Western Digital Corporation (WDC.US)Second Quarter of Fiscal Year 2026 Conference Call: The production capacity for 2026 is basically sold out.

Western Digital Corporation (WDC.US) held its fiscal second quarter 2026 earnings conference call. CEO Irving Tan revealed that the capacity for the 2026 calendar year is essentially sold out and confirmed purchase orders have been signed with the top seven customers. The company has also signed long-term agreements (LTA) covering 2027 with two of these customers, and an agreement covering 2028 with another. Irving Tan emphasized that AI inference applications will drive structural growth in HDD demand, as the inference process generates massive amounts of new data that need to be stored cost-effectively. Q&A Session Host: Good afternoon, thank you for your patience. Welcome to the Western Digital Corporation fiscal second quarter 2026 earnings conference call. Currently, all participants are in listen-only mode. We will have a Q&A session shortly. (Operator instructions) Just a reminder, this call is being recorded. Now, I will turn the call over to Vice President of Investor Relations, Ambrish Srivastava. You may begin. Ambrish Srivastava, VP of Investor Relations: Thank you, good afternoon. Today, joining us are Western Digital Corporation CEO Irving Tan and CFO Kris Sennesael. Before we begin, please note that today's discussion will include 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 regarding our product portfolio, business plans and performance, current market trends, and future financial results. We do not undertake any obligation to update these statements. Please refer to our latest 10-K annual report and other filings submitted to the Securities and Exchange Commission for more information on the risks and uncertainties that could cause actual results to differ significantly from expectations. In our prepared remarks, unless otherwise noted, all commentary will be based on non-GAAP results from continuing operations. Reconciliation tables between non-GAAP and comparable GAAP financial measures are included in the press release and other materials released on the Investor Relations section of our website, investor.wdc.com. Lastly, I want to point out that when we use terms like "we" and "our", it refers to Western Digital Corporation and not the entire industry. Now, I will turn the call over to Irving for his opening remarks. Irving? Irving Tan, CEO: Thank you, Ambrish. Good afternoon, and thank you for joining us today. The impact of artificial intelligence (AI) is accelerating across multiple industries. As generative AI models become the norm and agentic AI scales to drive business productivity, AI is increasingly becoming a true strategic driver of business transformation. AI inference has also started to become mainstream, serving as a genuine AI workload deployed in chatbots, virtual assistants, and customer relationship management tools. Innovation in physical AI is also rapidly accelerating, propelled by advancements in autonomous vehicles and AI models of increasing multimodality. In all these scenarios, data is the fuel that drives the entire AI process from training to inference to achieve stronger models and more precise inference results. With the generation of more data and increasing data value, storage requirements are expanding at an astonishing rate. As AI capabilities continue to expand, cloud business is also growing, driving the exploration and demand for higher-density storage solutions. In this new era dominated by AI and cloud, Western Digital Corporation has taken a customer-centric approach to manage this strong demand. We closely collaborate with hyperscale customers to ensure large-scale delivery of reliable, high-capacity hard drives, providing them with optimal performance and total cost of ownership (TCO). We are striving towards this goal by consistently focusing on increasing the aerial density of hard drives, accelerating our HAMR and ePMR roadmap, and driving customer adoption of higher-capacity hard drives and UltraSMR technology. Last quarter, we shipped over 3.5 million units of our latest ePMR products, offering capacities of up to 26TB for CMR and 32TB for UltraSMR. This represents strong customer confidence and widespread adoption. We have also initiated certification efforts for HAMR and next-generation ePMR products with different hyperscale customers. These hard drives will provide customers with the higher capacities and improved TCO they seek. Furthermore, we continue to accelerate our innovation in HAMR technology. To this end, we recently acquired related intellectual property, assets, and talent to help develop our internal laser capabilities. Additionally, last quarter, we, in collaboration with software ecosystem partners, jointly released platforms supporting UltraSMR, expanding the adoption range of UltraSMR to a broader customer base. These platforms offer significantly higher storage density compared to traditional hard drives, providing customers with hyperscale data center-level performance and making large-scale data analytics more sustainable and efficient. Our strategy is indeed resonating with customers, reflected in longer-term agreements and higher visibility into their demand. We have signed confirmed purchase orders covering the entire 2026 calendar year with our top seven customers. We have also signed stable commercial agreements with three out of our top five customers, two of which extend to the end of the 2027 calendar year, and one to the end of the 2028 calendar year. These agreements demonstrate the strong trust we have built with our customers and their confidence in us to meet their EB-level storage needs. Next week, on February 3rd, we will host an Innovation Day event in New York, where we will share updates on the HAMR and ePMR product roadmap and more details on our core innovative technologies developed to enhance hard drive performance, efficiency, and throughput. We will also provide updates on the financial models. To execute our strategy of incubating new growth areas based on intellectual property and core capabilities, last month, we announced a strategic investment in Colab, combining our expertise in material science and precision manufacturing with Colab's breakthrough quantum hardware design approach. Through collaboration with Colab, we aim to advance next-generation nanoscale manufacturing processes to enhance the performance, reliability, and scalability of quantum bits. Looking ahead, we see continued positive momentum and will remain focused on supporting customers' EB-level storage needs while completing the certification and launch of next-generation ePMR and HAMR hard drives. Now, I will hand over to Kris to share our second quarter performance and outlook for the third quarter. Kris Sennesael, CFO: Thank you, Irving, good afternoon. Western Digital Corporation once again delivered a strong quarter of financial performance, reflecting the rigorous execution capabilities of our entire organization and our ability to meet the growing demand from customers in the AI-driven data economy. In the fiscal second quarter of 2026, revenue was $30 billion, driven by robust demand for nearline hard drives, an increase of 25% year-over-year. Earnings per share were $2.13. Both revenue and earnings per share exceeded the upper end of our guidance range. We delivered 215 EB of data to customers, a 22% increase year-over-year. This includes over 3.5 million units totaling 103 EB of our latest ePMR hard drives, with capacities up to 32TB. Cloud business accounted for 89% of total revenue, at $27 billion, driven by strong demand for high-capacity nearline product portfolio, up 28% year-over-year. Client solutions business accounted for 6% of total revenue, at $1.76 billion, up 26% year-over-year. Consumer solutions business accounted for 5% of total revenue, at $1.68 billion, down 3% year-over-year. Gross margin for the second quarter was 46.1%, up 770 basis points year-over-year and 220 basis points quarter-over-quarter. The improvement in gross margin reflects the continued shift of our product portfolio towards high-capacity hard drives and our strict cost control in manufacturing facilities and the entire supply chain. Operating expenses were $3.72 billion. As a percentage of revenue, operating expenses decreased by 120 basis points quarter-over-quarter, driven mainly by operational leverage. Operating income was slightly over $10 billion, with an operating margin of 33.8%. Interest and other expenses were $450 million, and the effective tax rate for the second quarter was 15.1%. Considering a diluted share count of 378 million shares, earnings per share were $2.13, up 78% year-over-year. Turning to the balance sheet. As of the end of the second quarter, cash and cash equivalents were $20 billion, total liquidity was $32 billion, including undrawn revolving credit facilities. Total debt was $47 billion, with net debt of $27 billion, and the net leverage to EBITDA ratio is significantly below 1x. Operating cash flow for the second quarter was $7.45 billion, capital expenditures were $920 million, resulting in a strong free cash flow of $6.53 billion, with a free cash flow profit margin of 21.6%. During this quarter, we paid out $480 million in dividends and increased the stock repurchase amount to $6.15 billion, repurchasing 3.8 million shares of common stock. Since initiating the capital return program in the fourth quarter of fiscal year 2025, we have returned $14 billion to shareholders through stock buybacks and dividend payments. Additionally, today we announced that the Board of Directors has approved a quarterly cash dividend of $0.125 per share, payable on March 18, 2026 to shareholders of record as of March 5, 2026. Now, I turn to the outlook for the third quarter of fiscal year 2026. We expect revenue to be $32 billion, plus or minus $1 billion. At the midpoint, this reflects approximately 40% year-over-year growth. Gross margin is expected to be between 47% and 48%. We anticipate operating expenses to be between $3.8 billion and $3.9 billion. Interest and other expenses are expected to be approximately $500 million. The tax rate is expected to be around 16%. Therefore, we anticipate diluted earnings per share to be $2.30, plus or minus $0.15, based on a non-GAAP diluted share count of approximately 385 million. In summary, Western Digital Corporation has achieved another strong quarter, outperforming expectations. Our guidance for the next quarter highlights the continued favorable trend in our business and our disciplined approach to free cash flow, capital return, and creating long-term shareholder value. Now, let's begin the Q&A session. Ambrish? Ambrish Srivastava, VP of Investor Relations: Thank you, Kris. Host, we are now opening the floor for questions. To ensure we can hear from as many analysts as possible, please ask one question at a time. You will have an opportunity to ask a follow-up question after we respond to your initial question. Host: Ladies and gentlemen, we are now starting the Q&A session. The first question for today comes from Aaron Rakers at Wells Fargo & Company. Question: Aaron Rakers Thank you for the question. Regarding the gross margin, your guidance of 47% to 48% suggests that you have maintained about a 70% to 75% incremental margin. My question is, how do you view the sustainability of this incremental margin? Or, to put it another way, how do you view the cost decline curve per TB in the coming quarters? Thank you. Kris Sennesael Yes, Aaron, thank you for your question. First of all, I am very pleased with the performance of the gross margin. We achieved a gross margin of 46.1%, an increase of 220 basis points quarter-over-quarter and 770 basis points year-over-year. Our guidance of 47% to 48%, with a midpoint of 47.5%, represents a year-over-year increase of 740 basis points. I believe your calculations are accurate. The incremental gross margin is around 75%. As I mentioned earlier, I am very comfortable with an incremental gross margin above 50%, and 75% is certainly higher than 50%. Gross margin has two aspects: pricing environment and cost environment. In the pricing aspect, we have seen a stable environment, with flat or slightly increasing prices per TB. In fact, last quarter, the average selling price per TB (ASP) increased by 2% to 3%. This clearly demonstrates the value we continue to provide to customers. On the cost side, the team has executed very well. We continue to drive customer adoption of higher-capacity hard drives, which gives us a cost advantage. At the same time, we have executed very well in reducing manufacturing costs and costs throughout the supply chain. Last quarter, cost per TB decreased by about 10% year-over-year. Overall, we believe that in the coming quarters and beyond, we will be able to continue driving gross margin expansion. Host: The next question is from Erik Woodring at Morgan Stanley. Question: Erik Woodring Thank you. Irving, given the tightness in the HDD market and the significant increase in NAND prices, can you talk about the patience level in signing extended procurement orders for better economics? Has this approach yielded any differences in economic benefits compared to last year? Irving Tan Thank you, Erik. As we emphasized, the capacity for the 2026 calendar year is essentially sold out, confirmed purchase orders have been signed with the top seven customers. We have also signed long-term agreements (LTA) covering 2027 with two of these customers, and an agreement covering 2028 with another. These LTAs combine EB volume and price. Regarding pricing, first, it is important to recognize that our customers have seen a structural transformation in the value we provide, especially in the impact on total cost of ownership (TCO), as businesses increasingly pivot to commercializing inference applications. Therefore, the pricing we offer reflects the value we create for them. As Kris mentioned, we expect to continue to maintain a stable pricing environment in the future, giving us the opportunity to better support their supply and demand needs through higher-capacity hard drives and, ultimately, providing more value by offering improved TCO. Question: Erik Woodring (Follow-up question) Kris, I want to know how you are handling the ownership of Sandisk stock. Are you still planning to liquidate it before the deadline on February 21st? And more importantly, how do you plan to utilize these proceeds? Kris Sennesael Yes, Erik. We still hold 7.5 million shares of Sandisk stock and plan to liquidate them before the one-year anniversary of the split. It is likely to be done through a similar transaction as before, a debt for equity swap. Therefore, the proceeds will be used to further reduce debt. Host: The next question is from C.J. Muse at Cantor Fitzgerald. Question: Christopher Muse Thank you for the question. How have customer collaborations and contracts evolved in this tight supply environment? Irving Tan Yes, C.J., thank you. Over the past year, we have been very focused on developing a more customer-centric approach. We have shifted the organizational focus towards our large hyperscale customers, setting up dedicated teams for each of them. This has deepened our relationships in technology roadmap development and demand visibility, resulting in the longer LTAs we are able to sign with them. We look forward to sharing our innovations for supporting future AI workload demands next week. Overall, relationships have indeed improved. They see the value we provide, leading to the structural changes in pricing we see and longer contracts. Ultimately, we want to ensure a fair value exchange, providing predictable pricing for them as they are also concerned about the high volatility in certain tiers of the storage space, while ensuring sustainable value creation for both parties. Question: Christopher Muse (Follow-up question) Continuing on the Sandisk stock, could you talk about your plans moving forward? Will you focus more on stock buybacks or other areas? Irving Tan Since announcing a $20 billion stock buyback authorization in May 2025, we have been focused on stock buybacks. We have utilized $13 billion of that plan, repurchasing around 13 million shares, and we will continue to use it without hesitation. Host: The next question is from Asiya Merchant at BNP Paribas. Question: Amit Daryanani I am Eddie, representing Amit. I wanted to know if there are any major investments related to HAMR included in cost of goods sold (COGS) or operating expenses at the moment? Will these costs reduce or normalize with the volume production of HAMR? Irving Tan We have been researching HAMR for 10 years, and our engineering team is making good progress. We will continue to advance these projects and innovate to enhance performance and capacity. In terms of gross margin, HAMR has not started volume production yet, but we are confident that once it does, its impact on gross margin will be neutral to positive. Even during the expected volume production period starting early 2027, our capital expenditure as a percentage of revenue will remain in the range of 4% to 6%. Host: The last question is from Karl Ackerman at Credit Suisse. Question: Karl Ackerman Thank you. AI is expected to drive a cyclical recovery in traditional servers at the front end. In your case, as hard drive shipments are highly correlated with traditional server demand and new drives also bring content uplift, do you believe AI demand could propel you beyond the long-term consolidated annual growth rate (CAGR) of over 20%? Irving Tan Thank you, Karl. Over the past few quarters, we have indeed seen over 20% EB growth. We believe that as the value of AI shifts from training to inference, it will generate more data. To deliver this inference, more data storage is needed. From our conversations with customers, inference will undoubtedly drive significant data storage demand, which bodes well for the future of HDDs. Question: Karl Ackerman (Follow-up question) Back to HAMR, it sounds like you have accelerated the progress at least for the first major customer. Considering the strong demand for EB capacity from hyperscale data centers, can you talk about the interest from other customers apart from the initial one? Kris Sennesael As we mentioned, we have already started certification with one hyperscale customer this month for HAMR hard drives and are about to start with another. Host: This concludes today's conference call. Thank you for your participation. You may now disconnect.