Western Digital Corporation

Good afternoon, and thank you for standing by. Welcome to Western Digital's fiscal first quarter 2025 conference call. Presently, all participants are in 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 on your phone. As a reminder, this call is being recorded. Now, I will turn the call over to Mr. Peter Andrews. Vice President, Financial Planning and Analysis, and 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 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, our business plans and performance, the separation of our flash and HDD businesses, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. 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.

Thanks, Peter. Good afternoon, everyone, and thank you for joining the call to discuss our first quarter fiscal year 2025 performance. Western Digital delivered revenue of $4.1 billion, non-GAAP gross margin of 38.5%, and non-GAAP earnings per share of $1.78. Our dedication to lasting quality and reliability through our industry-leading innovation and diversified portfolio have allowed us to proactively mix bits into the most profitable end markets, resulting in sequential revenue growth and margin improvement across both Flash and HDD. These growth opportunities are bolstered by the AI data cycle. substantially increasing the long-term need for storage across both our flash and HDD markets. In flash, the proactive measures we took during the downturn, along with our discipline capital investment strategy, have significantly enhanced Western Digital's business agility and structural margin potential. Combined with our flexibility in bid allocation and continued progress, in bringing highly compelling enterprise SSDs to market, we mitigated headwinds in certain core end markets, achieving sequential and year-over-year revenue growth and improving flash gross margin beyond our through-cycle target. In HDD, the strength of our portfolio lies in our ultra-SMR technology, which empowers us to deliver the industry's highest capacity hard drives while ensuring unmatched reliability, quality, and performance. Western Digital has achieved record HGD gross margin in the highest revenue levels in 11 quarters, driven by the growing adoption of our ultra-SMR drives to meet the demand for scalable and cost-effective storage solutions. This technology is a key driver of our continued gross margin improvement with wide adoption at two cloud customers and a third expected to ramp shortly. We anticipate UltraSMR will continue to grow across the U.S. and beyond, solidifying our leadership in the market over time. Now I would like to provide an update on our business separation plans. We are on track with the separation of our Flash and HDD businesses. At the start of the fiscal second quarter, we completed our soft spin phase. Through meticulous planning and project management, this massive initiative has been executed exceptionally well and the businesses have hit the ground running thanks to the dedicated efforts of numerous teams over the past year. In the fiscal second quarter, we continue to execute our soft spin stage and are working diligently on the critical work streams needed as we make significant progress on the regulatory filings required in connection with the spin. Financing activities are anticipated to start soon, which will set the stage for us to execute the separation, which we expect will occur once we close the second quarter. I'll now turn to business updates. Starting with Flash, revenue reached its highest level in nine quarters. Sequentially, revenue growth was driven by continued recovery in data center, fueled by strong demand for our enterprise SSD applications which grew 76% sequentially, reaching the highest revenue level since fiscal fourth quarter of 2022. The cloud tailwind in the quarter was offset by ongoing weakness in consumer and in client, with PCOMs working down inventory and pushing out the refresh purchase cycle. On the technology front, we made significant progress with several hyperscaler and storage OEM qualifications, including developments with PCI Gen 5 data center enterprise SSD and our 30 and 60 terabyte high capacity offerings. In addition, we continue to enhance our premium SanDisk brand by delivering on our leadership blueprint and core devices roadmap. expanding our platform capabilities with product partnerships developing robustly. I'll now turn to our flash outlook. As we look ahead to the fiscal second quarter, we expect the continued ramp of our new enterprise SSD offerings to supplement seasonal strength in our consumer end market. Within client, we expect PC OEM demand to stabilize while gaming declines as we have successfully met the demand for the holiday season. We anticipate a recovery in our consumer and client end markets as we move through calendar year 2025. Furthermore, we are seeing high demand for enterprise SSD product offering and anticipate it to serve as the primary driver for revenue growth for the full fiscal year, with qualifications doubling since the start of the fiscal fourth quarter 2024. We now expect our enterprise SSD mix to comprise over 15% of our overall portfolio BIT shipments in fiscal year 2025, growing at a pace significantly faster than previously anticipated. Our overall view of the flash market remains positive as we maintain supply and demand balance by remaining committed to disciplined capital spending and improving profitability through a proactive BIT allocation across our most high-value end markets. increasing our exposure to enterprise SSDs. Turning to HDD, in the fiscal first quarter, we achieved record revenue in data center, reflecting the strength of our near-line portfolio and our ongoing efforts to capitalize on market tailwinds. We are operating in an environment where demand for our products exceeds supply. To address this, we are working with our customers to improve our visibility into their future needs with our largest customers on a two to six-quarter agreement cycle, aligning seamlessly with our proactive supply management strategy that supports predictable business operations and sustainable profitable growth. This long-term visibility allows us to not only better serve our customers, but also mitigate volatility while structurally improving our through-cycle profitability. On the technology front, We see increasing adoption of our UltraSMR technology, showcasing strong confidence in our product's capabilities and benefits. In the fiscal second quarter, we launched our 32TB UltraSMR and 26TB CMR drives, marking the world's first commercially available hard drives with 11 disks. Developed with our time-tested and reliable ePMR and UltraSMR technologies, We expect these products to complete customer qualifications and ramp in the coming quarters, delivering a compelling TCO to our customers and improving portfolio profitability. Turning to the HDD outlook. As we head into the fiscal second quarter, we anticipate continued momentum in data center to drive growth across our near-line portfolio. Adoption of our UltraSMR product line is expanding, particularly among cloud customers. The HD business continues to undergo a positive structural transformation. Our thoughtful approach to commercializing our product line, especially our UltraSMR technologies, has enabled us to drive record revenue in the midst of AI's emergence as another pivotal growth driver for the industry. And with improved visibility into future demand, a focus on operational excellence, efficient cost structure, and a strong commitment to maintaining a balanced supply-demand dynamic, we are well-positioned to continue delivering the most profitable and innovative product portfolio while establishing long-term industry leadership through our earnings potential. Let me now turn the call over to Issam, who will discuss our fiscal first quarter results.

Thank you, David, and good afternoon, everyone. In the fiscal first quarter, Western Digital delivered great results with gross margin and earnings per share above the midpoint of the guidance range. Total revenue for the quarter was $4.1 billion, up 9% sequentially and 49% year-over-year. Non-GAAP earnings per share was $1.78. Looking at end markets, Cloud represented 54% of total revenue at $2.2 billion, up 17% sequentially and more than doubling year-over-year. On a sequential and year-over-year basis, the increases were driven by higher near-line shipments in HDD and enterprise SSD bit shipments to data center customers. Client represented 29% of total revenue at $1.2 billion, flat sequentially, and up 5% year-over-year. Compared to last quarter, flash bit shipment growth in gaming and mobile was offset by a decline in PC OEM, while HDD revenue was flat. Year-over-year, an increase in flash revenue was primarily due to higher ASPs as bit shipments declined and was partially offset by lower HDD revenue. Consumer represented 17% of revenue at $0.7 billion, flat sequentially and down 7% year-over-year. Sequentially, a slight growth in HDD offset a decline in flash driven by softer consumer demand. Year-over-year, the decrease was due to lower flash and HDD bit shipments, partially offset by improved pricing in both flash and HDD. Turning now to revenue by segment. In the fiscal first quarter, Flash revenue was $1.9 billion, up 7% from last quarter and 21% year-over-year. Continued recovery in data center drove strong demand for Enterprise SSD products. Sequentially, Flash ASPs increased 4% on a like-for-like basis and decreased 6% on a blended basis. Bid shipments were up 14% from the previous quarter and down 12% compared to last year. HDD revenue was $2.2 billion, up 10% sequentially and 85% year-over-year. Sequentially, strong performance in the Nearline portfolio led to a 14% increase in HDD Exabyte shipments. On a year-over-year basis, Total HDD exabyte shipments increased 107%, and average price per unit increased 46% to $164. Near-line bit shipments were at a record level of 141 exabytes, up 12% from the previous quarter and 157% compared to the fiscal first quarter of 2024. Moving to the rest of the income statement, please note my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal first quarter was 38.5%, which was at the higher end of the guidance range. Gross margin increased 220 basis points sequentially due to improved mix, better pricing, and continued focus on cost reduction. Flash gross margin was 38.9%, up 240 basis points sequentially, driven by a higher mix of enterprise SSD bits, improvement in like-for-like pricing, and continued cost reduction. In HDD, strong demand for nylon drives, as well as efficient manufacturing operations and cost structure, have driven continued margin expansion, resulting in gross margin of 38.1%, up 200 basis points sequentially. We have structurally changed the way we operate our businesses. Combined with our strong product portfolio, this has enabled us to generate gross margins above our long-term target ranges in both Flash and HDD. Operating expenses were down sequentially to $691 million, including the synergies of $8 million. These results demonstrate continued focus on cost discipline while making progress on the execution of the business separation plans. Operating income was $884 million, up 33% sequentially, driven by better gross margins and disciplined spending. Operating margin was 21.6%, up 390 basis points sequentially, which is the highest in five years and was previously achieved at a higher revenue level. Income tax expense was $124 million, and effective tax rate was 16.1%. Earnings per share was $1.78. Operating cash flow for the fiscal first quarter was $34 million, and free cash flow was an outflow of $14 million. Operating and free cash flows included payments of $418 million for the company's repatriation tax installment, along with IRS settlement payments. Cash capital expenditures, which include the purchase of property, plant, and equipment, and activity related to flash joint ventures on the cash flow statement, represented a cash outflow of $48 million. Fiscal first quarter inventory increased sequentially to $3.4 billion, with days of inventory declining by five days to 121 days. A decrease in HDD inventory was more than offset by an increase in flash inventory. Gross debt outstanding was $7.5 billion at the end of the fiscal first quarter. Cash and cash equivalents were $1.7 billion and total liquidity was $3.9 billion, including underground revolver capacity of $2.2 billion. After the close of fiscal first quarter, we completed the previously announced sale of 80% of equity interest in SanDisk Semiconductor Shanghai to JCEP, thereby forming a joint venture between SanDisk China and JCEP. Proceeds from this sale will be reflected in the fiscal second quarter's cash flow. I'll now turn to the fiscal second quarter non-GAAP guidance. We anticipate both FLASH and HDD revenue to grow on a sequential basis. In FLASH, we expect the ramp of enterprise SSD products and seasonality of consumer demand to drive bid shipment increases in the mid-single digit percentage points. In HDD, We expect continued growth momentum in the near-line product portfolio. We anticipate revenue to be in the range of $4.2 to $4.4 billion. Gross margin is expected to be between 37% and 39%. We expect operating expenses to increase slightly to a range of $695 million to $715 million. including the synergy costs of $25 million to $35 million as we continue to make progress executing on the business separation plans. Interest and other expenses are anticipated to be approximately $110 million. Tax rate is expected to be between 15% and 17%. We expect EPS of $1.75 to $2.05, based on approximately 357 million shares outstanding. As shown in our guidance, we remain committed to executing our business, driving higher profitability and cost discipline, while making great progress towards the completion of our business separation plans. I'll now turn the call back over to David.

Thanks, Wisam. Let me wrap up, and then we'll open up for questions. Our results this quarter are a testament to our efforts to optimize our business for the long term and execute on our strategic initiatives. We are confident in our product roadmap across both our Flash and HGD businesses and are excited by the significant opportunities ahead that each present, especially with the continued proliferation of the AI data cycle. As we continue to work towards the completion of our business separation plans, We are confident in our ability to drive long-term shareholder value and deliver the most compelling and innovative products to our customers. Let's begin the Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer portion of today's call. If you have a question, press star 1 on your phone. If you would like to withdraw your question, please press star then 2. One moment, please, for the first question. And our first question today comes from CJ Muse with Cantor Fitzgerald. Please go ahead.

Yeah, good afternoon. Thank you for taking the question. I guess first question, you know, you raised your enterprise SSD as part of the mix to 15%, which I think is a pretty important inflection. So I was hoping you could speak to the qualifications that you've seen, and in particular, Would love to hear more around the recently announced qualification with NVIDIA's GB200NVL72 rack system. If there's any way to kind of quantify how to think about the ramp and magnitude of incremental dollars to your business would be great.

Hey, CJ. Thanks for the question. Yeah, we feel really good about where the portfolio is. We've talked, I think, for a quarter or so now about this, our compute-focused PCIe Gen 5 portfolio. product. That's what was qualified by NVIDIA in their reference architecture that allows us to go to all the folks that are building those products for customers and be in a good position to have those conversations as we drive that product more broadly in the market. We also have a very deep engagement with a couple large hyperscalers on that product as well. So To your point, we've got more confidence in the growth of the portfolio. It's a very good demand environment. I don't think that's new news for enterprise SSDs. And it's nice to have the portfolio where we can play into that. And as you said, we expect our mix of bits when we add it all up at the end of the fiscal year, last quarter when we were having this conversation, we thought it would be around 10%, and now we're more in the 15% to 20% range. So demand keeps going up. The number of qualifications, we've doubled in the last quarter. So the traction with the portfolio is good. It all aligns well with the AI data cycle we put out there, both for the compute-focused SSDs and then the high-capacity data-lag-focused SSDs, 30 and 60 terabytes. And again, the Traditional products that we were selling to the hyperscalers are also doing well also. So just I think that portfolio is something we've been working on for quite some time. As you know, we got qualified before the downturn. We came out of it with a better portfolio. I think we really did a good job. Teams did a great job throughout the downturn of staying focused on building those products and building a stronger portfolio, and now we're seeing the results of that.

Very helpful. Thank you. And I guess as a quick follow-up, you talked around the ongoing transformation of the HDD industry and now two to six quarters of customer visibility. We'd love to hear kind of how perhaps pricing negotiation is evolving. And within that construct, do you have visibility today for pricing beyond one quarter in the drive business? Thank you.

Sure. I think as you said, we've gotten to the point where I think we have a better supply-demand balance in this industry for the first time. Well, let's just talk about our business and our business for a very, very long time based on the actions we took coming out of the downturn. That matched against a fantastic portfolio that continues to get traction and We talked a lot about it in the script. The ultra-SMR technology is really getting very good traction with customers that have adopted it at quite a bit of scale. Once you go through the work to implement that technology, you get that additional 10% of capacity on every drive you deploy, so it gives customers a very good reason to keep deploying those drives. We just had the third hyperscaler, get the official qualification very recently, and we expect them to ramp pretty quickly now over the next several quarters. So both of those things allow us to get more visibility into the business. More visibility, more predictability is always great on a business where you're vertically integrated. And it does give us also, I've said it for Many years now, pricing is all about TCO. It's about delivering a better product. We deliver a better product that drives the TCO down for our customers. We get to participate in that equation and monetize that R&D that we developed. And we just launched a 26-terabyte CMR, 32-terabyte ultra-SMR drive. So we expect that to ramp as we go through 25. And as we do that, that'll bring better pricing and margin dynamics to the business. Thanks so much. Thanks, CJ.

Thank you. And our next question today comes from Joe Moore at Morgan Stanley. Please go ahead.

Great. Thank you. I just want to make sure I understand the steps towards separating the companies. You talked about having kind of prepared to soft spin. So you're going to report, you'll have two separate sets of numbers for the December quarter, and assuming that that goes well, you'll be able to file the Form 10 at some point during the March quarter. Is that the plan and kind of what are the, you know, anything that could cause that to come later?

Yeah, let me walk through that, Joe, because it's a little different than you described. So we're in the soft spin stage, which means we're still running the company as Western Digital, right? There's one company, but behind the scenes, we've separated all the systems into basically two stacks of systems. So, for example, if customers want to send us orders now, they have to send us two different orders first. HDDs and Flash because they go into two different sets of systems. They have a different vendor ID for those, all of those kinds of issues. Our own teams, as they go through the process to build those products, ship those products, are logging into different systems to manage the flow of that business through the enterprise. Now, so what we're doing is we're running Western Digital. We're doing this behind the scenes. That's called the soft spin process. We're actually essentially doing both. And what we'll do is we will execute in this mode for a full quarter because we want to go through a full quarter of all the financial things we do on a monthly and quarterly basis to give ourselves confidence that both of those systems work great, and then we'll go do the spin. So what we expect to do now is we will execute the business in this – form for the full second quarter. We will close the December quarter as Western Digital. We will only issue one set of numbers for Western Digital. We only did one guide for Western Digital this time. But behind the scenes, we're doing all that work to build confidence we could do it as two separate companies. Sometime in the next, I would say, couple months, we'll flip the Form 10 to public. We're going through the final phases of that with the appropriate authorities. Once we get that done, we'll make it public so we can start financing activities for both businesses to basically get all the financing in place so that once we close the books and we get confidence in that, then we could then move on with the actual distribution. So that's the way it will work. So cut through all that. We've got a lot of work to do. It's on track. You should think about this happening around the time we would do an earnings call for the December quarter.

Great. Thank you so much for that. And I guess, you know, I get a lot of questions from more event-driven types of investors about, you know, the resolve to do this in the wake of, you know, things that are happening with your JV partner, things like that. Just so just, you know, maybe you could just kind of state, you know, how focused you are on getting this done, any impediments, any chance that this doesn't happen from out of your discretion?

We're very focused on getting this done, Joe. As you know, we went through a thorough strategic review that we announced the outcome of October 30th of last year, and we started down this path. We knew it was a big, big thing to do, but, you know, we're not, the results of the strategic review is this is the right answer for our shareholders. We're not trying to time the cycle or anything else, so we plan to move forward with this when we're ready, and it's all about building confidence and the ability to execute to independent companies, and that's what we're driving to. I can't predict everything that will happen in the future, but from our perspective, we're driving to get this done as expeditiously as we can.

Great. Thank you, Raj.

Thanks, Joe.

Thank you. And our next question comes from Carl Ackerman with BNP Paribas. Please go ahead.

Yes, thank you. I have two, if I may. First off, how much room do you have in your existing facilities to expand capacity of heads and media for hard disk drives? I asked because you just reported record exabytes in hard drives, so it was about 180. And as you address that question, you spoke of a third hyperscaler that is qualified SMR, Dave, and you will ramp in the coming quarters. Is that for your 32 TB offering, or is that just a broad statement? Thank you.

You know, I think as a general, without getting into specifics on any particular customer, I think in general most customers want to go with the most dense drive they can once they start deploying SMRs. So we expect that customers will move to the 32-terabyte drive pretty quickly. Again, I think this is – the product strategy, I think, is really playing out well here. These drives can be qualified very quickly. Customers understand the technology. It's been in their environment for quite some time. So I'm talking about the base ePMR technology and the base architecture we have in these drives, and now we can – move capacity up quickly. So in general, customers want to deploy the densest drive possible. So we expect the 32s, once they get through qualifications, will start being deployed, let's say, as we move through 25. Your first question on capacity for heads and media, I mean, we don't really talk about what our capacity is. We've sized our infrastructure for a number of units. that we think is going to satisfy the market. Then we're going to increase exabytes by continuing to drive innovation and more density per unit. You're seeing that happen in real time as we just launched a new drive. We've got the capacity all the way through heads and media and test capacity and assembly to support that level of capacity. And, you know, that was really a big move in the downturn to get that right. And so that we can, you know, we can get our, make sure we keep our costs under control. And then, you know, Carl, the real focus is to get more visibility from our customers on what their plans are and planning so that we can make sure we've got that capacity aligned with what demand is and, you know, try and dampen some of the volatility of the You know, the typical, you know, we typically talk, or maybe not anymore, hopefully not anymore, talk about big, you know, ingestion cycles and then big degestion cycles. You know, we want a more predictable business than that. So we want to, you know, the key to that is visibility into customer demand.

Very clear. Thanks.

Thanks, Carl.

And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thanks for taking the questions. I'll stick to two as well. I guess the first question is, you know, going back to kind of operating the two entities separately now starting in this October period, can you just remind us again of how we should think about the synergies? What may be factored into your December quarter guide, you know, as clearly you're carrying, you know, two company cost structures? And then as kind of a follow-up to Carl's question, You know, you are shipping near-line capacity, you know, 25% above your prior peak levels, if my math is close to being right. You know, how quickly can you bring on new capacity? And is there any way to frame, like, I can appreciate technology and aerial density expansions and key driver, but do you see a situation where you will be constrained, you know, over the foreseeable next couple quarters or, you know, just – I'd love to dig a little bit deeper into Carl's question there.

Let me start with the first part of the question, Aaron. I think your question was on disenergies. So in the first quarter that we announced, we had approximately $8 million of disenergies in the operating expenses. In the guide, there is 25 to 35% roughly. Sorry, I take that back. There is $25 to $35 million, not percent, of OPEX assumed in the OPEX in the current guide. In other words, the 705 midpoint of OPEX includes approximately, let's say, midpoint $30 million. Basically, as we said last time, the synergies are assumed to be roughly split 50-50 between the two operating businesses. And so this is what's in the guide. In terms of where we would be at the steady state, I would say at this point it hasn't changed from what we discussed earlier. last quarter, and the steady state I anticipate to be roughly in the, let's say, $40 million range divided equally by each of the businesses. So that's how we should think of it beyond this quarter. But for this quarter, there's around $30 million, plus or minus $5 million. Maybe for the second part of your question, I don't know, David, maybe I'll start making some comments and I'll ask David to chime in. With respect to the manufacturing capacity, you know, our focus in the hard drive business, as we've said all along, is really on manufacturing. driving profitability and maintaining that supply-demand balance for our business. And so from where we stand now, we think we have, with the good visibility that we're getting from our customers, and in the implementation of bill-to-order, we think we're in a good place from a capacity or from a manufacturing capacity perspective, and we don't see the need for us to expand our manufacturing capacity footprint. David, if you had a few things to add.

I think that's right, Aaron. I mean, look, I mean, the way I think about this, capacity – If you look at the units we've shipped in the last two or three quarters, it's all converged pretty closely, so there's not a lot of variability in that number. It goes up and down some, like less than a million units, but for an industry that shipped hundreds and hundreds of millions of units not that long ago, that's a pretty tight window. You know, I think the way we're thinking about this is what's demand going to be a year from now? It takes a year to build a hard drive. Once we start a wafer, you know, no matter what our wafer capacity is for heads, once we start a wafer, it's going to be a year before that shows up in a hard drive. So what we really are working to understand is what demand is going to be a year from now and how our customers are thinking about that. And that's something new for them, right? And we're working through that process with them. And everything's going in the right direction. We talked about we have between two and six quarters of visibility. As we continue to get more visibility and develop conviction about what demand's going to look like over the next year plus, then we'll start looking at the capacity question, and if it's different than what we planned, we'll think about capacity at that point. But there's still more work to do to understand what capacity's going to look like in that kind of timeframe before we start adding that cost back into the system. We don't want to I talked about in the script, better through cycle dynamics. We don't want underutilization charges. We want more predictable flow of business. And our supply chain wants that too. So that's just a little bit on how I'm thinking about it.

Very helpful. Thank you, guys.

Thank you. Thank you.

Thank you. And ladies and gentlemen, we do ask that you please limit yourself to one question at a time in the queue. Our next question today comes from Timothy Archuri with UBS. Please go ahead.

Thanks a lot. Um, can you talk, just talk about bookings on the HD side? I mean, um, they see pricing going higher. They see you and Seagate talking about not adding capacity. So why would they not just play shadow orders to make sure they get what they need a year from now? Um, I mean, that's often how it works in memory. I certainly, you know, understand that the cycle times here are much, much longer, but can you talk about that and sort of what is this two to six quarter, uh, agreement cycle mean? Are these take or pay so that they can't just place shadow orders, that they'd be on the hook to take the stuff when you build it? Can you talk about all that? Thanks.

Yeah, Tim, I would say, you know, the industry is evolving, right? This is something new. I mean, this is an industry that wasn't that long ago, all the business transacted every quarter. So we're, you know, asking customers for more visibility and understanding what their demand is. They haven't particularly thought about this franchise that way and getting that much visibility into it. They're big relationships, especially with the big hyperscalers, very, very big relationships. Nobody wants to yank each other around unnecessarily. So I think it's in all of our best interest to have as much visibility as possible so that we can supply the market. We don't want to short the market, but we also don't want to you know, basically build capacity that we don't have visibility into how it's going to be used. So at this point, it's, you know, it's not take or pay. It's just about getting visibility into kind of how they're thinking about their infrastructure and what their demand is going to be so that, you know, we know how much supply we're going to have the ability to produce from a unit perspective that we get that aligned with their demand. And I would say we're working through that process right now and I mean, clearly the more visibility people, our customers and partners can give us, then we can allocate that future supply to them. And that's just kind of the process we're going through right now. So we're kind of walking into this and changing the industry, we think, in a very positive way for everybody involved. Thank you.

Thank you. And our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes, thank you so much. Your guidance suggests a slight takedown in gross margins at the midpoint sequentially. Can you just help us think through the drivers of that? And you obviously launched your 11 platter mass capacity drive too. How should we think of margins of that with that scale higher as you go through the course of fiscal 25? Thank you.

Yeah, so you got it right, Wamsi. As we introduce new products, we have the opportunity to drive margin higher. We just launched a new product. It'll just start qualification, so it's not going to start for our deployment for another couple quarters. So in the HGD business, we're going to see margins basically flat, Q2Q. Flash we'll see a little bit down. driven by the cost in the next quarter a little bit up from what they usually would be, probably what you guys model on a 15% down year over year. We're going to get a quarter where we have a little cost increase just given the way the expenses are flowing. So I think that should help you understand the way the margins are going to work.

Thank you. And our next question today comes from Harlan Sir with J.P. Morgan. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So on Enterprise SSD, it's taken a while, but now there's clarity on the really strong tie-in, right, to these AI and accelerated compute clusters. I think you gave us your view on bitmix, but I think according to my calculations, I think June quarter, I think Enterprise SSD was about 7%, 8% of your total flash revs. It's like in the September quarter, it stepped up to about 12%. 13% of your flash revenues. Is that about right? And then on some of the recent specs on your high-capacity 64-terabyte, 128-terabyte platforms targeted for AI, it looks like the team has really stepped up their competitiveness here. What have been the biggest drivers of that better performance? Is it controller technology? Is it firmware? Is it reliability, quality metrics? Like any color here would be great. Thank you.

Yeah, let me start with the first part of the question, Harlan. With respect to where we are from an enterprise SSD as a mix, we're basically, in the Q1, we've exceeded a little bit the 15% of that mix. And as David mentioned in his comments a bit earlier, that we would expect for the year the mix of enterprise SSD as a percent of total for the for the flash business to be between 15% and 20%.

So, Harlan, on the competitive part, I mean, you kind of got it, right? I mean, it's about getting the controller technology right, and we, as I said, during the downturn, we stayed very focused on that, got the right controllers built. We've always had great underlying NAND technology. The VIX roadmap is something we've talked about a lot. and we feel good about that now and going forward. We've still got all of Bix8 in front of us, and that 2-terabit die, that helps build higher-density enterprise SSDs as well because the lower number of die to get the density. We're not quite there yet, but we have that in our future, so it's about getting all of it aligned, and we stayed very focused over the last two, three years since I got here. This was a big focus of Again, going back to how we structure the company into kind of a business unit model, bringing in a general manager that can stay very focused on what should be built, stay on top of all the programs, and make sure we deliver the right products that drive the – make the highest ROI investments and then make sure those projects deliver the right products to market. And I think we're – if you feel good about where we're at, we're hitting – We're hitting this AI data cycle with the right – it's the right time for the portfolio to emerge. We've still got some more work to do, but we feel good about where we're at and the trajectory.

Thank you. And our next question today comes from Chris Sankar with TD College. Please go ahead.

Yeah. Hi. Thanks for taking my question. And, Dave, thanks for the caller. You know, when I look at December quarter, you said flash revenue should grow. while bit shipment should be up mid-single digits. So what does this mean for ASPs? The reason I'm asking is that while ESSD is strong, you keep hearing the non-ESSD data points are not good. So that's what I'm wondering, how to think about ASP. And if I may extrapolate, how to think about March quota for both flash and hard drives, given there is some seasonality aspect for both those segments in March? Thank you.

Yeah, Chris, so you got, I mean, again, I think you've got it in the way you framed your question. You know, the flash market is a big market. There's a lot of sub-markets inside of it. The PC market is, you know, some inventory there, and, you know, those customers restocked and have not replenished inventory. They're just building to demand at this point. Same with smartphone. The consumer business has just been a little bit soft recently. So you've got kind of that dynamic, and then on the other side of it, you've got very, very strong enterprise SSD. Now, we expect, as we go through 25, we expect those smartphone and PC markets to recover as we go throughout the year and be stronger. We could talk about that in more detail, but I think that's a well-understood topic. And we expect enterprise SSD to stay very strong. But then you look at it on a sequential basis, you're looking at basically flat blended pricing and a little bit of cost headwind, which is where you get a little bit of sequential decline in margins. You know, it's a little early to talk about the March quarter, but again, you know, you got it right on seasonality there. There might be some seasonality head. I would expect some seasonality headwinds going into the March quarter, but we'll have more to say about that as we move through the quarter and especially get to this time next quarter.

Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Thanks, Steve. My question, I guess... David, if I just go back to this hundred and, you know, the exabyte shipment of 163 on the HDD side, how do you get confidence that this is not sitting in inventory versus actually getting deployed by customers? Is there any metrics in the UC internally that gives you confidence that this is actually getting used up and not piling up as inventory potentially? Anything on that front would be really helpful to understand. And then, Musam, you just touched on your CapEx expectations for HDD and the Flash business for the rest of the year. That would be helpful. Thank you.

Yeah, we don't see a lot of inventory at the big players, right? We're coming off of, we're still like in a cyclical recovery from the very deep, deep downturn we're coming out of. And we're very, very close to these customers, given the size of the relationship. So we don't think that there's inventory, excessive inventory being built here or double ordering or any of that happening. We think, you know, everybody's just trying to figure out what their future demand is so we can make sure we do the best we can to meet it. And they give us the best, the highest integrity signal possible on what that demand is.

And with respect to the CapEx, Amit, what we started doing last quarter is we're talking about CapEx for the quarter. So for this quarter, I expect our gross CapEx to be more or less in line with the last few quarters, the average of the last few quarters, so there's no real inflection.

Thank you. And our next question today comes from Thomas O'Malley with Barclays.

Please go ahead. Hey Dave, what's up? Thanks for taking the question. I just, I just wanted to ask for you to help quantify the benefit on the ESSD side versus the traditional man portfolio. Obviously you're saying that that, that grows from 15% today to 15 to 20%. So nice tailwind throughout the year, but just on a like for like basis, could you just try to help describe what that tailwind means? Obviously you're not going to give the exact pricing away, but just give us a flavor for how beneficial that is for the business. Thank you.

Yeah, it's, It's accretive to the portfolio, let's put it that way. That's a good starting point. You probably knew that. But it tends to be one of the better, if not the best, price markets in the flash business. So it provides a nice tailwind to the portfolio.

Thank you. And our next question today comes from Shuni Bajuri with Raymond James. Please go ahead.

Yeah, thank you. David, just to follow up to the previous question, I'm looking at your flash ASPs being down 6% on a blended basis, but on a like-for-like basis, it's only down 4%. So it seems somewhat counterintuitive because your ESSD mix is growing, but the blended ASP is actually worse than like-for-like. So just trying to understand those dynamics as to why that's the case. And as I guess ESSD grows, How should you think about the blended ASP going forward? Thank you.

Yeah, so I think it's even a little different than what you said. I think you said down four on like-for-like. Like-for-like was up four, blended was down six. So it's all mix-related. I think we said going into this quarter we were mixing more into mobile. Clearly, as we mix in more Enterprise SSD, that helps. But, you know, that's an emerging story and an ascendant story for us. And so that's why you see that dynamic there.

Thank you. And our next question today comes from Asia Merchant with Loop Capital. Oh, I apologize. Our next question comes from Ananda Barua with Loop Capital. Sorry about that. Please go ahead.

No, I appreciate it. Thanks for taking the question. Hey, Ananda. Hey, Dave. Yeah, I was just, you know, could you, actually, what I wanted to ask is, can you refresh our memory on what your conventional technology aerial density roadmap looks like, kind of up until Hammer? I know you've talked about Hammer loosely, kind of like next few years. But how should we think about the conventional tech aerial density roadmap up until then? That would be helpful. Thanks a lot.

Well, it's a very interesting area to explore. One thing is it changes over time as you keep getting better, and I think a good example of that is we just introduced an 11-platter drive. I think for a long time people thought 10 was probably the limit given the form factor, but Advances in material science and things like that allow us to build thinner platters, and we can put an 11th in, and there you go. You get 10% more just by doing that. So it's always an evolving story, but we clearly see the ability to drive our current platform to 40 terabytes to make that bridge from 30 to 40. We're driving through that now. and that's where we expect Hammer to be introduced to carry the portfolio from there. So we've still got a generation or so here to go. We just announced one generation that just came into the market this quarter. Customers are excited about it. They have it in their labs. They're trying to get it qualified. They want to get it deployed. I'm not going to announce a new product here right now, but you can assume there's going to be another generation after that. So We've got quite a bit of runway here on the portfolio, and those drives are drives that customers really understand. They're in their infrastructure now. It's a straightforward qualification process. They understand the performance. They understand the reliability, the quality of those drives. So really feel good about the technology decisions we've made to kind of fuel this market. And now we have, you know, kind of these AI tailwinds behind it. And I think the portfolio is just extraordinarily well positioned to continue to drive growth in the business and continue to drive increased profitability.

Thank you. And our next question today comes from Asia Merchant with Citigroup. Please go ahead.

Great. Thank you for taking the call, taking the question. So just in terms of, you know, HDDs, I understand that this trend here, continued trend here in the December quarter, we typically see some seasonality on the flash side in the March quarter. Just given the strength you're seeing on the HDD side, should we expect some seasonality here in the March quarter on the HDD side as well? both in terms of bid shipments and then also on the ASB side. Thank you.

Yeah, I mean, it's a little early for March, but I don't think that's a bad assumption to make at this point from where we are to see that on the HDD side as well.

Thank you. And our next question today comes from Stephen Fox of Fox Advisors. Please go ahead.

Hi, good afternoon. I was just wondering if you could provide a little bit more color into the manufacturing efficiencies you think you get on a regular basis out of the HDD business. I would imagine there's de-bottlenecking still going on, and also as mix changes, it helps your utilization on the heads and platters. I don't know if there's any rule of thumb we can think about or just maybe a little bit more color on that would be helpful. Thank you.

I mean, the – The way to think of it is we typically have, obviously, many programs in terms of cost reductions, which would drive manufacturing efficiency, as well as things like improving yields, et cetera, and various parts of the supply of our manufacturing industry. process. The typical, I mean, I don't know if there's a typical, but the way to think of it is we would still be getting in the cost improvements and the probably mid to high single digit percentage on an annual basis. That would be probably a fair assumption. But, of course, it varies. It varies, of course, with respect to how we move from one capacity point to another as well. So it's not like a linear thing.

Thank you. And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead.

Yeah, thanks. Just a quick question on the ultrasonic master. With the land disks, are we able to still make it creative on the margin side to your current portfolio. And also on the flash side, just wondering what the CapEx looks like for next year. This year, I think you had like a 0.8, fairly low cash outlay on the CapEx side, but just wondering how it looks next year. Thanks.

Yeah, I mean, the 32-terabyte ultra-SMR drive is a perfect example of us delivering a drive to our customers that drives their TCO down. So as we drive their TCO down, it'll drive our profitability up. And so we're very anxious to get that drive deployed just like our customers are, and we expect that will provide some profitability tailwinds to the business.

Yeah, and with respect to the flash capex, as I mentioned earlier, we're not providing sort of a longer-term view in terms of quantitatively. But what I would say is we continue to be focused on the profitability of the business. And so our focus is really to drive costs down. But when you look at capex, last fiscal year our capex was very, very low. So you'd expect it to be a little bit higher from there.

Thank you. And our final question today comes from Matt Bryson with Wedbush. Please go ahead.

Thanks for taking my question. What I was wondering is your hard drive pricing was relatively stable quarter over quarter. I would have thought with the greater shipments into the cloud as well as the the mix-up towards higher-capacity drives, you would have seen a little bit of a benefit there. And then just one more point. I know you've talked about there being production constraints. One of the things that I've heard is being constrained in factors test, paradigm telling us that they're not seeing any test orders. Should we take that as a sign that the hard drive industry is acting in a more rational fashion than in the past? Thank you.

Yeah, I mean, look, on the second part of the question, I think we've just been pretty clear. We've kind of set our manufacturing capacity for a certain number of units. We think that unit times what our product roadmap is is going to satisfy the exabyte growth in the industry, and we're good with where we're at. And, again, if we get strong enough signals from our customers – that four to six quarter timeframe, then we can start talking about what that means for our production capacity. But we got a ways to go before we get something like that. On pricing, we did see a little bit of like for like pricing increase, very low single digits this quarter. It was a good quarter for margin improvement again in HDD, 38.1, another record. I think we've added over 15 points of margin in the last four quarters, so it's been a good run. We'll take a little breather here maybe for a quarter, and then as new products get deployed, we'll see more tailwinds behind that. So we just feel like this business is in a great spot, and quite frankly, that's because our technology is in a great spot, and it's really being developed adopted strongly by our customers. They're very much voting with their dollars behind the architecture that we're driving. And then during the downturn, the teams just did an awesome job of really getting our costs in the right spot to support this business and get supply-demand balance. So we feel good about the business, and we look forward to driving it forward over the next several years.

Thank you. That concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

All right, everyone. Thanks for joining today. I really appreciate the interest in the business and all the great questions, and we look forward to talking to you throughout the quarter. Take care.

Thank you. This concludes today's conference call. We thank you all for joining. You may now disconnect your lines and have a wonderful day.