at the gross CapEx level, almost a billion dollars lower than what our plan was at the beginning of the year for fiscal 23. for fiscal 24 we're projecting to be significantly lower it's mostly in line it doesn't impact necessarily our product roadmap it is more or less what we see today relative to what our land or basically other types of investments meaning nodal transitions or other types of investments planned. And so I wouldn't say there's any major change relative to what we've already been planning. But given the dynamic macro environment we're operating in, we will continue to monitor just like we've done in fiscal 23 on a quarterly basis and adjust as needed.

Thank you, and we'll move on to our next question.

Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is open. Please go ahead.

Thank you for answering my question. I'm wondering, you know, you have a unique perspective having both HDDs and SSDs. There's commentary coming out of Pure, and I'm hearing more from some of the other storage vendors of, you know, a growing use of storage. within cloud, within data, or sorry, growing use of SSDs, within cloud and data centers and almost like a, you know, potential secular shift. Again, Pure takes it kind of to the extreme. But I'm just wondering how you think about how the mix will trend over time, maybe layer in AI if you want, and just think about, you know, we shouldn't worry about What are you hearing from your customers? And then I have a follow-up. Thank you.

Hey, Shannon. Thanks for the question. We've talked about this a lot over the years. I think that both technologies are growing in the data center. HGD is the predominant storage mechanism in the data center. We don't expect that to change. Our customers don't expect that to change. As we continue to drive the HDD roadmap forward. You know, we just, you know, we're ramping 26 terabyte. We're already launching 28 terabytes. So we're moving forward with capacity points on HDD, and we expect robust growth of HDD storage in the data center going forward. We also expect growth of enterprise SSD storage in the data center going forward. It's probably growing a little bit faster than ACD, but not in a way where you're looking at one as a substitute for the other. They're highly complementary technologies, and we expect that to be the case for any useful planning horizon in the future. We look a decade out. The cost differences are still significant, And that's certainly the way we talk to our customers about how they're building mass-scale data centers.

Okay, great. And, wisdom, can you talk a little bit about OPEX, how you're thinking about it relative to maybe a normalized level, and how much for the model as revenues come back before you have to start spending more, you know, from an OPEX perspective? Thank you.

Yeah, sure. So on OPEX, You saw we continued to manage it very, very tightly. In fiscal Q4, we ended at 582, which is around 180 million lower than the same quarter last year. As to your question, you know, over the near term, I think we're within sort of the range where we expect to be. But as the business starts coming back, there could be some small increase as we start layering up some of the variable expenses on that. However, we shouldn't expect the increase in OPEX to be faster than the increase in revenue, and so we would be monitoring that, and it would be gradual. Similarly, if there's a need for us to take additional action on OPEX to continue to manage very tightly, we also have some room to do that.

Michelle, can we have the next question, please?

We sure can. Just one moment. Our next question comes from the line of Timothy Akuri with UBS. Your line is open. Please go ahead.

Thanks a lot. I had two. The first one is under utilization charges, and it's kind of like a two-part question. So the first is, what's the current utilization in NAND? And then on the HDD side, Is there kind of a milepost as to where these could start to go away? Because you're guiding $70 million for September for underutilization in HDD. It sounds like it goes to maybe $60 to $65 in December quarter. But when does it go away? Because you started to take underutilization charges, I think, when HDD revenue went sub $2 billion per quarter. So do we have to get all the way back to $2 billion a quarter to have those HDD underutilization charges go away?

Okay. So, Tim, with respect to the flash side, you know, we continue to make these decisions on an ongoing basis. And, you know, from the numbers, you can tell the underutilization related charges are projected to be roughly flat from Q4 to Q1. As for I think the math is, your math on Q1 is close to where the guide is, but I think in December quarter, if you think of the underutilization charges going, let's say, from Q1 to Q2 going down 5% or 10%, and all of that decrease coming from HDD, you start seeing some declines basically in the HDD underutilization in the December quarter. And based on what we see today, it's a bit too early to talk about the second half of the fiscal year 2024. But to the point you were making around the $2 billion revenue mark, we don't need to get to the $2 billion revenue mark to really fully utilize our If you recall, we've restructured quite a bit of our manufacturing capacity in the hard drive business, and we continue to take and optimize that fixed cost aspect of the cost structure. And so we can be fully utilized at a lower level than $2 billion, given the current cost structure.

Thanks a lot for that, Wassam. And then just on the debt service cost, so you have the convert due in February. I think that's at a pretty good rate. I think it's at 1.5%. So the debt you're going to replace that with, I imagine, is going to be pretty expensive. So it seems sort of – I guess my question is sort of where does that leave you in the cap structure? Obviously, it seems like debt service costs are going to go up maybe $20 million a quarter once you have to issue new debt for that. So can you just talk about sort of how you solve for all that? Thanks.

So, yeah, the current rate on the convert is 1.5%, and given where the interest rate environment is today, I would expect that to be, if replaced by debt, to be roughly more expensive than that. So, look, it's a little bit too early to talk about it in a lot of details, but this is something that is definitely... a focus for us as we think through the various options that are available to us with respect to refinancing for instance we look at the potential cost of capital and our goal is to make sure that we maintain a lower cost of capital to the extent possible but I expect it to be slightly up from here all said Thanks a lot.

Thank you. And one moment for our next question. Our next question comes from the line of Ananar Bharat with Loop Capital. Your line is open. Please go ahead.

Yeah, thanks, guys. Appreciate you taking the question. Thanks so much. Really, just two quick... Thanks, David. Two quick ones, if I could. When would you expect 26 terabyte, and maybe I'll even throw 28 in there since you mentioned it, David, to reach crossover. And then I just have a quick follow-up to that thing.

Crossover as – look, let me say that there's a lot of – there's multiple different capacity points, so I think we need to maybe talk about this a little bit different. It doesn't just move from – you know, 14, 16, 18, maybe like it did two, three years ago. Now there's a bit of distribution of different customers and what kind of technologies they're using, whether it's 20s or 22s or 26s or going to 28s or even some 24s. So, you know, as I look at where things are going to be in the next couple quarters, you're going to see a pretty even distribution across three or four different capacity points, all of them shipping, you know, half a million or more drives. So, you know, we expect... very substantial ramp of 26. I don't want to take away from the ramp that's going to happen there. It's going to be very quick and very rapid now that it's qualified and getting close to being a leading capacity point in the next couple quarters.

Thanks for making those distinctions. That's actually really helpful. And the follow-up is, do you guys have any view yet, any opinion on when things normalize out in hard drives, if the hyperscalers return to what their classic utilization levels have been historically, how they've run the capacity, or do you think they settle in somewhere different on the utilization?

Look, I think any time you go through a period like this, there's some work done on optimization of the infrastructure and consolidation. I think that's happening. But I would expect things, you know, you go through that and you just incrementally get better. Like anything in technology, you're constantly improving, constantly getting more efficient. I think that that is something that's always going to go on. And, you know, we're still going to see the growth in exabytes on top of that. So I think we're still looking at you know, 20, 25% exabyte growth in the HGD business. And I think, you know, we clearly haven't seen that in the last year, but we know it's a cyclical business and we expect to get back to those levels.

All right. That's awesome. Thanks a lot.

Thank you.

Thank you. And our last question is going to come from the line of Carl Ackerman, before we have a short statement by our CEO.

Could you discuss how we should think about a recovery in near-line units and unit pricing as you and your peer implement a bill-to-order process? And as you address that question, could you discuss how this bill-to-order process may differ from long-term agreements signed in 2021 that were a bit challenging to implement over time? Thank you.

So units, I expect to recover, right? I mean, we're going to get exabyte growth. We're at a low point on Unix. We expect units to recover and get back to where they were and eclipse that, actually, as we continue to get exabyte growth. I'll put in, say, once again, I am very excited about generative AI. I know everybody is, but I think it's going to come to our world on storage once all this gets deployed. And so I expect to see units recover quickly. I think the build-to-order process is going to be a fairly straightforward process because we have deep relationships with the set of customers here. It's a big market. It's a big relationship. And I think it's just getting the business model to a place where there's better alignment between the infrastructure we have in place. Again, we've been talking about this for many years now, the In a lot of ways, cloud has significantly benefited from the reduction in client, and there's been a consistent availability of infrastructure to build hard drives. And we're at the end of that transition now, so we have to just have more planning around that. I think the long-term agreements were a step into that. I think this is maybe the next step into how do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important. The storage is an incredibly important part of the data center, and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model, and I expect it to be very positive on all sides.

Thank you, Carl. All right, everyone, thanks for joining the call. We look forward to talking to you all throughout the quarter. Take care.

This concludes today's conference call. Thank you for joining. You may now disconnect. Thank you. Thank you. Good afternoon and thank you for standing by. Welcome to the Western Digital's fiscal fourth quarter and fiscal 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 1-1 on your telephone. As a reminder, this call is being recorded. Now, I would like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analyst in Investor Relations. You may begin.

Thank you and good afternoon, everyone.

Joining me today are David Geckler, 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 our product portfolio, spending and cost reductions, business plans and performance, 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 and or other filings 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 afternoon, and thank you for joining the call to discuss our fourth quarter and fiscal year 2023 results. Western Digital's fiscal fourth quarter revenue exceeded expectations as our access to broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end markets, reaffirming our strength in a challenging market environment. We reported fourth quarter revenue of $2.7 billion and non-GAAP gross margin of 3.9%. Non-GAAP loss per share was $1.98. Before diving into the specifics of the quarter and the full fiscal year, I would like to take a moment to reflect on our accomplishments in fiscal year 2023. Importantly, we continued to optimize our operations and successfully executed our innovative product roadmap, priming ourselves for greater profitability when demand rebounds across hard drives and flash. Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility. In HDD, we have successfully qualified our latest family of capacity enterprise hard drives at all major customers and are shipping our 26-terabyte ultra-SMR drive in high volume. In Flash, we pioneered the use of wafer bonding in advanced 3D NAND manufacturing and introduced the groundbreaking technology in BIX 8, which sets the foundation for future 3D NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce quarterly operating expense while continuing to deliver innovative products and technologies that address customers' growing storage needs. Further, we reduced our cash capital expenditure run rate by over 50% in the fiscal second half and consolidated our hard drive manufacturing footprint. These efforts enabled Western Digital to preserve capital while effectively executing on product strategies and aligning our supply with post-pandemic demand environment. Notably, we reduced our inventory by nearly $300 million sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro dynamics. In summary, we continued to proactively take action to bolster our agility, enhance our liquidity position, optimize our inventory levels across HCD and flash, and strengthened our position as an industry and market leader. we exited fiscal year 2023 well-positioned to capitalize on improving market conditions and capture long-term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing. We continue to make progress on this process and will provide updates as appropriate. Turning to the fiscal fourth quarter, Revenue in both client and consumer end markets returned to sequential growth, led by normalized end market demand and higher average capacity per unit in flash. In consumer, retail flash exceeded our expectations across all major product categories. We saw similar results in client, with upside in both HCD and flash, and across almost all major product categories, including client SSD, gaming console, embedded flash, and client hard drives. In cloud, demand for both hard drive and flash products remains subdued. I'll now turn to business updates, starting with HDD. In the fiscal fourth quarter, ongoing cloud weakness drove the overall decline in HDD revenue. However, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end of the fiscal fourth quarter, we have successfully qualified all variants of our 22 terabyte CMR and 26 terabyte ultra SMR hard drive platforms at all major cloud customers, setting the stage to improve shipments and profitability. In addition, We are about to begin product sampling of our 28 terabyte UltraSMR drive. This cutting edge product is built upon the success of our ePMR and UltraSMR technologies with features and reliability trusted by our customers worldwide. We are staging this product for quick qualification and ramp as demand improves. Turning to Flash, revenue increased sequentially led by growth in both client and consumer flash bit shipments, which exceeded our expectations with total bit shipments returning to year-over-year growth. The stronger-than-expected bit growth is attributable to normalizing PC and consumer demand, as well as content growth. Average capacity per consumer and client SSD increased over 40% and 20% year-over-year, respectively. Moving to technology developments, we continue to aggressively productize BICS-8 based on a chip bonded to array architecture. BICS-8 solidifies Western Digital and Keoksha's leadership in cost, capital efficiency, and IO performance into the future. Before I turn it over to Wisam, I wanted to share some perspective on our outlook. In HGD, as we look to the fiscal first quarter, we expect overall demand to remain stable. Beyond the fiscal first quarter, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability. In Flash, we are encouraged by several indicators signaling improving market dynamics. Notably, our two largest end markets, client and consumer, are returning to growth, inventories are normalizing, content per unit is increasing, and price declines have been moderating. With that, I'll turn it over to Issam.

Thanks, David, and good afternoon, everyone. As David mentioned, fiscal fourth quarter revenue exceeded our expectations. Total revenue for the quarter was $2.7 billion, down 5% sequentially and 41% year over year. Non-gap loss per share was $1.98. Looking at end markets for the fiscal fourth quarter, cloud represented 37% of total revenue at $1 billion, down 18% sequentially and 53% year over year. Sequentially, the decline was primarily due to a decrease in capacity enterprise drive shipments. Near-line bit shipments were 59 exabytes, down 26% sequentially, driven by ongoing weakness at cloud customers. The year-over-year decrease was primarily due to declines in both hard drive and flash product shipments. Client represented 39% of total revenue at $1 billion, up 6% sequentially and down 37% year-over-year. Sequentially, the increase was driven by growth in bit shipments for gaming consoles. The year-over-year decrease was due to declines in flash pricing and lower client SSD and hard drive unit shipments for PC applications. Consumer represented 24% of total revenue at $0.6 billion, up 3% sequentially and down 19% year over year. Sequentially, the increase was primarily due to higher retail SSD shipments. The year over year decrease was driven by price declines in flash and lower retail hard drive shipments. For the fiscal year, revenue was $12.3 billion, down 34% from fiscal 2022. Nungap gross margin declined 17.2 percentage points to 15.7%, and Nungap operating margin decreased 21.8 percentage points to negative 4.8%. Nungap loss per share was $3.59. Looking at end markets for fiscal year 2023, cloud revenue decreased 34% year over year, primarily due to reduced shipments of capacity enterprise hard drives and enterprise SSDs. Client revenue decreased 39% year over year, primarily due to declines in flash pricing, as well as lower client SSD and hard drive unit shipments for PC applications. Lastly, consumer revenue decreased 26% for the year as growth in retail SSD bit shipments was more than offset by broad-based flash price decline and lower consumer hard drive shipments. Turning now to revenue by segment. In the fiscal fourth quarter, HED revenue was $1.3 billion, down 13% sequentially and 39% year-over-year. Sequentially, Total HDD exabyte shipments decreased 18%, and average price per unit decreased 9% to $99. On a year-over-year basis, HDD exabyte shipments decreased 38%, and average price per unit decreased 17%. Flash revenue was $1.4 billion, up 5% sequentially, and down 43% year-over-year. Sequentially, flash ASPs decreased 6% on a blended basis and 9% on a like-for-like basis. Flash bid shipments increased 15% sequentially and 7% year-over-year. Moving to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal fourth quarter was 3.9%, down 6.7 percentage points sequentially, and 28.4 percentage points year-over-year. This includes $272 million in costs or 10.2 percentage points for manufacturing underutilization, flash inventory write-downs, and other items. HDD gross margin was 20.7%, down 3.6 percentage points sequentially, and 7.5 percentage points year over year. Sequentially, the decrease was primarily due to lower capacity enterprise volume, as well as higher underutilization related charges. Underutilization charges were 76 million, or 5.9 percentage points. Flash gross margin was negative 11.9%, down 6.9 percentage points sequentially, and 47.8 percentage points year-over-year. Underutilization charges due to the reduced manufacturing volumes were 135 million, and inventory write-downs were 27 million, resulting in an 11.8 percentage point reduction. We continue to tightly manage our operating expenses of $582 million for the quarter, down $20 million sequentially and $178 million year-over-year. Operating loss in the quarter was $478 million, driven mainly by underutilization charges, inventory write-downs, and other items totaling $272 million. Income tax expense was $57 million for fiscal fourth quarter and $237 million for fiscal year 2023. Despite a consolidated loss, we continue to have taxable income in certain geographies, resulting in taxes payable in those areas. Fiscal fourth quarter loss per share was $1.98 inclusive of $15 million dividend associated with the convertible preferred equity. Operating cash flow for the fourth quarter was an outflow of $68 million, and free cash flow was an outflow of $219 million. Cash capital expenditures, which include the purchase of property, planning, and equipment, and activity related to our flash joint ventures on the cash flow statement, were $151 million. Gross debt outstanding was $7.1 billion at the end of fiscal fourth quarter. Trading 12-month adjusted EBITDA at the end of the fourth quarter, as defined in our credit agreement, was $1.6 billion, resulting in a gross leverage ratio of 4.5 times compared to 2.8 times in the fiscal third quarter. As a reminder, the credit agreement includes $0.7 billion in a depreciation add-back associated with the flash joint ventures. This is not reflected in the cash flow statement. Please refer to the earnings presentation on the investor relations website for further details. During the fiscal fourth quarter, we executed amendments to our credit agreements. These amendments include modifications to the leverage ratio requirements applicable through the fourth quarter of fiscal year 2025, which provide additional financial flexibility in the near term. We also extended the commitment under the delayed draw term loan agreement to August 14, 2023. Please refer to our earnings presentation for details. At the end of the quarter, total liquidity was $4.9 billion, including cash and cash equivalents of $2 billion undrawn revolver capacity of 2.25 billion, and an unused delayed draw term loan facility of 600 million. Before I cover guidance for the fiscal first quarter, I'll discuss our business outlook. For fiscal first quarter, sequentially, we expect both HDD and flash revenue to be relatively stable. In fiscal first quarter, we are continuing to adjust production to better match demand, and anticipate underutilization charges to impact both HDD and flash gross margins, along with product mix pressures on flash ASP. Beyond the fiscal first quarter, we anticipate both HDD and flash revenue to improve through the remainder of fiscal year 2024, driven by normalizing demand in storage, as well as higher average content per unit in flash. Gross margin is expected to gradually improve driven by higher HDD volume and lower underutilization charges in both FLASH and HDD. We will continue to tightly manage our cost structure and expenses as we navigate the challenging environment. For fiscal year 2024, we expect capital expenditures to decline significantly. I will now turn to guidance. For the fiscal first quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $2.55 to $2.75 billion. We expect gross margin to be between 2.5% and 4.5%, which includes underutilization charges across FLASH and HDD totaling $200 to $220 million. We expect operating expenses to be between $570 to $590 million. Interest and other expenses are expected to be approximately $90 million. We expect income tax expense to be between $30 and $40 million for the fiscal first quarter and $130 to $170 million for fiscal year 2024. We expect the loss per share of $1.80 to $2.10, assuming approximately 323 million shares outstanding. I'll now turn the call back over to David.

Thanks, Wisam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress in strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater profitability as demand inevitably rebounds across hard drives and flash. As we move forward, we remain confident in our ability to capitalize on emerging opportunities and deliver continued success. Before opening up for Q&A, I would like to take a moment to recognize Siva Sivaram, our esteemed President of Technology and Strategy. Siva will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain. Seba has made significant contributions to Western Digital and SanDisk over the past 10 years, and he is a wonderful friend. We wish him all the best going forward.

Peter, let's start the Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star 11 on your telephone. If you would like to withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead.

Great. Thank you. I wonder if you could talk to NAND in the current quarter. It looks like the underutilization charges are similar. Does that mean your utilization is unchanged, and I guess it seems like you were able to make some inventory progress. Does that mean that you can at some point have line of sight to bring that back up?

Yeah. Hey, Joe. Thanks for the question. NAND in the current quarter, as we said, you know, we saw good, I guess, good market reaction in consumer and in the client business. Both returned to growth on an exabyte basis. They both were sequential growers, so we saw incremental upside there. So we were happy about that. We are still underutilizing the FAB. I'll let WESOM talk about that in a little bit more detail. We do plan to underutilize for another couple quarters, but we feel good about the overall, you know, the signs in the overall market. Price declines are moderating. Our inventory is down. Bid shipments are up. We expect bid shipments to be up again, double digits next quarter. So Not quite where we want to be yet, but the market is stabilizing, and we see a lot of good things, a lot of metrics going in the right direction.

Yeah, Joe, and with respect to underutilization, we saw similar type of underutilization charges in fiscal Q4 versus Q3. for the flash side. And when you look at HDD, we had a bit more unutilization. But sticking with the flash, also in our guidance, we've noted similar levels into fiscal Q1. Albeit, if you look at sort of the range of 200 to 220, I would say it is split 70% flash, 30% HDD. And also, if I think of, let's say, the fiscal Q2, I anticipate more or less similar levels of underutilization from where we stand today.

Great. Thank you. And if I could just show up, in terms of the uses of cash in the next few quarters, I know you've got the convert that comes due early next year. I think there's still some issues about a potential tax payment. Can you just update us there and sort of, you know, do you need to raise money to pay those out?

So with respect to uses of cash, as you noted, we do have the convert that matures in February 24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up and we expect also this payment to be very likely this quarter. But with respect to liquidity exiting fiscal Q4, we had approximately $4.9 billion of liquidity. And so if you recall, the delayed drought term loan was put in place in the event we need to address the IRS settlement. So that will be drawn down to take care of the IRS settlement when it happens. And with respect to the convert I mentioned, we'll address it in the coming two cores.

Thank you very much.

Thanks, Joe. You're welcome.

Thank you. And one moment, please, for our next question. Our next question is going to come from the line of CJ Muse with Evercore ISI. Your line is open. Please go ahead.

Good afternoon. I guess this question, from a supply perspective, we haven't seen the shutdown of digitalization. How do you think about a return to supply-demand normalization over the next six, nine, ten months?

Okay, hey, that was CJ, right?

CJ, that was very, it was a little tough to hear you there, but I think we got the gist of the question, which was supply-demand normalization. Is that right in Flash?

Yes.

No, that's all right. Okay, so look, I think, as I said, a number of things we saw in the market this quarter, we saw sequential bid growth overall. We saw client and consumer returning to exabyte growth on a year-over-year basis. Consumer SSD content up 40%. Client SSD up 20%. We saw our inventory down. We think in the consumer and client markets, PC markets, basically shipping to demand at this point. We expect our For the fiscal year, we saw our bits about flat year over year. For the calendar year, we see them down low single digits. We probably see the industry down a little lower than that. So, you know, we're taking the actions to bring supply and demand better into balance, and I think we're seeing that across our markets. Cloud is still – you know, there's still a couple quarters to go there. That's a larger story. But, you know, in our two biggest markets for flash, we're seeing – we're seeing that supply-demand balance start to move closer together, put it that way. Thank you.

And my second question, from a strategic view, you know, you announced early, fairly late, so I think there was the hope that maybe there might be some underlying causes underneath that that, you know, to win that. So I guess I actually would be thinking about training and hearing about and update that.

okay i think that was a strategic review and timing uh cj uh so like the process is active um you know we look forward to talking more about it when we reach a conclusion thank you thank you thank you in one moment for our next question please our next question is going to come from the line of aaron rakers with

Wells Fargo, your line is open. Please go ahead.

Thank you, guys. This is Michael on behalf of Aaron. I wanted to ask, how are you guys thinking with the recent uptick in AI investment in the data center? How do you think that impacts the mix of flash relative to HDD capacity being deployed or maybe how that will impact you going forward? And then kind of related to that, can you guys just give us an update on where you stand with your enterprise SSD qualifications? Thank you.

Yeah, I've been thinking a lot about generative AI. It's clearly a big topic these days and obviously a lot of spend going on to build out the infrastructure in the cloud, which I think, quite frankly, is a great thing. You know, the cloud distribution model of new technology is something that is pretty amazing that's been built out over the last decade, so we all get access to this technology very rapidly. And when I think about this in the storage domain, clearly the compute infrastructure is being built out now, but what we're all going to be enabled with are incredible tools to automate data creation at many different levels, whether it's text data, video data, whatever it happens to be. I think that we're essentially going to really accelerate our ability, all of us, to create information that needs to be stored. So I see this as kind of a catalyst for just a profound increase in the amount of data creation. I think that once those tools get distributed and we all start using them, I think that drives incremental growth across SSDs and hard drives. I mean, hard drives are the foundational storage in the cloud. It's going to be that way for a very long time. So While GenAI may have some disruptions on the business in the near term as the compute infrastructure gets built out, very optimistic that this is a, as I said, I think it's a profound, it's a catalyst for a profound increase in the rate of data creation. So quite excited about that. We don't know exactly how you model that just yet, except that, you know, there's new innovation drives new data creation which drives the need for storage. So we look forward as this infrastructure gets built out and rapidly adopted, the impact it's going to have on our business. Now, on Enterprise SSD, we still have the qualifications. We've recently qualified BICS-5 in some of these places. You know, that market, along with Nearline HDD or Capacity Enterprise HDD, is depressed right now or subdued, so we're not seeing a lot of growth in that. But we fully expect that when that market comes back and that part of cloud infrastructure spending comes back, that we'll be in a good position. You know, we're still investing in the products and feel good about the position we have with the major cloud vendors.

I appreciate that.

Thank you. Thank you.

Thank you. And one moment for our next question. Our next question is going to come from the line of Tom O'Malley with Barclays. Your line is open. Please go ahead.

Hey, good afternoon, guys, and thanks for taking my question. I wanted to narrow in on the HDD side. There's been a variance of timing of recovery across the industry. Could you just give us your latest on when you think the cloud portion of your HDD business is going to recover? I know you previously have said the fourth quarter. Has there been any push out in that expectation? And could you also just comment on the health? I know it's down this quarter, but just the health of that HDD business as you're seeing it today. So just the timing of the recovery and how it's turning today.

Yeah, I think as we move to, you know, so first of all, you know, we think we're going to see sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but it's going to be towards the end of the year into the first quarter where we start You know, we start to get line of sight to all of the customers coming back. I think we're having discussions across all of our customers about what they're – we always have conversations. But, you know, some of the big ones have been in inventory digestion for quite a while, so we're getting better line of sight to the end of that. But I think we still have a couple quarters to go, but improving – I think next quarter things will be stable. There will be a bit of mixed impact there. We expect clients to be a little bit more challenged than this quarter. But I think as we move throughout the year, things will get better. And I think your timing of a couple more quarters of getting through this phase and as we get into early next year, we expect things to look better.

Helpful. And then also in the HCD visit, your competitor kind of talked about being more aggressive in certain areas on pricing. Have you guys also looked to be more aggressive on pricing and any comments that you have on just your strategy with clients on the pricing side? Thank you.

Yeah, pricing really starts with innovation. I mean, I think that's where, you know, we're staging our 28T Ultra SMR product. You know, we're really, really happy with where Ultra SMR is at. EPMR, OptiNAN, and we're already staging our next product for growth there. That's the underpinnings of where we're able to bring a better TCO proposition to our customers. And as we do that, we're able to share in the benefits of that as those drives get deployed The rest of the market is more market-driven pricing. You know, we have a lot of different channels, a lot of different markets we sell into. And, you know, that type of pricing is just more what you would typically think in any big market around supply and demand.

Thank you.

Thanks, Tom.

Thank you. And one moment for our next question. Our next question comes from the line of Krish Vankar with Cowan. Your line is open. Please go ahead.

Yeah, hi. Thanks for taking my question.

I told them, first and foremost, in June, the pricing should improve after, or revenue should improve after December. Is that a function of overall non-pricing getting better, or your specific exposure to retail and PCs without BU. I'm going to follow up.

I missed the first part of the question.

Yeah, sorry. Sorry, Chris. Could you please repeat?

Yeah, we didn't have a great, there was a little bit of static on the line.

I apologize. I was just trying to figure out, you know, pricing was not added. We spoke about revenues improving. Is it a function of man pricing improving or just because your targeted curriculum is going to get better.

Okay, I think I got it that time. So NAN pricing, so first of all, in the last quarter, you saw like-for-like pricing down nine, blended down six, so moderating from the quarter before. Next quarter, we expect volume to pick up, which will drive, you know, volume to pick up, margin to be impacted a little bit more from where it is today. So continue to moderate, but volume picking up. Does that help answer your question? I don't know if I, I didn't get all of your question, Chris, so I'm sorry if I'm not answering it.

No, no, I think it does. I was just trying to figure out, you know, specific N-vertical, which is species and retail.

Oh, yeah, well, I got you.

So, you know, as we said, we saw the client and consumer markets return to growth, exabyte growth, and sequential revenue growth. So we see those markets have kind of threw their inventory digestion and more shipping to end demand. So, you know, we expect that to continue as we go forward.

Got it. Thanks, David. And then a quick follow-up on hard drive. You said that you're sampling the 28 terabyte ETMR. Is the 32 terabyte ETMR still on your roadmap? And are you doing that by increasing the number of disks per drive? And how do you think about the gross margin 22 terabytes?

Okay, so let me, again, I think I got most of the questions. So we're not adding more disks. I mean, UltraSMR is a, you know, it's a combination of our ePMR, OptiNAND, and UltraSMR technology. It's the next step on the roadmap. You know, I think we've talked a lot over the last year plus about this, you know, driving from 20 to 30 plus with a set of technologies around ePMR, OptiNAND, and Ultra SMR. And this is the next step in that roadmap. We still have a couple more steps to go. So we'll announce the products one at a time. But we're happy with where we are and continue to drive innovation. And as demand comes back, we'll be ramping into a great set of products. And these are products that can be staged quickly and ramp in volumes very quickly, very established technology. And the 26T drive is ultra SMR drive, we really, you know, that sold at scale this quarter, and we expect a significant growth in that in the next quarter as well.

Awesome. Very helpful. Thank you.

Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Wang Zai Mohan with Bank of America. Your line is open. Please go ahead.

Yes, thank you so much. So we've had a few head fakes on recovery on the cloud side, particularly in HDDs. And wondering, as you think through sort of this improvement starting in fiscal 2Q, what's underpinning some of the confidence you know to demand recovery? Are you seeing particular signs from customers that are pointing to that? And your primary competitor also noted taking some changes, including a build-to-order philosophy. Curious if you guys are contemplating any such changes. And I will follow up.

Hey, Wamsi. So first of all, yeah, I mean, you hit it. I mean, we have ongoing and very significant conversations with our customers on a, you know, many quarters out. So that's what gives us, you know, that's what, underpins the view we have. To your point, things can change, but that's a current view, and the conversations are productive and positive. On the build-to-order comment, look, I think the industry is going to come out of the – well, let me speak about us. So Western Digital will come out of this downturn. It's a pretty severe downturn in a cyclical industry, but We've done a lot of things that I think the business is going to be different on the other side of this. First of all, we've taken a significant amount of capacity out of the system. We've talked about the shift from client to capacity enterprise, at least as long as I've been here and it's been going on for many, many years before that. I think that transition is going to be essentially done. There's a long tail on any technology, but if you look on the unit basis, we'll come out of this with significant less spending on our infrastructure. We'll have the lowest fixed costs we've had in a decade plus in our HED infrastructure, and we'll really be focused exclusively on that client enterprise business going forward. We'll still have a client business, don't get me wrong. It's still going to be there. Like I said, there's a long tail of technology, but I think as part of that, the industry will come out, we will come out of this as more of a build the order, if you will, as opposed to a build to forecast. So that's why we're having these conversations with our customers because it is a long build time on an HDD and we want to make sure that we've got the infrastructure in place, we've got the components in place, and we're running the right process to deliver what our customers need at the right time. So I think that maybe the short answer to your question is yes, Western Digital is going to more of that kind of process.

Okay, thanks, Dave. And just a clarification on the underutilization charges, which look roughly flattish quarter on quarter. Are those charges roughly similar in Flash and HDDS this past quarter, or are there different moving pieces underlying that for September? Thank you.

Sure, Wamsi. So when you look at the September quarter, the guide had 200 to 220 million of underutilization charges, and they're split roughly 70% FLASH, 30% HDD. And I would, just to clarify also to add with respect probably to the following quarter, I expect underutilization related charges to be let's say 5 to 10% down and most of the, if not all of the decrease would be coming from HDD.

Thank you. You're welcome.

Thanks, Wamsi.

One moment for our next question, please. Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

Thank you. I want to ask about the cloud weakness again. I understand the cloud things could be lumpy, but curious about your conversations with the large hyperscale guys. How has that changed from a quarter ago? Are they giving you signals about when inventory will start stabilizing? Are they worried about supply in the second half, given production cuts by all the suppliers? And are they more receptive to purchase commitments?

What I would say is it's always a very robust conversation given the amount of business we do with the hyperscalers. It's clear that some of them have been in a very severe inventory digestion phase and kind of took a pause on buying anything, but we're back to having conversations with those customers. They're still growing and you know, storage is still being created and growing. So, you know, we expect those conversations and those businesses to, you know, the buying will reemerge and we're having the conversations on when that will happen and in what magnitude just to make sure that we've got all of our capacity aligned to deliver that. I think we're getting very good reception on the product roadmap as we talked about Our 22, 24, 26 terabyte platform and products have now been qualified by all of the major cloud vendors. We expect to ramp those significantly, especially the 26T next quarter. That's really becoming a major capacity point for some of the biggest cloud builders. And right on the back of that, we're launching a 28T Ultra SMR drive. So the conversations are strong, and it's about making sure we have clear alignment on what their requirements are going to be and that we get the proper manufacturing in place to deliver on that.

Okay, thanks. Maybe a quick follow-up on the hot drive side. Clearly, you guys have been better than the competitor last quarter. I just want to hone in on the SMR drives, which you said have qualified at all major cloud customers. Can you give us an idea what SMR adoption is today and where you think it will be in the few quarters from now? Thanks.

SMR, you know, it's very idiosyncratic, right? I mean, the intersection of adoption and inventory digestion makes it, you know, very lumpy if you look at the current quarter or last quarter. But I can say going forward that several of the major cloud providers are standardizing on an SMR deployment, ultra-SMR for us. And we expect to have a significant ramp of that technology over the next several quarters.

Okay, thank you.

Thank you, Sydney.

Thank you. And one moment for our next question, please. And our next question comes from the line of Toshia Hari with Goldman Sachs. Your line is open. Please go ahead.

Hi, guys. Good afternoon. Thank you so much for taking the question. I had one clarification, then a question. David, on NAND ASPs for the current quarter, I guess you talked about bids being up double digits sequentially, and you're kind of guiding revenue to flat sequentially. So I guess the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is the... the sharper price decline in September that's implied in guidance or embedded in guidance primarily a function of mix, or am I missing something there?

Yeah, it's maybe a little bit, sequentially maybe a little bit lower than what you're modeling, so I think that's where it is. So, Shia, we can follow up with you on kind of more details, but I think that's probably the clarification.

Okay, got it. Thank you. And then as my follow-up, maybe one for WESOM, you mentioned that for fiscal 24, you plan to cut CapEx significantly. Curious if it's purely impacting your capacity decisions in NAND, or are there any changes or shifts to how you think about the roadmap? And related to that, I think on a bit shipment, David, you mentioned for calendar 24, you guys are going to be, I think, down low single digits. But how should we think about BIP production in calendar 24, given the CapEx and production cuts that you're going through right now? Thank you.

Well, maybe let me start with the first part of the question on CapEx, Toshiya. The comment on CapEx is, you know, well, when you look at fiscal 23, we've taken quite a bit of CapEx out from our plans as we continue to preserve cash. I mean, you can see that we've spent, I think year on year, we're down roughly 30% to 35%. It's almost a billion dollars lower than, at the gross CapEx level, almost a billion dollars lower than what our plan was at the beginning of the year for fiscal 23. For fiscal 24, we're projecting to be significantly lower. It's mostly in line, it doesn't impact necessarily our product roadmap. It is more or less what we see today relative to what our NAND or basically other types of investments, meaning nodal transitions or other types of investments, planned. And so I wouldn't say there's any major change relative to what we've already been planning. But given the dynamic macro environment we're operating in, we will continue to monitor just like we've done in fiscal 23 on a quarterly basis and adjust as needed.

Thank you, and we'll move on to our next question.

Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is open. Please go ahead.

Thank you for answering my question. I'm wondering, you know, you have a unique perspective having both HDDs and SSDs. There's commentary coming out of Pure, and I'm hearing more from some of the other storage vendors of, you know, a growing use of storage. and cloud within data, or sorry, growing use of SSDs within cloud and data centers and almost like a, you know, potential secular shift. Again, Pure takes it kind of to the extreme. But I'm just wondering how you think about how the mix will trend over time, maybe layer in AI if you want, and just think about, you know, we shouldn't worry about What are you hearing from your customers? And then I have a follow-up. Thank you.

Hey, Shannon. Thanks for the question. We've talked about this a lot over the years. I think that both technologies are growing in the data center. HGD is the predominant storage mechanism in the data center. We don't expect that to change. Our customers don't expect that to change. As we continue to drive the HGD roadmap forward. You know, we just, you know, we're ramping 26 terabytes. We're already launching 28 terabytes. So we're moving forward with capacity points on HGD, and we expect robust growth of HGD storage in the data center going forward. We also expect growth of enterprise SSD storage in the data center going forward. It's probably growing a little bit faster than ACD, but not in a way where you're looking at one as a substitute for the other. They're highly complementary technologies, and we expect that to be the case for any useful planning horizon in the future. We look a decade out. The cost differences are still significant. And that's certainly the way we talk to our customers about how they're building mass-scale data centers.

Okay, great. And, wisdom, can you talk a little bit about OPEX, how you're thinking about it relative to maybe a normalized level, and how much for the model as revenues come back before you have to start spending more, you know, from an OPEX perspective? Thank you.

Yeah, sure. So on OPEX, You saw we continued to manage it very, very tightly. In fiscal Q4, we ended at 582, which is around 180 million lower than the same quarter last year. As to your question, you know, over the near term, I think we're within sort of the range where we expect to be. But as the business starts coming back, there could be some small increase as we start layering up some of the variable expenses on that. However, we shouldn't expect the increase in OPEX to be faster than the increase in revenue. And so we would be monitoring that, and it would be gradual. And similarly, if there's a need for us to take additional action on OPEX to continue to manage very tightly, we also have some room to do that.

Michelle, can we have the next question, please?

We sure can. Just one moment. Our next question comes from the line of Timothy Akuri with UBS. Your line is open. Please go ahead.

Thanks a lot. I had two. The first one is under utilization charges, and it's kind of like a two-part question. So the first is, what's the current utilization in NAND? And then on the HDD side, Is there kind of a milepost as to where these could start to go away? Because you're guiding $70 million for September for underutilization in HDD. It sounds like it goes to maybe $60 to $65 in December quarter. But when does it go away? Because you started to take underutilization charges, I think, when HDD revenue went sub $2 billion per quarter. So do we have to get all the way back to $2 billion a quarter to have those HDD underutilization charges go away?

Okay, so, Tim, with respect to the flash side, you know, we continue to make these decisions on an ongoing basis. And, you know, from the numbers, you can tell the underutilization-related charges are projected to be roughly flat from Q4 to Q1. I think your math on Q1 is close to where the guide is, but I think in December quarter, if you think of the underutilization charges going, let's say, from Q1 to Q2 going down 5% or 10%, and all of that decrease coming from HDD, you start seeing some declines basically in the HDD underutilization charges. in the December quarter. And based on what we see today, it's a bit too early to talk about the second half of the fiscal year 2024. But to the point you were making around the $2 billion revenue mark, we don't need to get to the $2 billion revenue mark to really fully utilize our If you recall, we've restructured quite a bit of our manufacturing capacity in the hard drive business, and we continue to take and optimize that fixed cost aspect of the cost structure. And so we can be fully utilized at a lower level than $2 billion, given the current cost structure.

Thanks a lot for that, Wassam. And then just on the debt service cost, so you have the convert due in February. I think that's at a pretty good rate. I think it's at 1.5%. So the debt you're going to replace that with, I imagine, is going to be pretty expensive. So it seems sort of – I guess my question is sort of where does that leave you in the cap structure? Obviously, it seems like debt service costs are going to go up maybe $20 million a quarter once you have to issue new debt for that. So can you just talk about sort of how you solve for all that? Thanks.

So, yeah, the current rate on the convert is 1.5%, and given where the interest rate environment is today, I would expect that to be, if replaced by debt, to be roughly more expensive than that. So, look, it's a little bit too early to talk about it in a lot of details, but this is something that is definitely... a focus for us as we think through the various options that are available to us with respect to refinancing for instance we look at the potential cost of capital and our goal is to make sure that we maintain a lower cost of capital to the extent possible but I expect it to be slightly up from here all said

Thanks a lot.

Thank you. And one moment for our next question. Our next question comes from the line of Ananabara with Loop Capital. Your line is open. Please go ahead.

Yeah, thanks, guys. Appreciate you taking the question. Thanks so much. Really, just two quick... Thanks, David. Two quick ones, if I could. When would you expect 26 terabyte, and maybe I'll even throw 28 in there since you mentioned it, David, to reach crossover. And then I just have a quick follow-up to that thing.

Crossover as – look, let me say that there's a lot of – there's multiple different capacity points, so I think we need to maybe talk about this a little bit different. It doesn't just move from – you know, 14, 16, 18, maybe like it did two, three years ago. Now there's a bit of distribution of different customers and what kind of technologies they're using, whether it's 20s or 22s or 26s or going to 28s or even some 24s. So, you know, as I look at Where things are going to be in the next couple quarters, you're going to see a pretty even distribution across three or four different capacity points, all of them shipping, you know, half a million or more drives. So, you know, we expect... very substantial ramp of 26. I don't want to take away from the ramp that's going to happen there. It's going to be very quick and very rapid now that it's qualified and getting close to being a leading capacity point in the next couple quarters.

Thanks for making those distinctions. That's actually really helpful. And the follow-up is, do you guys have any view yet, any opinion on you know, when things normalize out in hard drives, if the hyperscalers return to what their classic utilization levels, you know, have been historically, how they've run the capacity, or do you think they settle in somewhere different on the utilization?

Look, I think any time you go through a period like this, there's some work done on optimization of the infrastructure and consolidation. I think that's happening. But I would expect things, you know, you go through that and you just incrementally get better. Like anything in technology, you're constantly improving, constantly getting more efficient. I think that that is something that's always going to go on. And, you know, we're still going to see the growth in exabytes on top of that. So I think we're still looking at you know, 20, 25% exabyte growth in the HGD business. And I think, you know, we clearly haven't seen that in the last year, but we know it's a cyclical business and we expect to get back to those levels.

All right. That's awesome. Thanks a lot.

Thank you.

Thank you. And our last question is going to come from the line of Carl Ackerman, before we have a short statement by our CEO.

Could you discuss how we should think about a recovery in near-line units and unit pricing as you and your peer implement a bill-to-order process? And as you address that question, could you discuss how this bill-to-order process may differ from long-term agreements signed in 2021 that were a bit challenging to implement over time? Thank you.

So units, I expect to recover, right? I mean, we're going to get exabyte growth. We're at a low point on Unix. We expect units to recover and get back to where they were and eclipse that, actually, as we continue to get exabyte growth. I'll put in, say, once again, I am very excited about generative AI. I know everybody is, but I think it's going to come to our world on storage once all this gets deployed. And so I expect to see units recover quickly. I think the build-to-order process is going to be a fairly straightforward process because we have deep relationships with the set of customers here. It's a big market. It's a big relationship. And I think it's just getting the business model to a place where there's better alignment between the infrastructure we have in place. Again, we've been talking about this for many years now, the In a lot of ways, cloud has significantly benefited from the reduction in client, and there's been a consistent availability of infrastructure to build hard drives. And we're at the end of that transition now, so we have to just have more planning around that. I think the long-term agreements were a step into that. I think this is maybe the next step into how do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important. The storage is an incredibly important part of the data center, and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model, and I expect it to be very positive on all sides.

Thank you, Carl. All right, everyone, thanks for joining the call. We look forward to talking to you all throughout the quarter. Take care.

This concludes today's conference call. Thank you for joining. You may now disconnect.