Western Digital - Earnings Call - Q3 2025
April 30, 2025
Executive Summary
- Q3 FY2025 revenue was $2.294B, down 5% QoQ but up 31% YoY, with non-GAAP gross margin reaching 40.1% and non-GAAP EPS of $1.36; GAAP EPS was $2.11.
- Versus Street, WDC delivered a mixed print: EPS beat (consensus $1.11*) while revenue missed (consensus $2.48B*); EBITDA modestly beat (consensus $639M*).
- Guidance for Q4 FY2025 implies sequential growth: revenue $2.45B ± $150M, non-GAAP gross margin 40–41%, non-GAAP EPS $1.45 ± $0.20, and non-GAAP tax rate 8–10%.
- Strategic capital return: initiated a quarterly dividend of $0.10/share and subsequently authorized a $2.0B share repurchase program; also redeemed $1.8B of 2026 notes (reducing gross debt).
- Key catalysts include rapid ramp of 11-disk 26TB CMR / 32TB UltraSMR drives (>800K units shipped in March quarter; >1M expected in June) and long-term agreements with two hyperscalers extending into 1H CY2026.
What Went Well and What Went Wrong
What Went Well
- Cloud strength and pricing: Cloud revenue reached $2.007B (87% mix); pricing per unit up 5% QoQ while nearline bit shipments were 145 exabytes; Cloud revenue +38% YoY.
- Margin expansion: Non-GAAP gross margin of 40.1% (+170bps QoQ; +1,000bps YoY) driven by product mix, pricing discipline and operational execution; GAAP gross margin 39.8%.
- Product ramp and visibility: 11-disk platforms ramping rapidly (800K units shipped, >1M targeted next quarter); LTAs with two hyperscalers now extend into H1 CY2026, improving planning and demand visibility.
- “Western Digital executed well…revenue at the high end of our guidance range and gross margin over 40%” — Irving Tan, CEO.
What Went Wrong
- Sequential revenue decline: Total revenue fell 5% QoQ as Cloud (-4%), Client (-2%), and Consumer (-13%) each declined sequentially; Consumer weakness due to lower units and pricing.
- Tariff-related uncertainty: Management highlighted potential demand uncertainty in enterprise/distribution/retail segments given evolving tariff dynamics, widening the Q4 revenue range.
- Flash separation and discontinued operations noise: Post-Separation accounting created GAAP volatility (e.g., unrealized loss on retained interest in Sandisk and litigation reversals affecting GAAP P&L and tax), though non-GAAP results strip these effects.
Transcript
Operator (participant)
Good afternoon, and thank you for standing by. Welcome to Western Digital's third quarter fiscal 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 *1 on your phone. As a reminder, this call has been recorded. Now, I will turn the call over to Mr. Ambrish Srivastava, Vice President and Investor Relations. You may begin.
Ambrish Srivastava (VP of Investor Relations)
Thank you, and good morning, everyone. Joining me today are Irving Tan, Chief Executive Officer, and Don Bennett, Interim 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 obligations to update these statements. Please refer to our most recent financial report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially 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 at investor.wdc.com. With that, I will now turn the call over to Irving for introductory remarks.
Irving Tan (CEO)
Thanks, Ambrish. Good morning, everyone, and thank you for joining us today. I'm honored to be speaking with you for the first time as the CEO of Western Digital. It is a privilege to lead this exceptional organization, and I want to start by recognizing the outstanding work of our employees across the company who managed a complex separation process over the last several months, while also continuing to drive the strong performance we are reporting today. Throughout that time, they remained deeply connected to our customers, continued pushing the boundaries of leading-edge innovation, and sustained a strong focus on operational excellence. This combination of customer focus, innovation, and execution positions us well for the opportunities ahead. In the past month, we've also welcomed our new Chief Product Officer, Ahmed Shihab.
Having held leadership positions at two large hyperscalers, Ahmed is a seasoned expert in cloud storage needs and requirements, making him the right person to lead our product strategy and engineering teams as we continue to drive innovation and deliver solutions that meet the evolving demands of our data-driven world. We are excited to have Ahmed joining Western Digital as his customer-centric perspective and deep industry knowledge, particularly with data centers, will be invaluable to us going forward. Let me now provide you with a few updates on our business. Since stepping into this role, I've been spending a great deal of time with our customers, employees, and the investment community. What's clear to me is that Western Digital has an incredibly strong foundation, a resilient business model, and incredible potential to benefit from the demand in the age of AI.
Even in a world marked by geopolitical uncertainty and shifting trade dynamics, one thing remains constant: the exponential growth of data. From enterprise workloads to the explosion of AI-generated content, such as the millions of images and viral videos generated through AI, data generation is accelerating at an unprecedented pace. When it comes to storing data at scale, no technology rivals the cost efficiency and the reliability of HDDs. We continue to serve as the backbone of the world's data infrastructure, delivering unmatched value for mass storage needs. As we deliver our critical HDD technology to our customers, we are focused on continued innovation to provide the highest capacity drives with improved performance, energy efficiency, and lowest total cost of ownership.
Our industry-leading 11-disk drives, with capacities of up to 26 TB CMR and 32 TB UltraSMR, are now ramping rapidly, with over 800,000 units shipped in the March quarter. We are also on track to ship well over a million units in the June quarter. The swift qualification and adoption cycle is a hallmark of our technology roadmap, demonstrating reliability, ease of implementation, and scalability with fastest time to value for our customers. On Hammer, we remain on track with respect to our milestones and roadmap that we communicated at our investor day in February. We are working closely on Hammer with two hyperscale customers and continue to receive encouraging ongoing feedback on our drives. Let me now turn to our quarterly results. For the third fiscal quarter, Western Digital delivered revenue of $2.3 billion, non-GAAP gross margin of 40.1%, and non-GAAP earnings per share of $1.36.
Free cash flow for the quarter was $436 million. At our investor day, we outlined the three pillars of our shareholder-friendly capital allocation approach. They are to reinvest in the business, reduce debt, and return cash to our shareholders. On April 14, we redeemed $1.8 billion of our 2026 senior notes, thus further strengthening our balance sheet. I'm also pleased to announce that we are initiating a quarterly dividend of $0.10 per share in our fiscal Q4. These actions are underpinned by our strong belief in the strength and durability of our business. Don will cover this in greater detail in his remarks. Now, turning to our outlook. First, I want to acknowledge the current environment, which remains highly uncertain and volatile, driven in large part by tariffs and global trade tensions. At Western Digital, we are addressing these challenges on two fronts.
In the near term, we've established cross-functional teams to minimize disruption and mitigate the impact of tariffs on our customers and operations. At the same time, we're taking a strategic view, evaluating the longer-term implications of supply chain shifts to ensure we stay agile, resilient, and are well-positioned for the future. Though the broader environment has some uncertainty, demand from our hyperscale customers remains robust in a tight supply environment. We're thankful to our customers who increasingly recognize the complexity of the HDD supply chain and are partnering with us to provide visibility into their future needs. This collaboration enables us to plan more effectively, and we now have long-term agreements to extend through the first half of calendar year 2026 with two of our largest customers.
However, there are areas such as in the enterprise and in certain parts of our distribution and retail business where there could be more uncertainty with respect to demand, driven largely by the current tariff environment. Taking these factors into account and looking ahead into the fiscal fourth quarter, we expect sequential revenue growth driven by sustained strength in data center demand. We continue to work closely with our customers to align with their long-term requirements while delivering the best possible total cost of ownership. Let me now turn the call over to Don, who will discuss our fiscal third quarter results and fiscal fourth quarter guidance in more detail.
Don Bennett (Interim CFO)
Thank you, Irving, and good morning, everyone. In the fiscal third quarter, Western Digital delivered strong financial results and successfully completed the planned separation of the company's flash business on February 21. As such, the historical results for the flash business segment are reported as discontinued operations and excluded from these results unless otherwise noted in my comments. Total revenue for the quarter was $2.3 billion, down 5% sequentially and up 31% year over year. Non-GAAP earnings per share was $1.36, driven by gross margin of 40.1%, disciplined cost management, and tax benefits. Total exabyte shipments were down 6% sequentially, driven by lower nearline shipments related to deployment plans of our customers. Average price per unit increased 4% sequentially to $179. Looking at end markets, cloud represented 87% of total revenue at $2.0 billion, down 4% sequentially and up 38% year over year.
On a sequential basis, the decline was due to a 6% reduction in nearline bid shipments to 145 exabytes, while pricing per unit in cloud was up 5%. On a year-over-year basis, both revenue and bid shipments grew at 38% and 32% respectively, driven by the strength of our product portfolio. Client represented 6% of total revenue at $137 million, down 2% on both a sequential and year-over-year basis. Compared to last quarter and last year, revenue was down due to lower unit shipments. Consumer represented 7% of revenue at $150 million, down 13% sequentially and 4% year-over-year. The sequential decline in consumer was primarily due to lower unit shipments, while year-over-year, the decrease was largely due to pricing. Moving to the rest of the income statement, please note my comments will be related to non-GAAP results on a continuing operations basis unless stated otherwise.
Gross margin for the fiscal third quarter was 40.1%. Sequentially, gross margin improved 1.7 percentage points ahead of our guidance of 50 basis points improvement. Operating expenses were down sequentially to $324 million. Our results demonstrate continued focus on cost discipline as we concluded our business separation process. Operating income was $596 million, up 85 basis points sequentially, driven by higher gross margin and lower operating expenses, partially offset by lower revenue. Operating margin was 26.0%, up 1.5 percentage points sequentially, and up 17.3 percentage points on a year-over-year basis. Income tax expense was $12 million, and the effective tax rate for the fiscal third quarter was 2%. The decline in the company's effective tax rate from guidance is a result of the recognition of one-time deferred tax benefits in conjunction with the separation of the flash business.
Turning to the balance sheet, at the end of our fiscal third quarter, cash and cash equivalent were $3.5 billion, and total liquidity was $4.7 billion, including undrawn revolver capacity. Gross debt outstanding was $7.4 billion at the end of the fiscal third quarter. Inventory was $1.3 billion, representing 86 days of inventory, up $63 million sequentially and down $174 million on a year-over-year basis. Our net leverage ratio at the end of the fiscal third quarter was 1.7x. Please note, after the close of the March quarter, we successfully redeemed $1.8 billion of our 2026 senior notes using cash on hand. The redemption reflects our commitment to strengthening the balance sheet and achieving our target net leverage ratio of 1.0-1.5x as outlined at our investor day.
Operating cash flow for the fiscal third quarter was $508 million, and cash capital expenditures represented a cash outflow of $72 million, resulting in free cash flow generation of $436 million for the quarter. Please note that this is on a consolidated basis for the quarter. As Irving highlighted in his opening remarks, we are pleased to announce that we're initiating a quarterly dividend of $0.10 per share, reflecting the strength of our balance sheet and confidence in the long-term cash-generating ability of our business. This decision underscores our commitment to delivering value to our shareholders. I'll now turn to the fiscal fourth quarter non-GAAP guidance. This guidance includes our current estimate of all anticipated or known tariff-related impacts on our business in this period. We anticipate revenue to be $2.45 billion, plus or minus $150 million. Gross margin is expected to be between 40% and 41%.
We expect operating expenses to increase slightly on a sequential basis to a range of $330-$340 million. The increase is due to variable compensation reflecting improvement in the underlying business, hiring to fill critical open positions resulting from the business separation, and increased investments in research and development. Interest and other expenses are anticipated to be approximately $70 million. The decrease on a subsequent basis reflects our lower debt levels following the notes redemption previously discussed. The tax rate is expected to be between 8% and 10%. We expect EPS to be $1.45, plus or minus $0.20, based on approximately 360 million shares outstanding. Additionally, for modeling purposes, we would like to highlight that fiscal year 2026 will be a 53-week year for us. As a result, our first fiscal quarter in FY26 will have 14 weeks.
In addition, we expect the tax rate for FY2026 to be between 16% and 18%. In closing, Western Digital is well-positioned to navigate the current dynamic environment. We remain focused on creating value for our stakeholders and investing in our future to capture the significant growth and data ahead while maintaining a healthy supply and demand environment. With that, I'll now turn the call back to Irving.
Irving Tan (CEO)
Thanks, Don. Western Digital's results this quarter and guidance reflect the ongoing structural transformation of our business with continued progress towards a business that delivers sustained profitability. We continue to maintain strong conviction in the business and are confident that we will weather this uncertainty and come out even stronger. With that, let's now begin the Q&A.
Ambrish Srivastava (VP of Investor Relations)
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?
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one on your phone. If you would like to withdraw your question, please press the pound key. One moment, please, for the first question. Our first question comes from Eric Woodring with Morgan Stanley. Please go ahead.
Eric Woodring (Managing Director in Equity Research)
Hey, good morning, guys. Thanks for taking my questions and congrats on the nice quarter out the gate. Instead of asking a demand question, I wanted to actually ask about capital allocation. Irving, you have a dividend yield of about 1%, soon to be lower than that given how your stock is trading in the pre-market. That is about $100 million of annual cash outflow. Can you maybe just help us understand how we should be thinking about both dividend growth going forward, given it seems like you have some capacity there, but then also maybe how you're thinking about potential share buybacks? I know your intent is to deliver with the SanDisk stake, but just help us understand on the cash return side to equity holders how we could be thinking about the cadence of both dividend growth and buybacks. Thanks so much.
Irving Tan (CEO)
Yeah, thanks for the question, and I appreciate it. As we laid out in our investor day, our goal is to get our net leverage down to the 1-1.5x range. Once we're there, we intend to return 100% of our excess cash to our shareholders. That will be in the form of both dividend and share buybacks, as we also indicated at investor day, which we have honored and committed to today. We're starting off with a relatively small dividend to begin with, and as we progress, we'll look to increase that and complement that with buybacks as well. Stay tuned for that.
Eric Woodring (Managing Director in Equity Research)
Okay.
Irving Tan (CEO)
Eric, did you have a follow-up?
Eric Woodring (Managing Director in Equity Research)
Yeah, just the quick follow-up was, Irving, what I hear from you is kind of more visibility because of some of these LTAs. I am curious, with customers now giving you some indications into the first half of calendar 2026, does that mean you have enough visibility to expect revenue, margins, and EPS sequential growth through calendar 2025, or is it too early to make that call? Thanks so much, guys. Good luck.
Irving Tan (CEO)
Yeah, Eric, thanks. I think the shift to LTAs has given us greater visibility. As I highlighted in my opening comments, we now have two hyperscale customers that have given us LTAs up to the first half of calendar 2026. That has really helped us plan our supply chain appropriately, along with the CapEx investments that we need to make and give us a lot more confidence in the business. As I have highlighted in the past, I think especially when it comes to the hyperscale business, we see demand continuing to be strong and robust throughout calendar 2025 and now, as I have mentioned, into the middle of calendar 2026 as well.
Operator (participant)
Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please go ahead.
Aaron Rakers (Analyst)
Yeah, thanks for taking the question. Also, congrats on the first quarter out of the gate. In the comments around the guidance you guys alluded to into the fiscal fourth quarter, you did point out that it reflected all known or anticipated tariff impacts. I'm curious if you could unpack that a little bit. I believe the majority, if not all, of your manufacturing footprint is in Thailand. Just curious how you're thinking about how your best assessment of what these tariff impacts might be or any indications that you've seen with customers at this point.
Irving Tan (CEO)
Yeah, thanks for the question, and good to hear from you again. In Q4, we do not anticipate any direct tariff impacts in relation to its translation into pricing or cost to customers. As we have highlighted in our prepared statements, we do see some potential demand uncertainty in the enterprise distribution and retail segments of the business just due to the unpredictability and volatility. You would have heard a lot of comments in the marketplace around enterprises and consumers sort of pausing or holding back on making purchases as well. Factoring all that in, that is the guide that we gave. Again, the growth that we have guided to is really driven primarily by the strength that we continue to see in the data center, and specifically in our hyperscale business.
Don Bennett (Interim CFO)
Aaron, I'll just add that in Irving's prepared remarks, we talked about establishing cross-functional teams to minimize disruption and mitigation to both our customers as well as our internal operations. Additionally, we're taking a strategic view on looking at multiple alternatives depending on what the tariff situation looks like tomorrow or in mid-May or June, whenever the next round of tariff guidance comes out on our products. As you know, we're part of the semiconductor group, and we currently have 0% tariff on our products.
Ambrish Srivastava (VP of Investor Relations)
Aaron, did you have a follow-up?
Aaron Rakers (Analyst)
Yeah, I do. Thanks, Ambrish. When I think about the gross margin, right, 40.1%, I think at the analyst day, you talked about 38% plus as kind of being the longer-term model. When I look at the guidance into this next quarter, if my math is right, it looks like the incremental margin that you're alluding to is north of 45%. I guess my question is, is there anything structurally in the business or kind of the path forward that keeps us from thinking that gross margin could trend into that mid-40, if not higher range over time?
Irving Tan (CEO)
Yeah, I think, Aaron, at investor day, we provided a guide or a model on gross margin that was a floor of 38%, and that's over a five-year period. As you know, there are market vagaries and ups and downs along the way. 38% was the floor. We obviously were able to deliver very strong gross margins this quarter. We crossed the 40% threshold. That's really driven by the value that customers see in the technology that we are providing them, as well as very strong operational discipline and also pricing discipline that we've experienced within the market. As we continue to currently deliver total cost of ownership value to our customers, innovation capability whilst maintaining their operational discipline within our operations, sorry, we see gross margins continuing to remain strong.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Aaron.
Operator (participant)
Thank you. The next question comes from Carl Akerman with BNP Paribas. Please go ahead.
Karl Ackerman (Managing Director of Equity Research, Semiconductors, and IT Hardware)
Yes, thank you, gentlemen. For my first question, I know you have focused on technology transitions to drive exabyte demand from here. However, what are the hurdles for you to add manufacturing capacity? Is it driven by certain visibility you have on LTAs or other things we should consider? Thank you.
Irving Tan (CEO)
Yeah, thanks for the question, Carl. A lot of our exabyte growth has really been driven by areal density improvement and technology improvement. As we've highlighted, our UltraSMR technology, which is unique to us, gives us a 20% capacity uplift over the standard recording media. Our ability to deliver incremental exabytes without having to put in CapEx in terms of more production units has been one of the big differentiators that we've been able to create. That is an area that we continue to invest in, in our R&D function to continue to drive greater areal density performance. We've recently just launched our 26 and 32 terabyte industry-leading platforms, and we will bring out in the next few months our 28 and 36 terabyte platforms as well.
Those increases through areal density will continue to enable us to deliver exabyte growth without having to invest in CapEx for additional unit growth.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, Carl?
Karl Ackerman (Managing Director of Equity Research, Semiconductors, and IT Hardware)
I do, Ambrish. Please. Thanks for that, Irving. I wanted to follow up on the comments you made with regard to LTAs. It sounds like demand for hyperscale is quite good and has strong visibility into the first half of 2026. However, I was hoping you could provide a bit more color on the growth curve of private cloud and SMB customers. I'm curious whether you have seen perhaps any pull forward in calendar Q2 ahead of tariffs, and secondarily, how you think about the demand dynamic for those customers in the second half. Thank you.
Irving Tan (CEO)
Yeah, thank you. We definitely do see opportunities, especially in sovereign clouds and private clouds going forward. Even in the age of AI, where the primary beneficiaries have been the large hyperscalers, we also see growth sort of at the edge happening. That is an opportunity that we look to pursue going forward as well as a growth driver. We have not seen any pull forwards. The linearity that we saw within Q3 was very consistent with the linearity that we have seen in the past. Also, as we look at sequential quarter-on-quarter growth, very consistent with what we have seen in the past. No real change in terms of pull-ins, both last quarter and what we see happening this quarter as well.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Carl.
Operator (participant)
Thank you. The next question comes from CJ Muse with Cantor Fitzgerald. Please go ahead.
CJ Muse (Senior Managing Director)
Yeah, good morning. Thank you for taking the question. I guess to follow up on the prior question, I was hoping you could speak a bit about supply and what kind of exabyte growth you can get just from delivering higher capacity drives. I guess, what is the timeframe where you would potentially consider adding more capacity?
Irving Tan (CEO)
Thanks for the question, CJ. Look, we feel confident right now with the forecast that we have and outlook that we see in terms of exabyte growth. We are able to deliver that through, again, the technology and innovation we're delivering that provides us that capacity uplift without putting in any capacity. If there was any need to put in any capacity, it would probably be more on the head and media side of the house, but we don't anticipate any capacity investments in those areas for the near term.
Don Bennett (Interim CFO)
CJ, I'll just add that in this uncertain environment, we're very tightly managing our capital expenditures, and we continue to manage the business to the low end of our guidance range of 4-6%.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, CJ?
CJ Muse (Senior Managing Director)
I do, Ambrish. Thank you. I guess, could you speak to gross margins? Obviously, great results and guide. Curious in terms of the drivers from here. Is there still kind of a fixed cost benefit that would arise, or is it really all about higher capacity drives delivering higher ASPs? Is that the main driver, or are there other factors that we should consider? Thanks so much.
Don Bennett (Interim CFO)
Yeah, CJ, you hit it right. It's really about the product technology that we're delivering to our customers. We continue to add TCO benefit to them, and we're participating in that value that we're bringing to the customers. We're tightly matching supply and demand, so we're not going to see great impact from increased production over time because we're very tight in our supply allocation. It's really about delivering value to our customers through technology and continuing to drive leading-edge products at scale.
Ambrish Srivastava (VP of Investor Relations)
Thank you, CJ.
Operator (participant)
Thank you. The next question comes from Wamsi Mohan with Bank of America. Please go ahead.
Wamsi Mohan (Senior Equity Research Analyst)
Yes, thank you so much. Nice results here. Irving, if I heard right, you noted the potential for some enterprise slowdown driven by tariffs. I was curious, have you seen anything in your order patterns to suggest that, or is this sort of more anticipatory in terms of what could happen if a tariff regime became more onerous?
Irving Tan (CEO)
Yeah, thanks for the question, Wamsi. It's more the latter, right? We haven't seen any slowdown just yet, but obviously, there is demand uncertainty because of the tariffs. Obviously, we've heard a lot of news coming out of enterprises and earnings over the last few days around customers being a bit more cautious in terms of spending and capital investments as well. Given that, we've just factored that into the guide. Nothing untoward for the time being. That's why we've just widened the range in terms of our guide for Q4.
Ambrish Srivastava (VP of Investor Relations)
A follow-up, Wamsi?
Wamsi Mohan (Senior Equity Research Analyst)
Yes, thanks, Ambrish. Maybe for Don, as you look into the September quarter where you're calling out the 14 weeks, any parameters you can help us think through in terms of revenue and OpEx into that quarter, please? Thank you.
Don Bennett (Interim CFO)
Yeah, we guide one quarter at a time, but the reason I mentioned a 14-week is because obviously, we'll have 14 weeks of expenses. Typically, our customers order on a quarterly basis. The revenue will be it'll follow typical seasonal patterns, but at this point, we're not guiding revenue for that quarter.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Wamsi.
Operator (participant)
Thank you. The next question comes from Asya Merchant with Citi Group. Please go ahead.
Asiya Merchant (Director of Technology Equity Research)
Great. Thank you for the question. Great quarter, by the way. There seems to be some concern just around hyperscalers. I know your competitor talked about demand being very strong there as well and good visibility. Anything on why you do not think this could be double ordering, anything as it relates to pricing negotiations that would limit the impact if indeed there was any double ordering? Thank you.
Irving Tan (CEO)
Yeah, thanks for the question, Ashley. We definitely do not see any double ordering at this time. I think one of the key things is we are in a very tight supply demand environment. Even if there were double orders, I think we would be challenged to fulfill them right now. I think more importantly, the demand profile that we are seeing given the LTA visibility that we have all the way to middle of 2026, is we are seeing order patterns very much follow the LTA demand. There is nothing really abnormal. As Don mentioned, it follows very much both seasonality, quarter to quarter, and linearity within quarter as well. We do not see any double ordering.
If anything, on pricing, obviously, as we transition to new platforms, that always gives us an ability to deliver better TCO value to our customers and an opportunity for us to deliver greater pricing upside as well.
Ambrish Srivastava (VP of Investor Relations)
Asya, did you have a follow-up?
Asiya Merchant (Director of Technology Equity Research)
Yeah, sure. Thank you very much. On gross margins, it was better than expected in the current quarter that you reported. Why can't gross margins do similar incremental step-up? You are seeing better revenues in the June quarter. As you think about the remainder of the calendar or the fiscal 2026, should we continue to expect margin expansion from these levels? Thank you.
Irving Tan (CEO)
Yeah, thanks for the question. I think the strong gross margins that we have delivered and also guided to is a reflection of the value that we bring to our customers, particularly through the technology enhancements that really gives them both better TCO, but also very fast time to value. That is what we continue to focus on. If we are able to continue to deliver that innovation, continue to deliver that total cost of ownership benefit, and giving them fast time to value, we do not see any reason why gross margin could not expand going forward as well. That is our focus. We do not worry too much about the gross margin, but continue to focus on delivering value to our customers. I think the gross margin will flow from that.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Asya.
Operator (participant)
The next question comes from Amitesh Bajad with Evercore. Please go ahead.
Amit Daryanani (Senior Managing Director)
Thanks a lot. I guess maybe just to stop it on the tariff dynamic. I realize you do not have much of an impact on tariff right now, but as you are signing these LTAs into calendar 2026, can you talk about if you sort of have tariff escalators embedded in them to ensure you can pass through the cost of these to your customers, or would that be a difference in a discussion to be had once you know what the tariff scenario looks like?
Irving Tan (CEO)
Yeah, thanks for the question. We are obviously working very closely with our customers. As we all know, I think the situation is evolving on a daily basis and extremely fluid. It is hard for us to really speculate what the outcome would be. Right now, as I mentioned in my prepared remarks and Don emphasized as well, we have teams that are working across the company closely with our customers to really understand how we can mitigate the impacts of tariffs and also any supply disruptions in the near term. In the long term, we are also evaluating with them what their supply chain shifts may be so that we can also align to that.
We're also prepared both from an agility, resiliency, and long-term readiness perspective to be able to work with our customers as they shift their supply chains to be able to best support them as well.
Ambrish Srivastava (VP of Investor Relations)
Amit, did you have a follow-up?
Amit Daryanani (Senior Managing Director)
I do. Thanks, Ambrish. Maybe just on the Hammer side, I think you folks mentioned you're working with two cloud customers at this point on Hammer. Just any sense on when you expect these qualifications to happen? As you work towards them, should we think of some sort of upside bias to your R&D or OpEx investments through that process? Thank you.
Irving Tan (CEO)
Yeah, thanks for the question. I think we laid it out very clearly at Investor Day. We are looking to start qualification in the second half of calendar 2026 and then ramping up production at scale in the first half of calendar 2027. We have engineering samples with two large hyperscalers already today. We're in close contact with them on the performance of those drives. We're getting regular feedback from them. I would say so far, the performance has been meeting the milestones that we've both laid out. On a quarterly basis, based on the feedback that we receive from them, we are delivering the next generation of enhancements on those drives. I would say we're comfortable with where we are. We're on track with that roadmap that we laid out.
At the same time, we're also preparing to introduce our new 28-terabyte into the 6-terabyte ePMR platforms as well. Our whole focus is on ensuring that we really de-risk transitions for our customers, continue to deliver very scalable, predictable, reliable capacity points that gives them the fastest time to value.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Amitesh.
Operator (participant)
The next question comes from Tom O'Malley with Barclays. Please go ahead.
Tom O'Malley (Director of Equity Research)
Hey, guys. Thanks for taking my questions. I just wanted to focus in a little bit on the LTAs. We had this period in memory on the NAND and DRAM side through the pandemic where in the end, LTAs were pretty much torn up and were largely hyperscalers' advantage over suppliers. Could you talk about what benefit you get from these LTAs? Is this a take-or-pay agreement? Are these in writing where you get some sort of compensation if your customers are not going to take these? Or is this just a framework that you have with your customers that says, "We will supply this much over this period of time"? Could you just maybe dive into those a little bit? Because historically, they really have not meant much.
Irving Tan (CEO)
Yeah, thanks for the question, Tom. First of all, we do not disclose the terms of the commercial contracts that we have. I think it is important to note there are some quite significant structural changes that have happened within our business, I would say, across the entire hard drive industry over the last year where a lot of the excess capacity and existing inventory within the supply chain has been removed from the system to really reset the entire supply base to where we think the right demand profile is going forward. The LTAs play a very critical role to ensure that we have that right supply-demand balance.
Given the criticality that hard drives place to the business of our hyperscale customers, I think, as I have mentioned in my opening comments as well, they have been working very closely with us to ensure that sort of supply-demand imbalance that we saw during COVID and for a period post-COVID as well does not reoccur. I think we are in a good place where the LTAs really give us good visibility. We are seeing pretty much demand stick to those LTAs that we have outlined with them. The LTAs have moved from pretty much 3-6 months now to 9-12 months as well. That is giving us a lot more visibility to plan our supply chain very closely for our customers as well.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, Tom?
Tom O'Malley (Director of Equity Research)
Yeah, I just want to dive into the differences between the unit and pricing and the guide. You have had a pretty consistent track over the last couple of years of increased pricing. Is there any different type of dynamic we should think about? I know you guys do not guide by more than one quarter out, but looking into the June quarter units versus pricing, any commentary you have that get you to that guide?
Don Bennett (Interim CFO)
Sure, Tom. Yeah, we've had, as Irving mentioned, a structural change in our business. The majority of our business today is in data centers or at the edge. We've seen this continued progression of ASP. Currently, we announced we're at $179, which is up 23% year over year on an aggregate weighted average basis. As that mix continues to move to cloud, we should see sustained increases in ASP. Obviously, it'll move around quarter to quarter depending on what our client and consumer mix is because that typically is a lower capacity drive overall. It's impacted by segment mix, customer mix, as well as we continue to drive TCO value to our customers. We see price per unit stable or up in most cases as we deliver further technology into those accounts.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Tom.
Operator (participant)
The next question comes from Steven Fox with Fox Advisors. Please go ahead.
Steven Fox (Founder and CEO)
Hi, good morning. Thanks for taking my question. I guess first one, I just was curious if you could sort of give yourself a grade on the free cash flow for the quarter. Seemed pretty good to me at 78% of net income and how we can think about sort of what you're measuring yourselves against in future quarters for free cash flow. I had a follow-up. Thanks.
Don Bennett (Interim CFO)
Yeah, thanks for the question. Free cash flow, we do not guide cash flow on a quarterly basis because there are a lot of moving parts in cash flow. As you mentioned, we did have very strong both operating and free cash flow. We are driving the business to operating profit and to free cash flow generation so that we can execute on our capital allocation priorities. Irving laid those out in the script, but I will just repeat them. One is to reinvest in the business, so deliver leading-edge technology at scale to our customers. The second thing is to delever our balance sheet. You have seen us do that with taking out $1.8 billion of our 2026 notes. We are now down below $4 billion of net debt on the balance sheet. Lastly is returning capital to our shareholders.
We started that with the initiation of the dividend, and there will be more to come on that in the future.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, Steve?
Steven Fox (Founder and CEO)
Yeah, I was just curious when we think about non-enterprise and non-cloud markets, how you're managing those against all the demand you're seeing. Do you feel like you're de-emphasizing those or figuring out a way to maybe more efficiently manage them? I'm just curious what we think about those markets over the next year or two. Thanks.
Irving Tan (CEO)
Yeah, we're definitely not de-emphasizing them. They're still a material part of our business. The supply chains for our cloud and non-cloud business are really quite discrete and separate, and we sort of manage them independently. If anything, we are looking at opportunities to see whether we can sort of drive incremental growth in those areas.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Steve.
Operator (participant)
Thank you. The next question comes from Mark Miller with Benchmark Company. Please go ahead.
Mark Miller (Equity Research Analyst)
Congratulations on your first report after the spinout. I'm just curious, can you tell us how many shares you currently hold with SanDisk, and have your plans changed because of the relatively low price of SanDisk about what you're going to do with the shares?
Irving Tan (CEO)
Yeah, we own 19.9% of SanDisk as the retained stake that we have. As we have communicated in Investor Day, we will look to disposition those shares, ideally over a 12-month period starting in February as part of our deleveraging strategy going forward.
Mark Miller (Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question comes from Harlan Sur with JP Morgan. Please go ahead.
Harlan Sur (Executive Director of Equity Research)
Good morning. Thanks for taking my question and great job on the quarterly execution. Back in February, the team outlined a three-year nearline exabyte growth figure of around 20-25%, which is what some of the third-party research firms are kind of forecasting for this calendar year, which is also consistent, Irving, with the strong cloud data center CapEx spending trends that you talked about this year. Given your fairly good visibility, does your forward demand profile also suggest a low 20% exabyte growth profile in this calendar year or better?
Irving Tan (CEO)
I think you're in the ballpark.
Ambrish Srivastava (VP of Investor Relations)
Harlan, this is Ambrish. Remember, we had given a three to five-year forecast.
Irving Tan (CEO)
Right.
Ambrish Srivastava (VP of Investor Relations)
Did you have a follow-up, Harlan?
Harlan Sur (Executive Director of Equity Research)
Yeah, no, I know Irving has given a three to five-year forecast, but that sort of 23% kind of aligns with some of what the third-party research guys are kind of forecasting for this calendar year. I appreciate the answer there. Also, back in February, Irving, you did articulate about a 40% current mix of your nearline capacity was UltraSMR based. As you look at your order book and shipment plans, where do you expect that mix to be either second half of this year or exiting this calendar year? You're driving, obviously, strong TCO benefits. You're driving strong pricing power. On a like-for-like basis, capacity-wise, which carries the higher gross margin profile? Is it your CMR or UltraSMR-based drives?
Irving Tan (CEO)
I think we look to deliver value across the portfolio. I think we see a pricing leverage across both our CMR and UltraSMR platforms. Obviously, our UltraSMR platforms give us better ESPs per drive because of the additional capacity we deliver from it. It also helps us with CapEx, as I have highlighted earlier, because of the technology benefit we have without having to put CapEx into it. In terms of mix in any given quarter, it is probably around a 40-45% ratio. It depends on because these are large hyperscalers and they have different deployment time frames, and different hyperscalers use different technologies. It can fluctuate from quarter to quarter, but somewhere between 40-45% in any given quarter is what we see.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Harlan.
Operator (participant)
Thank you. The next question comes from Ananda Barua with Loop Capital. Please go ahead.
Ananda Baruah (Research Analyst)
Yeah, hey, guys. Thanks for taking the question. And congrats on getting out the gate here as new co. I guess, yeah, Ambrish, too, if I could. I guess the first one is really an architectural question. As the consuming Seagate continues to progress with Hammer and you guys continue to progress over the next, call it, 24 months with your legacy tech, kind of pre-getting to Hammer volume, just as per the analyst, does that create any new architectural realities inside the data center with what can be mixed and matched or how folks begin thinking about storage system stacks? Would love any context there if there's anything. And then I have a quick follow-up. Thanks, Ambrish.
Irving Tan (CEO)
Yeah. Look, I think there will be some architectural adjustments accordingly. Obviously, at the highest level, the interplay between what's on flash, what's on hard drives, and what's on tape will continue to be there. As we've highlighted in Investor Day, hard drives, again, will be the predominant storage media with over 80% of bits stored on hard drives. We don't anticipate that changing, whether that's ePMR or Hammer going forward. There are some rack-level changes that will be required for the deployment of Hammer. You're not going to be able to mix and match the drives that easily. Similar to UltraSMR, there are some whole site software changes that are required as well. These are very sophisticated customers. Their data center architects are very familiar with what's needed to be done.
The success that we've had and the continued growth that we see in our UltraSMR portfolio is a great example of people really embracing their technology and really making and investing in the architectural changes within both their data center environment and their software stack to be able to take advantage of that benefit. We see that going forward.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, Harlan?
Harlan Sur (Executive Director of Equity Research)
Yeah, thanks. Maybe this is for Don. I guess the March quarter gross margin, am I correct in recalling that March quarter gross margin was actually originally anticipated to be impacted by product transition, yield dynamics, normal stuff? If that did, in fact, occur, does that actually mean that the normal, the structural margin is actually set up higher than what you guys reported?
Don Bennett (Interim CFO)
I think we guided at 50 basis point improvement. We actually saw better yields and utilization. The ramp of our new product technology was faster than expected, as we announced in our press release. We shipped over 800,000 units of our new 11-disk platform. That is being produced at very high quality, reliability, and yields in our factory today. That was one of the things that improved gross margin above guide.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Anand.
Operator (participant)
The next question comes from Mehdi Hosseini with SIG. Please go ahead.
Mehdi Hosseini (Senior Equity Research Analyst)
Yes. Thanks for taking my question. Your main competitor recently announced their intention to acquire Intervac. I want to learn more how you're thinking about procuring the key components for Hammer technology, especially as you engage with two hyperscalers that you highlighted in the prepared remarks. I have a follow-up.
Irving Tan (CEO)
Yeah. First and foremost, I think the Intervac acquisition by our peer does not have any impact on us because we have obviously two sputtering systems that we use. We have resiliency within our technology supply chains as well. We are obviously looking out for opportunities in which we can continue to capture even more value and accrete even more value to our products through potential acquisitions and vertical integration. We continue to keep a lookout for them. In many cases, in terms of tool providers, we actually do feel and our philosophy is that they actually benefit from actually servicing multiple customers because that is how they can innovate better as well. That is generally our rule of thumb. We are constantly looking at opportunities to see how we can continue to vertically integrate and capture more value within our portfolio.
Ambrish Srivastava (VP of Investor Relations)
Do you have a follow-up, Mehdi?
Mehdi Hosseini (Senior Equity Research Analyst)
Yes, sir. A follow-up has to do with the CFO search, especially since you're executing well right out of the gate and committing to cash dividend. To that extent, what's the update on the CFO search? How should we think about the execution and search for the CFO?
Irving Tan (CEO)
Yeah. Thanks for the question. First and foremost, I mainly must thank Don for agreeing and stepping into the interim CFO role. He's done a great job, as you can hear from the results as well. The search is progressing very well and will communicate in due course once we have a CFO identified.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Mehdi.
Operator (participant)
Thank you. The next question comes from Tim Akuri with UBS. Please go ahead.
Tim Akuri (Managing Director)
Thanks a lot. Drive units were down from 13.5 million down to like 12.1 in March. Is 13.5 million, is that kind of like should we think about that as a high watermark for the number of drives you could produce in a quarter?
Irving Tan (CEO)
I would not use that as a watermark. I think it really depends on mix. It also depends on the various capacities that we are delivering. As Don mentioned, the teams continue to do a great job on really pushing the boundaries of yield and output that we can within the supply environment that we have. It fluctuates really based on yield and the mix of products that we have.
Don Bennett (Interim CFO)
I'll just add, there's segment mix. Client and consumer was down for the quarter as we ramp into seasonal periods with Prime Day and back to school and Christmas. We may see some of that volume come back in the client and consumer space as well. We have capacity there to expand.
Ambrish Srivastava (VP of Investor Relations)
Did you have a follow-up, Tim?
Tim Akuri (Managing Director)
I do, yeah. Just back on this question about these LTAs. I mean, these same large customers have similar deals for memory, and they routinely overstate what they need. Why would they not be doing that with you as well? I mean, I certainly understand that demand is good, but for this stuff that is booking out to next year, why would they not, if they need two drives, why would they not tell you that they need three? And if they did not take the drive, are you going to enforce a cancellation policy on them? Thanks.
Irving Tan (CEO)
Yeah. Look, I think we've got into a good, healthy relationship with our customers. They have understood that in order for the hard drive industry to be healthy for us to continue to be able to be profitable and invest in innovation that they benefit from, from a TCO advantage, it's in both our best interest to provide as best as possible the demand outlook, given the long lead times, especially when it comes to nearline drives. That's something we've clearly gotten visibility. In fact, for the two LTAs that we have into the first half of calendar 2026, we actually have firm POs associated with them as well. I guess the question is, do we put in a clause around take or pay? To be frank, we are not a fan of that because all you're doing is creating problems down the road.
We rather work with our customers to smooth out demand and make sure we continue to work with them to have the right and appropriate supply-demand balance to sustain a profitable business that we can continue to invest in innovation for them going forward.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Tim.
Operator (participant)
The next question comes from Vijay Rakesh from Mizuho. Please go ahead.
Vijay Rakesh (Managing Director and Senior Semiconductor Analyst)
Yeah. Hey, just a quick question on the Hammer side. When you look at the two hyperscale customers you mentioned, are you still looking at ramping those in calendar 2026, like second half 2026, I think, as you mentioned on the analyst day event?
Irving Tan (CEO)
Yeah. As per the roadmap, we've communicated, which has been shared with our customers for quite a while. At analyst day was when we made it more public to the general population. That roadmap has been done in partnership for customers for quite a while. Just to reiterate what we shared, we're looking to start qualifications in the second half of calendar 2026 with high-volume production ramp in the first half of calendar 2027.
Vijay Rakesh (Managing Director and Senior Semiconductor Analyst)
Got it. Then on the data side, just a quick clarification. When you look at shipping into China, is that going from your Malaysia facilities, or do you ship hard drives into China? Likewise, in the U.S., how much of that is you have production here versus coming in from Malaysia, etc.? If you can give us a little bit of color around that. Thanks.
Irving Tan (CEO)
Yeah. We have production facilities throughout Asia. None of our products that we ship into the U.S. is coming from China. Most of it is coming in from Southeast Asia. Products going into China are not subject to any tariffs. As of April 11, products that we ship into the U.S. are also not subject to any tariffs. Obviously, that situation is evolving and fluid, so we stay very close to it.
Ambrish Srivastava (VP of Investor Relations)
Thank you, Vijay.
Irving Tan (CEO)
Thanks.
Operator (participant)
Thank you. The last question comes from Krish Shankar from KD Cohen. Please go ahead.
Wamsi Mohan (Senior Equity Research Analyst)
Hey, guys. This is Eddie for Krish. How should the investors think about the impact from rare earth export control from China? I think historically, you guys were able to recycle some of these metals, but at some point, it did impact your margins. I just wonder if down the road, it's an area investors should be thinking about.
Irving Tan (CEO)
Yeah. Thanks for the question. It's a good one. We, over the last few years, have really been on a supply chain resiliency program where we have been able to develop alternate sources of supply for both rare earth and precious minerals as well. We don't anticipate there being any material impact as a result of some of those controls.
Ambrish Srivastava (VP of Investor Relations)
Did you have a follow-up?
Irving Tan (CEO)
Sure. Thanks, everyone. As you guys ramp the 11-disk platform, how should we think about the margin impact? Because my understanding is, as you add disks, it may reduce the gross margin equation. Do you think it is at a point where it is mature enough where margins would be unaffected by that ramp? Thank you.
Don Bennett (Interim CFO)
Yeah. The margin accretion is included in our guidance. We factor the ramp of the new technology into guidance.
Irving Tan (CEO)
Yeah. Maybe just to add on to Don's comment, we were already ahead of our ramp plans in Q3. As I mentioned in my prepared remarks, we shipped over 800,000 units of that new 11-disk platform. We'll be shipping well over a million units in Q4. We are seeing very high yields and productivity coming out of those platforms. I guess to your question, they're actually margin accretive as opposed to being dilutive.
Ambrish Srivastava (VP of Investor Relations)
Thank you.
Operator (participant)
Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Irving Tan, Chief Executive Officer, for any closing remarks.
Irving Tan (CEO)
Thank you all very much for joining us today. It is very exciting to have our first quarter out as a standalone HDD company. As you can see from the results and the guide, we are executing well on our strategy that we have laid out at Investor Day, really being focused on our customers, driving leading-edge innovation, being extremely disciplined on operational excellence, and having rigorous financial discipline and a very capital-friendly return policy. This quarter and the guide that we have shared, I think, truly reflects that. We thank you for your ongoing interest in WDC, and I look forward to catching up with all of you in due course.
Operator (participant)
This concludes today's conference call. Thank you for joining us. You may now disconnect.