Western Digital Corporation

Good morning, ladies and gentlemen, and welcome to the Western Digital first quarter fiscal 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touchtone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Peter Andrews, VP of FP&A and Investor Relations. Sir, please go ahead.

Thank you, and good morning, everyone. Joining me today are David Geckler, Chief Executive Officer, and Wissam Jabre, Chief Financial Officer. Before I begin, we have a lot of exciting items to discuss today. In addition to the earnings press release and slides, We also have a press release and slides regarding the conclusion of our strategic review. All of these materials will be posted in the investor relations section of our website shortly. Let me remind everyone that today's discussion contains forward-looking statements based on management's current assumptions and expectations and as such does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, spending and cost reductions, business plans and performance, market trends, financial results, the outcome of a potential separation of our HDD and flash businesses, including the form, timing, and tax-free status of the transaction, our ability to complete the transaction, the future performance of our separated businesses, and the creation of shareholder value by separating our businesses. We assume no obligation to update these statements. please refer to our most recent financial report on Form 10-K and 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 will now turn the call over to David for introductory remarks.

Thank you, Peter. Good morning and thank you for joining our call. I will first discuss the completion of the strategic review and then turn to our first quarter results. We're thrilled to announce the completion of our strategic review and plans to form two independent public companies focused on capitalizing on the data storage industry's growth in HGD and FLASH. After evaluating a comprehensive range of alternatives, the Western Digital management team and board determined that spinning off its Flash business is the best executable alternative at this time to fully realize value for shareholders. This transaction will allow each franchise to execute on its product and innovation roadmap and capitalize on the unique growth opportunities in their respective end markets. Each company will benefit from streamlined management focus, operational flexibility, and the ability to set its own distinct capital allocation and shareholder return policies. We are excited for the opportunities this transaction creates to better serve our customers, support our suppliers, partners and employees, and unlock significant value for our shareholders. Before discussing the details, Let me walk you through the journey that brought us to this point. In March 2020, I joined Western Digital with a strong conviction in the company's unique position to accelerate and benefit from the digital transformation that is reshaping every industry, every company, and how all of us live our daily lives. And importantly, I saw an opportunity to create value for a leader in both NAND flash and hard drives. During my early days at the company, I spent considerable energy into rebuilding and refocusing the company, including the formation of the HDD and Flash business units. It soon became clear that our focus on driving two distinct technology portfolios was the right strategy, and the new management team that I brought in worked together to transform Western Digital by bolstering business agility and reinvigorating innovation. In addition, we promptly focused on strengthening our balance sheet. We made the tough decision to suspend our dividend, which allowed Western Digital to speed up debt reduction and paid down $2.7 billion of debt over a couple of years following the suspension. We further enhanced our liquidity by bringing in $900 million of strategic investment from Apollo Global Management and Elliott Investment Management and amended our credit agreements. We also settled a long-standing tax dispute to increase strategic optionality. The groundwork we laid over the past several years, including the additional actions taken in fiscal year 23 to right-size the business, have enabled us to navigate a dynamic environment, all while staying focused on delivering a range of industry-leading products. Each business is now in a strong operational position to succeed on its own, and the actions we are announcing today will further enable each company to drive long-term success in the years to come. The Western Digital team and board completed the strategic review after evaluating a comprehensive range of alternatives and determine that spinning off its flash business is the best executable alternative at this time to fully realize value for shareholders. During our strategic review process, we evaluated material opportunities for each of our businesses. However, given current constraints, it has become clearer to the Board in recent weeks that delivering a standalone separation is the right next step in the evolution of Western Digital and puts the company in the best position to unlock value for our shareholders while providing strategic optionality for both businesses. Given the confidential nature of the strategic review, we will not be discussing any of the other alternatives that were considered during the process. On page six of the presentation, we present a separation transaction summary. The HDD business will retain the Western Digital name and become an independent publicly traded company. The flash business is expected to be spun off in a tax-free transaction to Western Digital shareholders, and the name of the publicly traded company will be determined at a later time. We target to complete these plans in the second half of calendar year 24, subject to the principal closing conditions described in the slide. Page 7 provides a bit more visibility into some of the end market exposure for our flash and HDD businesses on a trailing 12-month basis. Moving to the individual businesses on page 8, in HDD, Western Digital is a well-known leader in the mass storage market with an ability to generate consistent cash flow on a standalone basis. Our ability to lead the industry in bringing new innovations to the hard drive market to enable higher capacity points for mass market adoption has established Western Digital as a key strategic supplier to the world's global cloud service providers, storage OEM, and distributors. The massive opportunity is driven by the ongoing expansion of the cloud infrastructure connected to intelligent endpoints and powered by high-speed networks. Industry analysts estimate the HCD addressable market to grow at approximately 12% compounded annual growth rate to $25 billion over the next three years, with cloud representing over 90% of the total addressable market. The cloud represents an incredibly large and growing end market for Western Digital, and we are well positioned to address customer storage needs. Moving to our flash business on page 10. The Western Digital flash business is well known for its broad go-to-market channels, enviable premium brand retail franchise, and strong client SSD portfolio. Industry analysts forecast the flash market to grow at approximately 15% compounded annual growth rate over the next three years to $89 billion in calendar year 2025. We believe content increases in the consumer and client end markets, as well as explosive growth of data created in the cloud by emerging applications such as generative AI, virtual reality, and autonomous driving, are driving a faster growth in Flash versus HDD. The highlight of our consumer end market is the strength of our SanDisk brand of retail products, and our suite of high-performance SSDs for gaming enthusiasts. The brand recognition and affinity, combined with our unmatched presence across the world, is a great setup for the business on a standalone basis. Our successful 23-year partnership with Kyoksha continues to provide us a reliable source of high-performance, low-cost flash. Together, we have successfully brought to market numerous generations of flash technology with the industry's lowest cost and best capital efficiency. The joint venture fabs produce over 30% of the world's bits, And our joint memory technology roadmap remains incredibly well positioned, especially as we lead the industry's transition to wafer bonding. We will likely host an investor day closer to the time of the spinoff of our flash business to give investors greater clarity into the historical and future outlook for each of our businesses, along with the intended capital structures for each business. With that, I'd like to turn to first quarter fiscal 24 earnings review and business update. Western Digital's first quarter results exceeded our expectations as the team's efforts to bolster business agility, drive innovation, and right-size the business have enabled us to capitalize on enhanced earning power in an improving environment. We reported first quarter revenue of $2.75 billion and a non-GAAP loss per share of $1.76. Our ability to develop differentiated and innovative products across a broad range of end markets has resulted in sequential margin improvement across both flash and HDD businesses. In flash, healthy inventory levels on our balance sheet and signs that flash pricing is beginning to inflect have laid the groundwork for further gross margin improvements. Our broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio have enabled us to shift bits to the most attractive end-market categories and achieve 26% sequential bit growth, as well as upside in gross margin. In HDD, our industry-leading 26-terabyte Ultra-SMR drive became the highest near-line volume runner in just two quarters. which demonstrates Western Digital's aerial density leadership and ability to deliver high-volume innovative technologies to data center customers worldwide. During the quarter, demand in consumer and client continued to improve, exceeding our expectations. In consumer, flash revenue has returned to growth on a year-over-year basis, led by strong content increases and unit growth. In client, PC and component demand also exceeded our expectations, and demand for gaming consoles and mobile remained resilient. In cloud, demand for both hard drive and Flash products remained subdued. I'll now turn to the business updates, starting with Flash. During the quarter, flash revenue increased sequentially, led by record exabyte shipments and continued content growth in consumer and client end markets, including PCs and all retail products, as we continue to optimize bid placement in an improving environment. WD Black, which is optimized for gaming, continued to perform well with bit shipments more than doubling and content per unit increasing over 50% year over year. We are in an excellent position from both the flash technology and capital efficiency perspective. Today, a majority of products we are shipping are based on BIX5, the most capital-efficient node in the 3D era that continues to provide an amazing cost structure and efficient capital spending. As we look into calendar year 24, we are ramping an array of QLC-based client SSDs based on BIX6 technology to lead the expected industry transition to QLC. After Bix 6, we remain on track to introduce a broad range of high-performance products based on Bix 8 technology with its unique chip-bonded on-array architecture. Turning to HDD, revenue declined due to lower near-line exabyte shipments driven by subdued demand from our cloud customers and slower than expected recovery in China. However, demand for consumer and client hard drives was stable. Western Digital has continued to lead the industry in driving innovation within the near-line market. Our ability to bring innovation into mass market drives that are quickly deployed into cloud data centers is reflected in our results as we successfully led the industry's transition to SMR-based near-line drives. Specifically, our 26 terabyte ultra SMR drive, which we first announced at our investor day, accounted for nearly half of our nearline exabyte shipments, with total SMR shipments exceeding the 40% goal we laid out in the same quarter a year prior. We are on track with our 28 terabyte ultra SMR drive qualification and have a clear roadmap of ePMR and ultra-SMR-based innovations into the 40-terabyte range. These developments are a result of the choices we have made in the past few years through a combination of product R&D and manufacturing capabilities, and we are proud of how we have been executing against our strategy. Looking ahead to the fiscal second quarter, In FLASH, we expect both modest BIT and ASP improvement and a decline in underutilization charges to drive continued sequential improvement in both revenue and gross margin. In HDD, we expect higher near-line shipments and seasonal demand in consumer end market to drive sequential revenue growth. We anticipate our value-based pricing efforts and lower underutilization charges will lead to sequential revenue and gross margin improvement in the quarter and through the rest of fiscal year 24. As we continue to execute against our HUD product roadmap, we are setting the stage for profitable growth for years to come. With that, I'll turn it over to Assam.