Q4 2024 Earnings Summary
- Western Digital has introduced a new 32-terabyte hard drive, which is 13% more capacity than the next biggest drive on the market, demonstrating their continued innovation and ability to deliver better TCO to customers.
- Margins in both HDD and NAND businesses are going up, driven by strong product portfolios and strategic focus on innovation, with HDD gross margin reaching the highest in 5 years. The company expects these improved margins to be durable and continue into the future.
- The AI Data Cycle is driving significant demand for storage, and Western Digital is well-positioned to capitalize on this growth, with demand expected to outstrip supply through the second half of the year and throughout next year. The company sees sustained demand in both HDD and NAND businesses, supported by their strong product offerings and strategic customer relationships.
- Risk of declining HDD gross margins due to increased competition: Analysts are concerned that Western Digital's current strong HDD performance may not be sustainable if competitors introduce advanced technologies like HAMR, which could normalize market share and reduce gross margins. ,
- Weakness in NAND demand, particularly in consumer markets: The company acknowledges weaker volume in NAND, especially in consumer sectors, leading to demand headwinds and less aggressive pricing, which could negatively impact revenues and margins.
- Potential overcapacity risk due to reliance on extended lead times: Western Digital's request for 52-week lead times from customers may lead to overordering, increasing the risk of overcapacity and margin pressure if demand softens or customers adjust their orders. ,
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HDD Gross Margins Outlook
Q: How will HDD gross margins progress in coming quarters?
A: Management is very happy with the HDD business, noting that gross margins have surpassed targets and are expected to go higher. They've optimized manufacturing and costs, and strong products like the UltraSMR drives are delivering leading capacity points. With a 52-week lead time established with customers, they have better visibility and alignment with demand, which should help maintain supply-demand balance and drive margins higher. -
NAND Pricing and Demand
Q: Why is NAND pricing strong despite weaker volumes?
A: The NAND market is dynamic, with good pricing increases in negotiated markets like enterprise SSDs, where they saw strong sequential growth. In more transactional markets, such as consumer, demand is weak and pricing is more volatile. Despite this, management expects demand to outstrip supply through the second half of the year and into next calendar year, driven by strong demand in enterprise SSDs and an improving PC market. -
HDD Market Share Sustainability
Q: Is increased HDD market share sustainable amid competitor transitions?
A: Management attributes their above 50% HDD market share not to competitor transitions but to offering great products that deliver the highest TCO for customers. Their roadmap is well-received, and they are delivering leading capacity drives at scale, like the new 32-terabyte drive (13% more capacity than their previous 28TB drive). Products like UltraSMR provide significant capacity benefits, with a third hyperscaler adopting the technology in the second half of the year. They plan to continue innovating to maintain this advantage. -
CapEx Plans and Utilization
Q: What are the CapEx plans and current fab utilization rates?
A: The NAND fabs are running at full utilization with no underutilization costs. For the current quarter, cash CapEx is expected to be around 2% of revenue, consistent with the previous quarter. Management's focus remains on profitability, and future investments will reflect that priority. -
Dis-Synergy Costs Post-Separation
Q: What are the expected dis-synergy costs post-separation?
A: The dis-synergy costs of $35 million to $45 million, mostly in operating expenses, are expected to represent the steady state for the combined business going forward until the separation and beyond. There are minimal dis-synergy costs in COGS. -
Risk of Customer Overordering
Q: How are you guarding against customers overordering HDDs?
A: Management is closely monitoring customer orders, given their strong relationships with large customers. They believe customers are being rational, understanding that providing visibility enables better manufacturing planning without leading to oversupply. They have information on ordering patterns and remain vigilant to prevent potential overordering as they implement 52-week lead times. -
Enterprise SSD Product Momentum
Q: How is the enterprise SSD product portfolio performing?
A: The company is seeing strong interest in their enterprise SSD products, particularly their PCI Gen 5 compute product designed for AI training infrastructures, and their 64-terabyte drive for high-performance data lakes. These products are being qualified at hyperscalers and are in addition to existing products that are gaining momentum after the downturn, indicating a growing share of SSDs in their portfolio. -
Mix Dynamics and NAND ASPs
Q: What is the expectation for NAND ASPs in the September quarter?
A: Due to a significant mix dynamic, with weakness in consumer offset by strength in enterprise SSDs and mobile, management expects NAND ASPs to be slightly up in the low single-digit percentage range in the September quarter. -
Industry Structure and Cost Declines
Q: How does the industry structure affect cost declines in Flash and HDD?
A: In HDD, cost per terabyte is decreasing in the high single digits annually due to technological improvements and optimized manufacturing. In NAND, costs are declining by about 15% this year through technological innovation. Management emphasizes the importance of continuing to drive down costs to maintain profitability in a favorable pricing environment.
Research analysts covering WESTERN DIGITAL.