Western Digital Corporation

Good day and welcome to the Western Digital first quarter fiscal 2026 earnings call. All participants will be in the listen-only mode. Should you need assistance during the conference call, 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 press star, then one on your telephone keypad. To withdraw your question, you press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Amrish Srivastava, VP of Investor Relations. Thank you and over to you.

Thank you and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer, and Chris Senesal, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual 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. In our prepared remarks, our comments will be related to non-GAAP results on the continuing operations basis unless stated otherwise. 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 at investor.wdc.com. Lastly, I want to note that when we refer to we, us, are, or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving?

Thanks, Ambish. Good afternoon, everyone, and thank you for joining us today. Across industries, adoption of AI is expanding, fueling innovation, reshaping business models, and ushering in a new wave of digital transformation marked by higher productivity and richer user experiences. As agentic AI begins to scale at several industries and multimodal LLMs become the norm, we are seeing a steady acceleration of AI use cases and applications, driving robust ongoing demand for the data infrastructure that enables this growth. AI is not only a consumer of data, but a prolific creator of data as well, both synthetic and real-world. It is reshaping how data is being generated, scaled, stored, and monetized. Data is the fuel that powers AI, and it is HDDs that provide the most reliable scalable, and cost-effective data storage solution, playing a vital role in storing the ever-increasing zettabytes of data created by the AI-driven economy. To cite an example of how AI is transforming various industries, one of the world's leading medical institutions is using an AI workflow that analyzes over 7 billion images derived from 14 million de-identified patient records. This process enables predictive analysis, improves the speed and accuracy of diagnostics to deliver enhanced patient outcomes. Such applications are generating massive volumes of new data that is being stored. At Western Digital, we are also leveraging AI internally to enhance productivity and accelerate innovation across our organization. For example, in engineering, AI is helping to modernize our firmware enabling us to deliver new features quickly to our customers, and in a more cost-effective manner. In our factories, we are seeing productivity gains of up to 10% in select AI use cases. AI tools are improving yield, detecting defect patterns through intelligent diagnostics, and optimizing our test processes. In parallel, they are also being used to up-level our technician capabilities. enabling them to perform higher-skilled tasks, accelerating issue diagnostics and troubleshooting. Across corporate functions, AI is streamlining workflows, making the organization more efficient every day. The rapid adoption of AI in data-driven workloads at hyperscalers is driving robust demand for our products and solutions. To fulfill the demand of more exabytes of storage, our customers are increasingly transitioning to higher capacity drives. Shipments of our latest ePMR products, offering up to 26TB CMR and 32TB UltraSMR capacities, continue to grow at an impressive pace, surpassing 2.2M units in the September quarter. Our ability to reliably scale our ePMR technology and transition customers to higher capacity drives is one of several ways we support the growing demand for exabytes. We are also investing in head wafer and media technology and capacity to drive aerial density higher. In addition, we are increasing our manufacturing throughput by leveraging automation, AI tools, and enhancing our test capabilities. We recently inaugurated our system integration and test lab, 25,600 square foot state-of-the-art facility in Rochester, Minnesota to enable rapid adoption of our next-generation high-capacity drives. This lab provides dedicated test capabilities that mirror our hyperscale customers' production environments, enabling collaborative integrated product development with our customers, accelerating qualification cycles, thereby ultimately shortening time to market for our products and time to value for our customers. The AI-driven growth in data storage is accelerating demand for high capacity drives, which comes with greater manufacturing complexity and longer production lead times. As a result, our customers are providing greater visibility into their long-term needs, which in turn strengthens our partnership and helps us to support their future growth requirements. Our top seven customers have now provided purchase orders extending throughout the first half of calendar year 2026. And five of them have provided purchase orders covering all of calendar year 2026. I'm also pleased to share that one of our largest hyperscale customers has signed an agreement covering all of calendar year 2027. These commitments underscore both essential role of our products in the AI data economy, and our customers' strong confidence in our product roadmap, including the transition to Hammer technology. We are making rapid progress in our Hammer development and are on track to start Hammer qualification for one hyperscale customer in the first half of calendar year 2026 and to expand the qualification process to up to three hyperscale customers through calendar year 2026. The key focus of our qualification efforts is to ensure the highest level of reliability, quality and scalable performance so that once qualification is complete, our customers have strong confidence in our hammer products and can rapidly deploy them at scale. This positions us well for the ramp up of volume production in the first half of calendar year 2027. In parallel, We will begin qualification of our next-generation ePMR drives in the first quarter of calendar year 2026, building on our industry-leading ePMR technology, a trusted, scalable, and proven solution that our customers are very familiar with and that has been used reliably in their data centers. Together, our ePMR and HAMR technologies will enable high-capacity drives that meet the growing demand for exabytes from cloud and AI workloads. Our platform's business is also sharing in the upward momentum, driven by overall growth of on-prem and cloud storage, including AI and social media applications. We will continue to invest in this business as more opportunities unfold and continue to scale up. Innovation lies at the heart of what we do. we continue to expand our proven ePMR roadmap even further, while bringing new technologies, including Hammer, to market. In parallel, our engineering teams are focused on improving data, throughput speed, and bandwidth of our drives, as well as power efficiency. Major progress is being made on all fronts, and we will keep all stakeholders, including customers and investors, updated on any new developments. Let me now turn to our quarterly results and capital allocation updates. For the fiscal first quarter, Western Digital delivered revenue of $2.8 billion, non-GAAP gross margin of 43.9%, and non-GAAP earnings per share of $1.78. Free cash flow for the quarter was $599 million. This quarter yet again underscores our business' strong free cash flow generation. We remain confident in the long-term strength of the business and our balance sheet. As a result, this quarter we significantly increased our share repurchases and I'm pleased to announce that we will increase our dividend per share by 25% to 12.5 cents per share. Chris will discuss our capital allocation in more detail later. Looking ahead, we're excited about the opportunities AI continues to unlock for our business, even as we navigate macroeconomic uncertainties. For the fiscal second quarter of 2026, we expect continued revenue growth driven by data-centred demand and improved profitability led by the adoption of higher capacity drives. Let me now turn the call over to Chris, who will discuss our fiscal first quarter results and the outlook for the second fiscal quarter in more detail.

Thank you, Irving, and good afternoon, everyone. As a strategically focused hard disk drive company, Western Digital plays a critical role in enabling the data-driven AI economy. The company is executing well, fulfilling customers' rapidly growing exabat demand while delivering strong financial performance. During the first quarter of fiscal 2026, revenue was $2.8 billion, up 27% year over year, driven by strong demand for our near-line drives. Earnings per share was $1.78. Both revenue and EPS were above the high end of the guidance range. We delivered 204 exabytes to our customers, up 23% year over year. This includes 2.2 million drives of our latest generation EPMR with capacity points up to 26 terabyte CMR and 32 terabyte Ultra SMR. Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year, driven by strong demand for our higher capacity near-line product portfolio. Client represented 5% of total revenue at $146 million, up 5% year-over-year. Consumer represented 6% of revenue at $162 million, down 1% year-over-year. Gross margin for the fiscal first quarter was 43.9%. Gross margin improved 660 basis points year over year and 260 basis points sequentially. The improved gross margin performance reflects continuous makeshift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $381 million. slightly exceeding our guidance range driven by higher variable compensation on stronger than expected results. Operating income was $856 million, translating into an operating margin of 30.4%. Interest and other expenses were $44 million, and taking into account an effective tax rate of 17% and a diluted share count of 369 million shares, EPS was $1.78. Turning to the balance sheet, at the end of our fiscal first quarter, cash and cash equivalents were $2 billion, and total liquidity was $3.3 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leverage EBITDA ratio of just below one turn. Operating cash flow for the fiscal first quarter was 672 million and capital expenditures were 73 million, resulting in strong free cash flow generation of 599 million for the quarter, despite the fact that we made our final repatriation tax payment during the quarter of 331 million. During the quarter, we increased our share repurchases to approximately 6.4 million shares of common stock for a total of $553 million and made $39 million of dividend payments. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned a total of $785 million to our shareholders by way of share repurchases and dividend payments. Also, today we announced that our board has approved a quarterly cash dividend of 12.5 cents per share of the company's common stock, payable on December 18, 2025, to shareholders of record as of December 4, 2025. This marks a 25% increase over the dividend announced in April and speaks to the long-term confidence we have in our business. I will now turn to the outlook for the second quarter of fiscal 2026. This outlook includes our current estimate of all anticipated or known tariff related impacts on our business in this period. We anticipate revenue to be 2.9 billion plus minus 100 million. At midpoint, this reflects a growth of approximately 20% year over year. Gross margin is expected to be between 44 and 45%. We expect operating expenses to decrease on a sequential basis to a range of 365 million to 375 million. Interest and other expenses are anticipated to be approximately 50 million. The tax rate is expected to be approximately 17%. As a result, we expect diluted earnings per share to be $1.88 plus minus 15 cents. based on a non-GAAP diluted share count of approximately 375 million shares. In closing, this was another strong quarter for Western Digital with results exceeding expectations. The guidance for next quarter reflects continued tailwinds in our business as we remain focused on strong pre-cash flow generation and demonstrating our commitment to creating long-term value for our shareholders. With that, I will now turn the call back to Irving.

Thanks, Chris. Our leading technology roadmap, combined with our scalable, reliable, and strong product portfolio, is highly recognized by our customers. This is demonstrated by the longer duration agreements we've signed with our major customers. Western Digital's consistent execution, combined with powerful AI-driven tailwinds, position us to deliver strong results and robust cash flow Over the long term, as data creation continues to accelerate, our innovation and operational and fiscal discipline enables us to capture these opportunities efficiently and drive sustained shareholder value. With that, let's now begin the Q&A. Ambrish?

Thank you, Irving. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has not been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of CJ Muse from Cantor Fitzgerald. Please go ahead.

Thank you for taking the question. Storage demand is off the charts, and part of the great narrative for the HDD industry is an oligopoly acting very rational with supply. On the other hand, we're seeing SSD adoption rise for certain AI workloads given the tight overall storage supply. So my question, how do you plan to meet rising customer demand while keeping supply demand in balance?

Hey, CJ. Thank you for the question. I hope all's well. Our focus is really on a couple of things. One, ensuring that we continue to quickly and reliably deliver increasing higher capacity drives. A good example is the current PMR product that we have that's where we ship over 2.2 million units last quarter that equates to roughly about 70 exabytes of data in total. And that product is expected to ship well north of 3 million units this quarter. So it's a real demonstration of our ability to deliver exabytes to customers at scale. The second thing is that, as we've highlighted in the past, our unique innovation around UltraSMR. This quarter, our UltraSMR to CMR mix is roughly 50-50. As you recall, UltraSMR gives us a 20% capacity uplift over CMR and a 10% capacity uplift over standard SMR. Those capabilities plus the fact that we'll be launching our next generation ePMR drive very soon. It starts qualification in Q1 of calendar 26 and we anticipate it will go into ramp in the second half of calendar 26. We'll give customers an ability to take advantage of higher capacity drives. Second, we've been working very closely with customers to mix them up in terms of capacity points as well. So if you go back a year, the average capacity for our top seven hyperscale customers has increased 21% year-on-year. So that's a very strong testimony to how capacity points in our drives have scaled up. We also continue to invest into aerial density technology improvements and capacity as well, as we stated from the very onset of us spinning out as a standalone hard drive company. those investments will continue to be able to deliver a greater aerial density improvement without the need for any additional unit capacity. We're also looking at increasing our manufacturing throughput by leveraging more automation, AI tools that we highlighted in the script, and also enhancing our test capabilities. This increase in productivity of our existing footprint will enable us to deliver more exabytes to our customers as well. And last but not least, as we highlighted in the script as well, the investments that we've made into our SIRT labs to accelerate qualification is a key part of our ability to bring higher capacity drives faster to customers and therefore fulfill the need for exabytes as well. And maybe just let me end my comments by being very clear about one statement. We are not adding any unit capacity to our portfolio right now.

CJ, did you have a follow-up? I did, Brice. Thank you. I guess on gross margins, you know, great, you know, 660 BIP uplift year on year, but obviously we're always looking forward. So how should we think about incremental gross margins from here? Is there a framework that we should use? Thanks so much.

Yes, CJ. So I'm really pleased with the gross margin in Q1 delivering 43.9% gross margin in which, as you point out, was up 660 basis points year over year and 260 basis points on a sequential basis. Even when you look at the incremental gross margin in the quarter on a sequential basis was approximately 75%. As you've seen in the prepared remark, we've also guided for Q2 fiscal 26 with further gross margins improvement in the range of 44% to 45%. so that gives you to 44.5% at the midpoint, which gives you one or about 65% of incremental gross margin on a sequential basis. Looking forward, obviously, as a company, we're going to continue to focus on further gross margins improvements, and I'm comfortable to have incremental gross margins improvements on a sequential basis of approximately 50%, and that will drive some further gross margins improvement. Thank you, CJ.

Operator, we can have the next.

We have the next question from the line of Aaron Rakers from Wells Fargo. Please go ahead.

Yeah, thanks for taking the question and congrats on the quarter. You know, I think in the prepared remarks you alluded to even further extending out UltraSMR, it's good to hear kind of a reaffirmation of the Hammer roadmap. But I'm curious if you can unpack that a little bit more, if there's further room above and beyond the 36 terabytes that you see for UltraSMR. Is there a 12-platter stack? I know one of your smaller competitors, you know, recently made some announcements around that. I'm just curious of how far... before we can get the hammer if there's further potential upward expansion on average capacities.

Yeah, Aaron, so as we've highlighted in the prepared remarks, we've pulled in the qualification process of our next generation ePMR product to the first quarter of calendar year 2026. Initially in our roadmap, it was in the first half of calendar year 2026. In the current roadmap, The capacity points are scheduled to be at 28 TB CMR and 36 TB UltraSMR, but I'll say we have very innovative and creative engineers, so they will obviously continue to push the capacity points, and we'll see where we get to by the time we actually get to production RAM and qualification completeness. On HAMR, as you mentioned, we also pulled forward the qualification process by half a year. As we've highlighted in our roadmap in the past, the plan was to start hammer qualification in the second half of calendar year 2026. We've now pulled that in into the first half of calendar year 2026 with one customer and we look to expand that to up to three customers by the end of the calendar year. And that's really testimony to the comments I've made last quarter where I said I was very pleased with the progress that we've been making in terms of aero density improvements, in terms of our capability to build a highly scalable product. Our focus now is ensuring that we are able to deliver a product with the right reliability and right yields that are similar in capacity and capability to our ePMR portfolio, which is what our customers expect of us.

Do you have a follow-up? Yep. I do. I guess thinking about, you know, kind of sticking with CJ's comment, we're always kind of looking forward. You know, historically there's been some attributes of seasonality to think about into the March quarter, but it sounds to me like, you know, you're pretty much stocked out from a capacity perspective through calendar 26. So curious if you have any thoughts on how we should maybe think about seasonality or whether or not that even applies for the March quarter at this point. Thank you.

Yeah, I mean, CJ, we go like one quarter at a time, but I would say the business has structurally changed. You know, close to 90%, 89% of our business is data center right now. So there isn't really any seasonality associated to it. It's really driven by the deployment schedule of our large hyperscale customers. If there's any seasonality associated, It really applies to the 10% to 15% of our business that we have in the channel and our client and consumer portfolio. But I think your comment is a fair one. There really isn't, by and large, any material seasonality to our business going forward.

Thank you. Thank you.

Thank you. We have the next question from the line of Eric Woodring from Morgan Stanley. Please go ahead.

Hey, guys. Thank you very much for taking my questions and congrats on the results. Irving, your February analyst day feels like it was in a completely different time in the market, even though it was only eight months ago. At the time, you talked about 16% to 23% exabyte growth and something like 7% annual price per terabyte deflation. It's probably safe to say that the market has inflected since then in just So I'd love to just get your updated thoughts on how we should be maybe thinking about the growth of these two metrics over the next few years. Is there any update you could share? Thank you very much.

Yeah, thanks for the question, Eric. You know, I think we gave a base case of 15% CAGR exabyte growth with an AI uplift case of 23%. We're definitely seeing exabyte growth trend more towards that 23% growth rate, especially as we get into these longer-term agreements. In fact, firm POs we have pretty much throughout all of calendar year 26, and we have agreements now for 27 and discussions with customers for durations even longer than that. We are clearly seeing demand trending more towards that 23%. range. And then on the cost side, I think, you know, the sort of mid to high single-digit cost down is probably still a safe assumption.

Do you have a follow-up, Eric?

Super. Thank you. I do. Thank you very much, guys. Irving, I'd just also love to get your perspective on, you know, how short do you think demand is relative, or excuse me, supply is relative to demand today in And just based on your new product introduction timeline, when do you think that supply can maybe more materially expand such that your EB growth really reflects more so demand than supply? Thanks so much, guys.

Yeah, thanks for the question, Eric. I think calendar year 2026, the supply-demand balance is going to continue to be very supply-constrained. You know, with the ramp up of the new capabilities both on the ePMR portfolio and HAMR, we expect to see more exabytes probably coming on stream in the second half of calendar year 27.

Thanks so much, guys. Good luck. Thank you.

Thank you. We have the next question from the line of Amit D from Evercore. Please go ahead.

Thanks a lot. I guess maybe to start with, Erwin, it sounds like you're pulling in at least the start of the Hammer qualifications a bit earlier than expected. Can you talk about how long does it normally take for a product to go from qualification to deployment? And do you see Hammer being roughly in line to that, or could it be done quicker?

Yeah, thanks for the question, Amit. Yes, we are pulling in our Hammer qualification by half a year, as I mentioned, from the second half of 26 into – the first half of 26. You know, if we use our ePMR portfolio as a proxy, we typically are able to go from start of qualification to completion and ramp in roughly two to three quarters. That's the sort of target they were working to, and that's why we talked about ramp in the first half of calendar 27 for our hammer products. But again, I reiterate, our focus is really on ensuring that we not only qualify a product and can ramp it, but we're delivering a reliable product. to our customers as well. The last thing we want to do is qualify a product, ramp it up, and then we have production-level challenges with our customers. So that's what our focus is on. But in the meantime, we still have our next generation of EPMR that we are starting qualification in calendar Q1 of 26 that we anticipate to qualify in two quarters and ramp very quickly thereafter as per the current generation of EPMR that we've delivered as well.

you a follow-up, Amit?

I do. You folks talked about leveraging AI internally. Can you talk about what sort of productivity savings you think West Indies can realize as you deploy AI internally? And, you know, does that sort of imply that as revenues keep growing, you can actually keep OPEX flat in this $370, $375 million range? I'd love to just understand what does AI implementation internally mean? What does that mean from a productivity or savings basis for the company? Thank you very much.

Thanks for the question. We have a series of AI initiatives that spread across the enterprise as we've highlighted in the prepared remarks as well. We're clearly seeing benefit in our manufacturing operations for AI use cases where we're seeing a 10% productivity gain. It's really resulting in better yields and faster throughput. of our products. We've also started to use AI in helping us rewrite some of our firmware. We're seeing gains in the space of about 20% productivity gains there. But it's still early days. I think there's still a fair amount of experimentation and exploration. But we see tremendous opportunity in the sort of early use cases that we've been able to apply AI into the enterprise has yielded very positive results.

Thank you, Amit.

Thank you. Thank you. We have the next question from the line of Wamsi Mohan from Bank of America. Please go ahead.

Hi, this is Joseph Lehman on for Wamsi. How should we be thinking about the mix of the 2.2 million ePMR drives you shipped in the quarter? I'm not sure if I heard correctly, but I think you said it was about 70 exabytes, so that's about 31 terabytes per drive. Is the mix change from quarter to quarter, or is that just going to trend higher, especially once the next qualification comes through?

Yeah, so your numbers are right. So it's 2.2 million units, and they delivered roughly 70 exabytes. This quarter, we are planning to ship over 3 million units. We don't anticipate the mix to really change that much. So it's pretty much pretty consistent based on the customer profile that we have.

Did you have a follow-up?

No follow-up. Thank you.

Thank you.

We have the next question from the line of Carl Ackerman from BNP Paribas. Please go ahead.

Yes, thank you. I was hoping you could discuss the breadth and stickiness of the announced price increase you disseminated in September, in particular since much of your volume is on long-term agreements. Are ASP improvements only to volume that is not on LTAs? If you talk about that, that would be helpful.

Yeah, the letter that we sent out, Carl, was predominantly to our channel customers, so it really affects predominantly our client and consumer customers. and probably the lower end of our near-lying capacity drives, and that's really roughly only about 10% to 15% of our business. For all our hyperscale customers that are on firm POs or LTAs, those are discrete commercial agreements that we have with them that were not affected by that letter.

A follow-up for you, Carl?

Excuse me, yes, if I may. I was, you know... It seems you have several months remaining to divest the remaining stake of SanDisk without incurring a tax penalty. Having said that, that investment in SanDisk is proving quite prescient. So could you perhaps update your thoughts on whether you intend to divest the remaining stake and if you do, what your cash issues plans would be, whether it's pay down debt, investment heads of media, buybacks, et cetera. Thank you.

Yeah, so during Q1 of fiscal 26, we did not monetize the remaining stake in SanDisk, and so we still have 7.5 million shares. It is our intention to monetize that stake prior to the expiration of the one-year anniversary of the separation, which is February 1st. Last time when we did the monetization, we did a debt for equity exchange, and we haven't made up our mind how we are going to do it, but it could potentially be a similar transaction like we did in the first time.

Thank you, Carl.

Thank you. We have the next question from the line of Tom O'Malley from Barclays. Please go ahead.

Hey, guys. Thanks for taking my question and really nice results. I wanted to go into the long-term agreements. Irving, during the pandemic, we've been conditioned with kind of the DRAM and NAN suppliers to think about long-term agreements as something that is really good while things are moving up and to the right and kind of get torn up when things correct. Can you talk about the hooks that are in these agreements? Are these take or pay? How are they structured so that you feel confident around your ability to get value for the length of agreements that you're signing?

Sure. As I highlighted, for five of our hyperscale customers, we actually have firm POs. So these are not LTAs. These are firm POs that have been placed on us. And for one of our largest hyperscale customers, we have an agreement for all of calendar 27 with quite significant amount of commercial teeth in them. So it's quite a different environment where I would say we are moving to a world where we have firm purchase orders and and even with longer-term agreements, there are appropriate commercial terms in there to protect ourselves in the case of any adjustments in their forecast.

Do you have a follow-up, Tom?

Yeah, I've been asking this question throughout earnings here. We heard from Lam about their impact to AI spend. I asked C. Gate just on what they think on $100 billion of AI spend you would see from a benefit to their business. They kind of talked about a high single-digit percentage of CapEx traditionally has gone there. Do you guys have any difference here, or would you be more nuanced in the way you looked at that?

Yeah, I would say it's a bit more nuanced. You know, we do track it. There's not a direct correlation there. To it, obviously, the big span in AI goes to GPUs and HBMs and power, but we've seen the percentage of CapEx on HDDs go from probably low single digits to trending more towards the 4% to 5% range.

Thank you, Tom.

Thank you. We have the next question from the line of Harlan Sur from J.P. Morgan. Please go ahead.

Good afternoon. Thanks for taking my question, and congratulations on the strong execution. You know, this year it looks like near-lying exabyte growth is trending more towards that sort of 35% range for the full year. You drove 36% year-over-year growth in June, 30% growth here in the September quarter. You've got an order book that extends out over the next, call it, 12 months, which is reflective, like you said, of your customers' exabyte demand profiles. Does the forward exabyte demand profile really suggest a normalization back to a 23% demand figure as you talked about, Irving, or is that more of a supply constraint driven profile and demand is really trending above that range, right? My point is that given all this AI infrastructure investment in compute, networking, memory, and storage, a 23% bit demand figure may not be too conservative, but wanted to get your views.

Yeah, it's a good question. I would say it's still an evolving environment where the CAGRs continue to increase, as I mentioned, you know, if you go back just less than 12 months ago, we thought mid-teens was the right number. We're now seeing a trending to the, you know, 23% range with potential as we fast forward to the 27, 28 timeframe to increase even more. But that's something we're working through with our customers to ensure that we continue to drive aerial density improvements to be able to support the care group growth that they're expecting going forward. So it's something we're working very closely with them. I think the big Difference is that in the environment that we're facing, we're getting much deeper insight into our customers' forward-looking Exabyte requirements, a much closer partnership in terms of how they want to more rapidly adopt a higher capacity drive to be able to support their data storage requirements going forward.

A follow-up, Harlan? Yeah, just a quick follow-up. So on the UltraSMR mix shift, you know, good to see the team out of 50-50 mix I don't think you guys answered this question, but given the order book, POs, LTAs, where does the mixed trend on ultra-SMR into 2026, and is this mixed shift towards ultra-SMR a rather important part of the driver of the stronger incremental gross margin fall through?

Yeah, we will see the mix of ultra-SMR continue to increase over time, both as Existing customers who have qualified ultra-SMR increased their ultra-SMR footprint, and we have another two customers that are going through ultra-SMR qualification as we speak right now. So we anticipate the take-up of ultra-SMR to be an increasing part of our portfolio and continue to grow going forward.

Yeah, and Harlan, just in general, the transition to higher capacity drives typically translate into a better gross margin profile.

Mm-hmm.

And if I may add, Harlan, if I may add, this is Amrish. Remember, UltraSMR is also translatable to our hammer. So that's something to keep in mind as well. Thank you. Yeah. Thank you.

Thank you. We have the next question from the line of Asiya Mochin from Citigroup. Please go ahead.

Great. Thank you for taking my question and great results here. If I can, you know, just trying to unpack pretty strong beat relative to the guidance Given that you guys are in these long-term agreements and there is capacity constraints, just if you could help me unpack what drove the upside. Was it some pricing that came through? Was there some extra drive that you were able to push through? I don't know if it was makeshift. If you could just help me unpack that, that would be great. Thanks.

Yeah, so as it relates to the upside in revenue was mostly driven by great execution by our manufacturing operations organization, pushing really hard on the supply side and improving yields, improving throughput. and that created some upside on the supply side for us from a revenue point of view. Also, on the gross margin side, we had some upside. They are mostly driven by a strong price environment where we have seen some modest low single-digit ASP per terabyte increases on a sequential and a year-over-year basis. In addition to that, as I just indicated, the shift to higher capacity drives is definitely benefiting the gross margin profile, and our customers are they want more exabytes, and they know they can get more exabytes as they move faster to higher-capacity drives. And so that was definitely beneficial. And in addition to that, again, the operations team is executing strong on driving down costs internally as well throughout the supply chain, and a combination of all of that provided some upside in the Q1 financial results. Do you have a follow-up, Asir?

Sure. Thank you very much. And how should I think about then, you know, given you guys have been running very well on your productivity initiatives, how should we think about that cost decline? Especially given, you know, you have some calls that are ramping up faster than expected. How should we think about the cost declines here in the outer quarters? Thank you.

Yeah, again, the team continues to execute really well. Again, a combination of moving to higher capacity drives, which results in a lower cost per terabyte, but then also really working on productivity, yield improvements, test time reductions, and driving operational efficiencies throughout the whole supply chain. And so a combination of all of that. is delivering the mid to high single digits cost per terabyte reductions that we've indicated at the analyst day and that you have seen being executed in the last couple quarters.

Thank you.

Thank you. We have the next question from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi. Good afternoon. If I adjust your free cash flow for the tax payment, it's $930 million against a non-GAAP net income of $655 million. I'm assuming there's something unusually positive in that number, and I'm trying just to right-size to how we should think about free cash flows relative to net income going forward, because that's just a tremendous performance in one quarter. Thanks.

Yeah, so very pleased with the very strong free cash flow of $599 million. This is the second quarter in a row where the free cash flow margin is well above 20%. So great execution there. As it relates to Q1 of fiscal 26, we had a major reduction in our working capital. So in part driven by a reduction in our DSOs as the billing linearity during the quarter is very strong. Days of inventory was slightly up. but also the day's payable went up. And so great execution there by the team. Unfortunately, as you know, once you've obtained some major reductions in working capital, it's hard to repeat that each and every quarter. It's our goal to maintain it at this level, but you will not see the incremental benefit that we saw in Q1 of fiscal 26. Anyhow, I think going forward, I feel comfortable with a free cash flow margin in the plus 20% range. Did you have a follow-up, Steve?

Yeah, just real quick on the prior question. So it's maybe a chicken and egg question, but you said the customers are recognizing the need to mix up to get the exercise they need. So is it the fact that they're pushing harder on you that you're then pushing harder on your development team? to get these higher-mixed products out? Is that sort of the dynamic that's going on? Thanks.

I think it's a win-win scenario, Steve, that sort of both organizations are working very closely. Customers obviously want higher-capacity drives to fulfill the exabyte demand. It's also beneficial for them from a TCO standpoint. Don't forget, when you have high-capacity drives, rack densities, are much higher, and therefore TCO is much better as well. And from our standpoint, that's a great way for us to better support the demand that our customers have on us and for us to be able to support the strong growth trajectory that we are seeing both in cloud and in AI going forward.

Thank you, Stephen. Operator, can we have the last question, please?

Sure. We have the last question from the line of Chris Sankar from TD Coven. Please go ahead. strong quarter.

This is Eddie for Krish. I do have a long-term question regarding the shortages. It seems like you and your main peer are very disciplined about adding capacity, which of course makes sense from a financial standpoint. But I do wonder how you balance that discipline on one hand with the risk of pushing customers more towards SSDs because they have no other choice, which in turn results in more NAND capacity in the industry, which lowers and prices longer term. So it's a tricky situation, and it would be great to know how your company is planning on navigating this.

Yeah, thanks for the question. It is something we look closely at as well. I think the good news is that AI, as we highlighted, is a prolific generator of data, and therefore more data is getting stored as the value of data increases. So all boats are rising, the demand for SSD and N bits, hard drive bits, and even tape bits are increasing as a result. And, you know, there are specific use cases that make sense for them to use SSDs. But fundamentally, if you look at data center architectures and the tiering between SSDs, HDDs, and tape, that is unlikely to change over time, right? And we anticipate that HDDs will continue to remain roughly about 80% of the bits that that are stored within the data center. And it's also important to recognize there are some inherent TCO benefits of HGDs as there are reliability challenges in terms of the number of rights that QLC can handle as well. So given all that dynamics, we don't anticipate seeing any major change. There may be quarter-to-quarter variations because of supply-demand dynamics, but sort of the 80% of exabytes being stored on HED, we anticipate will be the case going forward as well.

Do you have a follow-up, Eddie? Yeah, sure. Thank you, Irving. Your main tier did purchase Antivac earlier this year, which sells equipment for Hammer. And you guys sounded pretty positive about the qualification. I do wonder if you have fully navigated the risk from the InterVac purchase or it's something that's still in progress today. Thank you.

Yeah, we have fully mitigated the risk related to InterVac. As we highlighted when the acquisition first happened by our peer, all our hammer development is actually being done on a separate system called Enelva that's provided to us by Canon.

Perfect. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Thank you all again for joining us today and for your interest in Western Digital. At Western Digital, we continue to make good progress executing on our strategy. We look forward to sharing more with you on some of the exciting new innovations that we've been working on and the steps that we are taking to create long-term shareholder value. Let me close by giving a shout-out to all our employees, our Western Digital drivers, and our ecosystem partners who show up every day, making a difference for our customers, shareholders, and each other. Thank you all very much, and have a wonderful day ahead.

Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.