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WESTERN DIGITAL CORP (WDC) Q1 2026 Earnings Summary

Executive Summary

  • Western Digital delivered a strong Q1 FY26: revenue $2.818B (+27% y/y, +8% q/q), non-GAAP gross margin 43.9% (+260 bps q/q), and non-GAAP EPS $1.78; all above guidance and Street consensus, with free cash flow of $599M .
  • Versus S&P Global consensus, WDC beat on revenue ($2.818B vs $2.730B*) and EPS ($1.78 vs $1.576*); EBITDA also modestly exceeded consensus ($883M vs $845M*) with Cloud at 89% of revenue ($2.5B) .
  • Q2 FY26 guidance implies continued momentum: revenue $2.9B ± $100M, non-GAAP GM 44–45%, OpEx $365–375M, EPS $1.88 ± $0.15; dividend raised 25% to $0.125 per share .
  • Stock reaction catalyst: tightening supply-demand and long-term POs through CY26–27, increased Ultra SMR mix, and an accelerated HAMR qualification roadmap underpin multi-quarter gross margin durability and estimate revisions higher .

What Went Well and What Went Wrong

What Went Well

  • Execution and mix: revenue and gross margin above the high end of guidance, supported by strong adoption of higher-capacity ePMR and Ultra SMR; 2.2M latest-gen ePMR units shipped and Ultra SMR/CMR roughly 50/50 mix .
  • Cloud strength: Cloud represented 89% ($2.5B) of revenue; delivered 204 exabytes, up 23% y/y, reflecting hyperscaler demand for higher capacity nearline drives .
  • Capital returns and FCF: free cash flow $599M; increased buybacks to $553M and raised dividend to $0.125/share, signaling confidence in cash generation .

What Went Wrong

  • Transcript discrepancy: CFO remarks referenced a “$12.50” dividend, conflicting with the actual $0.125 declared; press release/8-K confirm $0.125 (likely transcription error) .
  • OpEx slightly above guidance due to higher variable comp on stronger-than-expected results, though still supporting margin expansion .
  • Supply constraints: management expects supply-demand to remain tight through CY26; capacity additions are disciplined (no unit capacity add), potentially limiting upside volumes near-term .

Financial Results

MetricQ3 2025Q4 2025Q1 2026
Revenue ($USD Billions)$2.294 $2.605 $2.818
GAAP Diluted EPS ($)$2.11 $0.67 $3.07
Non-GAAP Diluted EPS ($)$1.36 $1.66 $1.78
Non-GAAP Gross Margin (%)40.1% 41.3% 43.9%
Non-GAAP Operating Margin (%)26.0% (596/2,294) 28.1% 30.4%
Cash from Operations ($USD Millions)$508 $746 $672
Free Cash Flow ($USD Millions)$436 $675 $599
Actual vs S&P Global ConsensusQ3 2025Q4 2025Q1 2026
Revenue - Consensus ($USD Billions)*$2.484$2.473$2.730
Revenue - Actual ($USD Billions)$2.294 $2.605 $2.818
EPS - Consensus ($)*$1.108$1.480$1.576
EPS - Actual ($)$1.36 $1.66 $1.78
EBITDA - Consensus ($USD Millions)*639759845
EBITDA - Actual ($USD Millions)*669774883
Values marked with * retrieved from S&P Global.
Segment Mix (Q1 FY26)Revenue ($USD Millions)% of Total
Cloud$2,500 89%
Client$146 5%
Consumer$162 6%
KPIs (Q1 FY26)Value
Exabytes shipped204 EB
Latest-gen ePMR units2.2M
Ultra SMR mix~50% of nearline vs CMR

Notes:

  • GAAP OI&E benefited from mark-to-market on retained Sandisk interest (GAAP interest and other income $545M; non-GAAP normalized to $(44)M) .
  • Y/Y comparisons reflect WDC continuing operations post Flash separation (Sandisk shown as discontinued operations pre-Separation Date) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ1 FY26$2.70B ± $100M Actual: $2.818B Beat vs guidance
Non-GAAP Gross MarginQ1 FY2641–42% Actual: 43.9% Beat vs guidance
Non-GAAP EPSQ1 FY26$1.54 ± $0.15 Actual: $1.78 Beat vs guidance
RevenueQ2 FY26—$2.9B ± $100M New (raised sequentially vs Q1 guide)
Non-GAAP Gross MarginQ2 FY26—44–45% New (higher seq.)
Operating ExpensesQ2 FY26—$365–375M New (lower seq. vs $370–380M prior guide)
Interest & Other (net)Q2 FY26~ $50M ~ $50M Maintained
Tax RateQ2 FY2616–19% ~17% Maintained (midpoint)
Diluted EPS (Non-GAAP)Q2 FY26—$1.88 ± $0.15 New
Diluted WA Shares (Non-GAAP)Q2 FY26~363M ~375M Increased
Dividend per shareOngoing$0.10 (Q4 FY25) $0.125 (Q1 FY26) Raised 25%

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 FY25)Previous Mentions (Q4 FY25)Current Period (Q1 FY26)Trend
AI & hyperscaler demandCloud 87% ($2.0B); nearline bits -6% q/q; pricing +5% Above-guide revenue/GM; FY25 rev +51% y/y; capital return program Cloud 89% ($2.5B); 204 EB; long-term POs into CY26–27; AI use cases accelerating Strengthening demand visibility
High-capacity drives (ePMR/Ultra SMR)Pricing per unit up; mix shift underway GM expansion; higher-capacity adoption 2.2M ePMR units; Ultra SMR ~50/50; next-gen ePMR 28TB CMR/36TB Ultra SMR Mix up, supporting margins
HAMR roadmapNot highlightedStrategic tech confidence HAMR qualification pulled forward to 1H CY26; volume ramp 1H CY27; Canon ENLVA mitigates supplier risk Accelerating
Supply-demand & seasonalitySequential declines in cloud Above-guide despite macro; disciplined returns Supply tight through CY26; minimal seasonality given data center mix Tight supply persists
Pricing/ASPPricing +5% q/q in Cloud Above-guide GM Low-single-digit ASP/TB increases; channel price letter focused on ~10–15% of business Pricing firming
Tariffs/macroOngoing risks Ongoing risks Guidance includes anticipated tariff impacts Managed within outlook
Capital returnsDividend initiated ($0.10) $2B buyback auth; debt reduction; dividend Buybacks $553M; dividend raised to $0.125 Increasing returns

Management Commentary

  • CEO: “We achieved revenue and gross margin above the high end of our guidance range, while delivering strong free cash flow… As AI accelerates data creation… position us well to capture new opportunities” .
  • CFO: “At the mid-point… we expect revenues of $2.9 billion, non-GAAP gross margin of 44.5%, with non-GAAP EPS of $1.88” .
  • Operations: “Shipments of our latest ePMR… up to 26TB CMR and 32TB Ultra SMR… surpassing 2.2M units” .
  • Demand visibility: “Top seven customers have… POs extending through 1H CY26… five covering all of CY26; one largest hyperscaler for all of CY27” .
  • HAMR: “On track to start HAMR qualification… 1H CY26… expand to up to three customers… volume production in 1H CY27” .

Q&A Highlights

  • Supply-demand and capacity discipline: no unit capacity additions; throughput gains via automation/AI; qualification lab accelerates time-to-market .
  • Gross margin trajectory: incremental GM ~75% sequential in Q1; guide to 44–45% in Q2; medium-term incremental ~50% .
  • Ultra SMR trajectory: two more customers qualifying; mix to increase; translates to HAMR readiness; margin accretive via higher capacity .
  • Seasonality: minimal given ~89% data center exposure; driven by hyperscaler deployment schedules .
  • SanDisk stake monetization: 7.5M shares remaining; intends to monetize before Feb 21; potentially debt-for-equity exchange .
  • Pricing letter scope: targeted to channel/lower-end nearline; LTAs/firm POs for hyperscalers unaffected .
  • HAMR equipment risk: mitigated via Canon ENLVA platform .

Estimates Context

  • Q1 FY26 beats: revenue $2.818B vs $2.730B*, EPS $1.78 vs $1.576*, EBITDA $883M vs $845M*; Q4 FY25 also beat both revenue and EPS; Q3 FY25 missed revenue but beat EPS and EBITDA versus consensus.*
  • Drivers for upward estimate revisions: stronger price environment (low-single-digit ASP/TB increases), faster mix shift to high-capacity ePMR/Ultra SMR, and improved cost/throughput yielding mid-to-high single-digit cost/TB declines .
    Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

  • Multi-quarter margin expansion thesis intact: non-GAAP GM 43.9% in Q1 with Q2 guide 44–45%; mix and pricing support further gains .
  • Demand visibility exceptional: firm POs across CY26 and an agreement for CY27 underpin revenue durability and reduce seasonality risk .
  • Technology roadmap de-risks capacity adds: next-gen ePMR qualification in Q1 CY26 and HAMR pulled forward to 1H CY26; volume in 1H CY27 .
  • Cash return story strengthening: $553M buybacks and dividend raised to $0.125/share; strong FCF ($599M) even after tax payments .
  • Watch supply constraints: management expects tight supply through CY26; upside more likely via mix/pricing than unit volumes .
  • Normalization of GAAP vs non-GAAP: large GAAP OI&E driven by Sandisk mark-to-market; valuation should focus on non-GAAP profitability and FCF .
  • Near-term trading: positive skew on continued beats vs consensus and upward revisions; monitor Ultra SMR adoption pace and tariff impacts embedded in guidance .

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