Q1 2025 Earnings Summary
- Record HDD gross margins of 38.1%, adding over 15 percentage points in the last four quarters, driven by strong adoption of technology and products like new 11-platter drives.
- Rapid growth in enterprise SSD business, with mix expected to exceed 15% of overall portfolio shipments in fiscal year 2025, significantly faster than previously anticipated, fueled by progress in qualifications with hyperscalers and OEMs.
- Improved supply-demand management and customer relationships, working with customers on a 2- to 6-quarter agreement cycle, providing better visibility into future demand and supporting sustainable profitable growth.
- Risk of Demand Overestimation Due to Lack of Take-or-Pay Agreements: Western Digital is not securing take-or-pay agreements with customers, which may lead to risks of customers placing shadow orders without commitment. This could result in overestimating demand and possible overproduction, impacting financial performance.
- Limited Capacity Expansion May Constrain Growth: The company is cautious about expanding manufacturing capacity without strong customer signals over the next 4 to 6 quarters. This limited capacity expansion could hinder its ability to meet future demand and capitalize on growth opportunities.
- Uncertainty in Flash CapEx and Investment Strategy: Western Digital did not provide clear guidance on Flash capital expenditures for the next fiscal year, mentioning that CapEx was very low last fiscal year and expects it to be higher, but without quantitative details. This lack of clarity may raise concerns about their investment strategy in Flash memory.
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Company Separation Timing and Commitment
Q: When will the company separation occur? Any impediments?
A: Management plans to complete the company separation around the time of the December quarter earnings call. They are currently in a soft spin phase, operating separate systems behind the scenes to build confidence for a full spin. The Form 10 will be made public in the next couple of months to begin financing activities. Despite challenges, they are committed to executing the separation expeditiously, believing it is the right decision for shareholders. -
HDD Capacity Constraints and Expansion Plans
Q: Do you foresee HDD capacity constraints? How quickly can you add capacity?
A: Management believes they have adequate manufacturing capacity to meet demand, focusing on profitability and maintaining supply-demand balance. They do not see the need to expand capacity unless they receive strong signals from customers over the next 4 to 6 quarters. The strategy is to increase exabytes shipped through innovation and higher density per unit, rather than increasing units produced. -
Enterprise SSD Growth and NVIDIA Qualification
Q: Can you discuss enterprise SSD growth and NVIDIA qualification?
A: The enterprise SSD mix is expected to be 15% to 20% of total Flash revenue, up from around 10% previously. Their compute-focused PCIe Gen 5 product was qualified by NVIDIA in their reference architecture, enhancing confidence in portfolio growth and aligning with the AI data cycle. The number of qualifications doubled in the last quarter. -
UltraSMR Technology Adoption by Hyperscalers
Q: How is UltraSMR technology adoption progressing?
A: The third hyperscaler has officially qualified UltraSMR technology, and management expects a rapid ramp over the next several quarters. Customers prefer deploying the densest drives possible, like the new 32-terabyte UltraSMR drive, which can be qualified quickly due to familiar technology. This adoption increases visibility and predictability in the business. -
Margin Improvement and Pricing Dynamics in HDD Business
Q: What are the margin and pricing trends in the HDD business?
A: HDD margins improved to 38.1%, adding over 15 points in the last four quarters. The launch of new high-capacity drives is expected to enhance pricing and margins. A slight like-for-like pricing increase was observed, driven by delivering better products that reduce customers' TCO. -
Impact of Dissynergies on Operating Expenses
Q: What dissynergies are expected due to the company split?
A: The December quarter operating expenses include approximately $30 million in dissynergies, split equally between the two businesses. At steady state, dissynergies are anticipated to be around $40 million, again divided equally. These costs are included in the guidance, with the $705 million midpoint of OpEx accounting for them.
Research analysts covering WESTERN DIGITAL.