Q3 2024 Earnings Summary
- Exceptional HDD Business Performance with Significant Growth and Margin Expansion: Western Digital's HDD business experienced the largest sequential exabyte growth in a very long time, driven by their industry-leading SMR product portfolio. They expect this growth trajectory to continue, focusing on bringing great products to market that deliver the highest capacity and best TCO for customers.
- Favorable Supply-Demand Dynamics Supporting Higher Margins in HDD: With a favorable supply-demand balance and tightness in the market, Western Digital is benefiting from better pricing and increased customer visibility, leading to margin expansion in their HDD business. They are optimistic about continuing to drive profitability higher.
- Strategic Focus on Flash Business Profitability and AI Growth Opportunities: Western Digital is optimizing bit placement to prioritize higher-margin products in their Flash business and is well-positioned to capitalize on increasing demand for enterprise SSDs driven by AI workloads, supporting future growth and margin expansion.
- Constrained Gross Margin Expansion: Despite favorable pricing in both Flash and HDD segments, the company only expects a 4-point gross margin improvement, raising concerns about cost pressures or execution issues.
- Flash Business Below Target Margins: The Flash segment is still significantly below its target gross margins of 35% to 37%, indicating challenges in improving profitability and a long way to go to reach through-cycle margins.
- Reliance on Significant HDD Margin Improvement: Meeting the company's cost guidance for the year requires a significant step-up in HDD gross margins, which may be challenging to achieve, creating uncertainty about the company's ability to meet financial targets.
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Gross Margin Outlook
Q: What's driving gross margin improvements?
A: We anticipate margin improvements in both NAND and HDD due to better pricing and cost discipline. In flash, we're expecting further pricing improvements, and in HDD, we're focusing on technology, cost control, and supply-demand balance, which all contribute to gross margin expansion. -
AI Demand Impact
Q: How is AI affecting demand?
A: AI is boosting demand in both businesses. For SSDs, customers are requesting higher capacity drives of 30 and 60 terabytes for AI training, which we're qualifying now. We've also introduced a new high-performance PCIe Gen 5 SSD based on BiCS6, receiving positive feedback. In HDDs, AI increases data storage needs, especially for big data lakes that are stored on HDDs, supporting both training and increased data generation. -
HDD Market Share and Sustainability
Q: Can you sustain HDD market share gains?
A: Yes, our HDD performance is driven by our great products like ePMR, OptiNAND, and UltraSMR, which offer the best TCO and resonate with customers. Nearly 50% of exabytes shipped this quarter were SMR. We plan to continue delivering products that meet market needs to drive sustained profitability. -
Flash Bit Growth Outlook
Q: How will flash bit growth ramp up?
A: We expect flat bit growth in calendar Q2 but anticipate a pickup in the second half of the year as we optimize our supply for profitability and meet increasing demand, particularly in enterprise SSDs. We're balancing supply to align with mid- to high-teens market demand growth while maintaining pricing discipline. -
Technology Roadmaps (BiCS6/BiCS8, HAMR)
Q: What's the status of BiCS8 and HAMR technologies?
A: We're confident in BiCS8, a major advancement in NAND architecture, and will productize it when market conditions support investment, maintaining mid-teens percentage year-on-year cost downs. We're selectively using BiCS6 in products where it makes sense. For HAMR, we've been developing it for some time and plan to introduce it at 40 terabytes, aligning with market readiness and economics. -
OpEx Increase and Investments
Q: Why is OpEx increasing?
A: The increase is driven about 50% by variable compensation due to an improved financial outlook and 50% by project-specific R&D investments with direct revenue correlation. We expect OpEx to remain in this range for the next couple of quarters. -
Flash Margins and Cost Reductions
Q: How will flash margins evolve if prices plateau?
A: Our target gross margin for flash remains 35% to 37% through the cycle. We'll achieve this by focusing on our product mix, bit placement, and ongoing mid-teens percentage cost reductions, even if prices stay flat. -
HDD Exabyte Shipment Growth
Q: What's the outlook for HDD exabyte growth?
A: We're targeting around 25% growth, consistent with historical trends. AI could be a tailwind, potentially increasing the growth rate, but it's too early to quantify its full impact. -
Cash Flow Outlook
Q: How will cash flow track going forward?
A: We returned to free cash flow positive in Q3. As revenue and business recover, we remain focused on profitability and cash flow generation, which should continue to improve from here. -
Supply Chain Support
Q: Are you supporting the supply chain like competitors?
A: Yes, we stay very close to our suppliers and have supported them throughout the downturn, ensuring stable operations as the market improves. -
Partnerships with Hyperscalers
Q: How critical are hyperscaler partnerships?
A: We maintain close relationships with hyperscalers, customizing products to their needs, especially in enterprise SSDs, to ensure we're aligned with market demands and architectural requirements. -
Manufacturing Footprint
Q: Is U.S. SSD manufacturing critical for AI?
A: Our NAND is manufactured in Japan, and we're confident in our global manufacturing footprint to serve the entire market effectively. We've not encountered any impairments in our ability to meet demand due to our manufacturing locations.
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