Good afternoon. And thank you for standing by. Welcome to Western Digital's Second Quarter of Fiscal 2020 Conference Call. Now I will turn the call over to Mr. Peter Andrew. You may begin.

Okay. Thank you, and good afternoon, everyone. Joining me today are Steve Milligan, Chief Executive Officer; Mike Cordano, President and Chief Operating Officer; and Bob Eulau, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements including product development expectations, business plans, trends in financial outlook based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-Q filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to Steve.

Thank you, Peter, and good afternoon. Western Digital delivered solid results in the second quarter as revenue came in at the midpoint of the guidance range and non-GAAP EPS was at the upper end of the range. Our performance reflects strong execution in our product roadmap, success in increasing our hard drive gross margin, and an improving flash environment. Notably, these results reinforce our prior comments that the June quarter marked the bottom of this flash cycle. We extended our capacity enterprise product leadership as we started sampling 18-terabyte and 16-terabyte CMR and 20-terabyte SMR drives in December. These drives feature our energy-assisted magnetic recording technology providing unrivaled areal density and TCO benefits. We expect to commence revenue shipments of the CMR drives in the March quarter and ramp shipments through the rest of calendar 2020. Our 14-terabyte platform is performing well, and customer interest in our air based 10-terabyte drive is quite high. The strength of our capacity enterprise product portfolio will continue to allow us to maintain our leading market share position. We achieved our goal of high-single-digit enterprise SSD market share and secured additional NVMe design wins, including at another major hyperscale customer positioning us for continued revenue growth and share gains. We made an important announcement this afternoon of our next-generation 3D NAND technology, BiCS5, with 112 layers of vertical storage. BiCS5 joins a full portfolio of 3D NAND technologies as our highest density and most advanced 3D NAND to date, delivering exceptional performance and reliability. Our team executed well in the quarter, increasing our hard drive non-GAAP gross margins to approximately 31% from 28.5% in the prior quarter. We now expect an accelerated recovery in our flash gross margins in the first half of calendar 2020 with continued improvement through the end of the year. I will now ask Mike to share our business highlights.

Thank you and good afternoon. Our December results reflect solid product execution, an increase in hard drive gross margin, and an improving flash market environment. Data Center Devices and Solutions, we executed well in delivering new products, positioning us for continued share gains and profitable growth in calendar year 2020. In capacity enterprise drives, close collaboration between our head, media, and mechanical design teams allowed us to simultaneously introduce energy-assisted magnetic recording technology and a triple-stage actuator in our new 16, 18, and 20 terabyte drives. These innovations provide us with continued areal density leadership and a greater design margin resulting in best-in-class product quality and reliability. Our focus on introducing the right technology at the right time, while delivering the best TCO and highest product quality to hyperscale and OEM customers makes us their trusted partner. In calendar year 2019, the success of our capacity enterprise product line led by our 14-terabyte drive drove over 40% year-over-year exabyte growth. We also started sampling our 18-terabyte and 16-terabyte CMR and 20-terabyte SMR drives and plan to commence revenue shipments of the CMR drives in the current quarter. As these drives ramp along with our 10-terabyte air-based drives, we are well positioned for continued leadership. In flash, we achieved our goal of high-single-digit enterprise SSD market share as our NVMe based enterprise SSD revenue grew over 50% sequentially. Supply constraints limited our upside as demand was better than expected. I am encouraged to see the significant investments we have made in expanding our product portfolio over the past several years are enabling us to increase participation in higher margin, higher growth, and lower volatility parts of the flash market. We have secured additional design wins, including another major hyperscale customer, which demonstrates our success in broadening our product portfolio and diversifying our customer base. In calendar year 2020, we expect to double our enterprise SSD revenue as we move towards our goal of 20% market share. Our competitive position within the data center is unrivaled, built on the breadth of our product portfolio, strong customer relationships, technology leadership, and superior product quality. We look forward to another year of strong growth in the data center market. Client Devices, strong growth in client SSD, and smart video along with growth in mobility and desktop hard drives drove the sequential revenue growth in the December quarter. As we enter the March quarter, flash pricing continues to improve. Furthermore, starting in the June quarter, we expect to begin shipments into a new gaming platform. The gaming console market is expected to be a multi-exabyte opportunity this calendar year. Within Client Solutions, strong holiday demand for both our flash and hard drive solutions enabled revenue to grow on a sequential basis. At CES 2020, we demonstrated a range of innovative products including the world's highest capacity, pocket-sized, portable SSD and the world's first USB 3.2 SSD exclusively for gaming. This afternoon, we announced our fifth generation 3D NAND technology, BiCS5. Utilizing a wide range of new technology and manufacturing innovation, BiCS5 has significantly increased cell array density horizontally across the wafer. These lateral scaling advancements in combination with 112 layers of vertical memory capability enables BiCS5 to offer up to 40% more bits of storage capacity per wafer compared to Western Digital's 96-layer BiCS4 technology. We have commenced shipping initial consumer products built on BiCS5 with mass production expected to begin later this calendar year. We believe inventory in the flash supply chain has returned to normal levels, and with strong demand for our products we are experiencing pockets of tightness. These dynamics combined with continued product execution in both flash and hard drives position us well for continued profitable growth. I will now turn the call over to Bob for details on our financial performance.

Thanks Mike and good afternoon everyone. Revenue for the December quarter was $4.2 billion, up 5% sequentially and flat from a year ago. Please recall that the September quarter was a 14-week quarter. By end markets, Data Center Devices and Solutions revenue of $1.5 billion was down 3% sequentially and up nearly 40% year-over-year. On a sequential basis, growth in enterprise SSD was offset by a decline in capacity enterprise drives and the impact of our exit from the storage-system business. Client Devices revenue of $1.8 billion was up 11% on a sequential basis and decreased nearly 20% year-over-year. As Mike noted earlier, the sequential growth was driven by client SSD, smart video, mobility, and desktop HDD. The year-over-year decline was primarily due to pricing in flash, our decision to limit our participation in mobility, and a decreased TAM for notebook and desktop hard drives. Client Solutions revenue was $948 million, up 6% sequentially and flat year-over-year. Sequential growth was driven by strength in hard drives. By product category, flash revenue was $1.8 billion, up 13% sequentially and down 15% year-over-year. Flash ASPs were down 8% sequentially, primarily related to our increased participation in mobility. Bit shipments were up 24% sequentially. Hard drive revenue was $2.4 billion, roughly flat sequentially and up 16% year-over-year. Average price per hard drive was flat sequentially at $81. And exabyte shipments were down 1% sequentially. As we move on to cost and expenses, please note all my comments will be related to non-GAAP results, unless stated otherwise. Gross margin for the December quarter was up 1.1 percentage point sequentially to 25.9%. Our flash gross margin was 19.5%, up slightly from last quarter, as a better pricing environment was offset by our increased participation in mobile. The hard drive gross margin grew more than expected to almost 31% from 28.5% the prior quarter. This improvement was due to the full realization of the cost benefits of the KL closure and a stable pricing environment as overall ASP per drive sequentially flat at $81. Operating expenses were $765 million. Operating expenses with normal incentive compensation expense would have been closer to $720 million. Operating cash flow for the December quarter was $257 million and free cash flow was $377 million. Capital expenditures, which include the purchase of property, plant and equipment and activity related to flash ventures on our cash flow statement were an inflow of $120 million. As previously noted, we are benefiting from the timing of the funds going back and forth between us and the joint venture. For the full fiscal year, we expect cash capital expenditures to be close to zero. Gross capital expenditures, which includes our portion of joint venture leasing and self-operating funding is expected to be between $2 billion and $2.5 billion. In an effort to provide greater transparency and clarity into our capital expenditures, we've added a few new slides to our earnings presentation available on our Investor Relations website. In the December quarter, we distributed $149 million in dividends to our shareholders. We reduced debt by $388 million, which included an optional $325 million debt pay-down. From a capital allocation perspective, our first priority is to reinvest in the business to maximize long-term shareholder value. After that, paying our dividend and reducing our debt are the next priorities. At the end of the quarter, we have $3.1 billion in cash and cash equivalents. Our $2.25 billion revolver remained unused and our gross debt outstanding was just under $10 billion. Total inventory dollars were down $165 million on a sequential basis as both hard drive and flash inventory decreased. Moving on, our non-GAAP guidance for the third fiscal quarter is as follows. We expect revenues to be in the range of $4.1 billion to $4.3 billion. We expect gross margin to be approximately 28.5% to 29.5%. Please note that this range includes approximately $70 million in costs associated with the K1 fab. Operating expenses are expected to be between $740 million and $760 million. The midpoint of the guidance range assumes a return to normal variable compensation expense, and selective new R&D investment. We expect interest and other expense of $80 million to $85 million and we expect the tax rate to be between 25% and 27%. As a result of this detailed guidance, we expect earnings per share between $0.85 and $1.05, assuming approximately $305 million in fully diluted shares. With that, I will now turn the call over to the operator to begin the Q&A session. Operator, we'll now take our first question.

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. Our first question comes from Wamsi Mohan with Bank of America.

Yes, thank you and congrats on the strong guidance. When you speak of an accelerated recovery here in flash gross margins, can you lay out the key drivers of that through 2020 and how you're thinking about the velocity of that recovery and any thoughts on where you might exit the calendar year?

Yes, Wamsi, this is Steve. I'll take that question. So, there's really a couple of different things that I would say are going on in terms of the flash market. One, the first thing is as we indicated in our prepared remarks, we believe that industry inventory levels to the best of our estimation have returned to balanced or normal levels. So, that's one thing that occurred. The other thing is, obviously we have been working very hard on improving our product lineup, which is allowing us to sell into markets that carry higher gross margin profiles as well as stickier business, and we believe that that will help us over time to manage the volatility that is associated with the flash business. The other thing is that, as part of all that, there is an increasing awareness on behalf of our customer base that inventory supply and demand is tightening up. In other words, demand is going to exceed supply this year. And so, we're seeing customers recognizing that. Prices are improving. Right now, that tightness is kind of in pockets. It's not necessarily across the board. So we're seeing pockets of tightness in the market, and as we move through the balance of the year, we expect that that tightness will increase. And so what that means from a gross margin perspective, last quarter we said that we thought we would see modest improvement in our gross margins in the flash area. Now, we're saying that our margin profile will accelerate in terms of that improvement, and I would expect as we move into the back half of the year, we'll see more of that as the market tightens up even more in the back half of calendar 2020. What that means from a numeric perspective is that we would say that we have the opportunity for our flash gross margins to get into the 35% to 40% range as we get into the back half of the calendar year.

Okay, great. That's great, Steve. Thanks. Appreciate the color. And can you maybe just — and you guys obviously executed pretty well in the quarter on the HDD side as you had guided to sort of have those margins step up as well. Can you talk about the path of the HDD gross margins from here as well? Thank you.

Yes, I think the way to think about those is we're in a range where we're comfortable going forward. So we will continue to operate around the range that we reported.

With a bias for those margins improving over time as an increasing amount of our hard drive volume shifts to capacity enterprise. So what we've talked about is something in the mid-30% range. We're not necessarily saying that that will happen in this calendar year, but that should be the bias over a period of time.

Okay, great. Thank you.

Our next question comes from Aaron Rakers with Wells Fargo.

Yes. Thanks for taking the questions. First kind of keeping on the hard disk drive business, I know you talked about it in the press release or the slide deck, a 100% plus growth year-over-year in nearline HDD capacity shipments. But given the competitive landscape and the questions, I'm curious, what did that — how did that perform on a sequential basis and how are you currently seeing the competitive environment?

Yes, so I think in general, we maintain our leading market share position, call it in the kind of low to mid-50s. We'll see where this all settles out once everybody reports. We expect that to continue right through the first half of this calendar year. And then in the back half, we obviously think we have some opportunity to continue to grow slightly. So from a product positioning standpoint, we feel very good about not only our 14-terabyte, which continues to be the highest volume shipper, but the expected ramp of our 16, 18, and 20 which will occur throughout the year. And as we noted in the prepared remarks, we will begin initial revenue shipments in the current quarter.

Okay. And then on the gross margin on the flash side, mix can be a meaningful driver to gross margin. But I'm curious as you continue to execute on BiCS, I guess, it'd be BiCS4 and now we start to talk about BiCS5. Can you just update us on how we think about the cost curve relative to that mix shift effect to kind of take you back to that as you said, 35% to 40% gross margin? And just where are we at currently in the mix of BiCS4 in terms of bits shipped right now?

Yes, BiCS4 is the overwhelming majority of bits. We’re just starting the initial BiCS5 ramp. The way to think about Aaron, though, is really in this kind of 15% plus or minus annualized cost take down, and certainly we would expect that to continue as we move through this next product transition. Relative to mix, I would say both product and market segment exposure and then of course the broader ASP pricing environment are going to be the drivers of the margin enhancement through the calendar year 2020.

Thank you.

Our next question comes from Mehdi Hosseini with SIG.

Yes. Thanks for taking my question. I have two follow-ups for Mike and Steve. First on the NAND side and on the new game console, this is incremental as I imagine the prior generations were hard disk drive based and now moving to SSDs. I’m just wanted to see, what is your assumption for the kind of NAND supply that the new game console is going to consume, given the fact that this is incremental? I have a follow-up.

Yes, I think you’re right. It is all incremental. And from an industry standpoint and certainly from our standpoint, because we were not participating in the gaming market in 2019 calendar year on the hard drive side, I don’t think we want to go any farther than what we said in our prepared remarks, this is going to be a large multi-exabyte market and we wouldn’t want to comment any more specifically.

Okay, fair. Moving on to hard disk drive, obviously, you’re introducing a new 18 terabyte. Can you help me understand how you’re cost competitive? I understand your product has fewer number of platters and as we migrate from 16 to 18. How is that cost competitiveness going to be used to increase market share?

Yes. So I think from our standpoint, we think we have a significant time-to-market lead on 18 and 20. And so the platter count to our understanding is different with next generation. So our benefit relative to market share is always about bringing the right products to market in a leading way, getting smoothly through customer qualification and ramping quickly. We’ve been doing that generation over generation for several years. We will do that again on the 18, 16 and 20-terabyte products that we’ll be ramping this year.

And Mehdi, we do have a cost advantage and we would think that, I mean, that’s represented in our underlying hard drive gross profit performance. One of the things that you’re alluding to is that our capacity enterprise drive—and this continues for the 16, 18 and 20-terabyte drives—we are using aluminum media versus glass media and that is a lower cost.

Got it. Thank you.

Our next question comes from Karl Ackerman with Cowen.

Hi, good afternoon, gentlemen. I have two, if I may. First question is regarding your NAND supply outlook and you were calling for 30% growth for the industry in calendar 2020. Is most of that coming from process conversions and existing capacity? Or is it going to be dictated by adding substantial greenfield capacity at the K1 facility? In addition, your South Korean peer last night spoke about NAND supply growth. How does that play into your capital planning process?

Yes. Hey, Karl, one thing I want to comment is, when they were talking about high 20%, I believe that was supply growth, not demand growth. I'll let Mike comment on the specifics.

Yes. So all the growth, both ours and the industry's, is technology transition. So our K1 expansion is all about room for technology transition. There is no greenfield capacity addition in our plans going in. That’s really it, I think that across the industry. And just to comment further on where we think, we talked about low 30s in terms of supply growth, Steve commented on what Samsung’s comments were. We believe demand growth will be in the 35% plus range this year.

Hence, the shortage.

Very helpful. Last one, if I may. Your enterprise SSD market share opportunity is quite significant and impressive. But when we think about that—how much of that is driven by a new server architecture launch this year versus retrofitting existing servers? I ask because a Tier 1 U.S. based hyperscaler announced after the close that depreciation will be lower for them in March due to an increase in useful life of their server. So can you talk about that a little bit?

No, we’re not dependent on any specific server transition. What we’re able to do with our NVMe products is win both new server and existing socket designs in the NVMe space. Similarly in SaaS, there’ll be a series of new products announced where we will be designed in. So we’re not dependent on any particular server transition and it’s really the power and strength of the product portfolio as well as the customers' view of us as a preferred supplier that’s driving that share growth.

Thank you.

Our next question comes from Tim Long with Barclays.

Thank you. Just going back—two for me as well. On the HDD side, can you talk a little bit about as 16, 18 and 20 ramp through the year just for your nearline business? What do you think the gross margin and ASP impacts will be there? And then on the NAND side, there was earlier comment about mix. Could you give us a sense as to the dilution from mobile? And should we expect more or less participation in that market as we move through calendar 2020? Thank you.

Tim, so the first one on the hard drive, we have not been giving specifics on capacity enterprise margins, but they are better than average. As we've said before, as our mix trends more and more across enterprise we do expect our hard drive gross margins can get up into the mid-30% range. So that will be a benefit to us. And on the mix question: we’re not able to provide exactly what the numerical implication was from mobile, but it obviously was dilutive to us this quarter. Over time, we’ll participate some in the mobile market, but we’ll continue to manage that.

As the flash supply-demand situation tightens up, we will see the mobile market become more attractive for us from a gross margin perspective.

Okay. Good point. Thank you.

Our next question comes from Joe Moore with Morgan Stanley.

Great. Thank you. I wonder if you could talk about the planning process behind the CapEx at the JV level on NAND. To the extent that you guys are feeling better about the business and where profitability is going, do you feel the need to change CapEx at the JV? And then sort of second half of that question, you said earlier that you can get industry bit growth without a lot of CapEx because you won’t have fab shutdowns or outages. Can you update your thinking on how that impacts your supply growth for the calendar year?

I'll comment overall on CapEx and growth. From an overall philosophical perspective, we want to add bit supply to the market consistent with overall demand growth. So we’re not, as a result of an improving environment, looking at accelerating or decelerating our plans. Over a longer period, we want to try to manage growth from a supply perspective to align with demand. That hasn't changed.

Great, thank you.

Our next question comes from Mitch Steves with RBC Capital Markets.

Hey, guys. Just two questions from me. I want to try to clarify some numbers. When you look at the SSD opportunities, you’re trying to double your share for NVMe, as stated. Combine that with the gaming platforms coming in. How much of that is adding to overall demand? You gave a 35% number. I'm trying to understand how much of this you have clean visibility on so we can understand how much demand is gaming plus your share gains on the enterprise side.

The broader industry demand number we gave is independent of our own share growth and in any one particular segment. Our view of 35% demand-side growth is an aggregate across the industry per bit. We talk about segment share gains in enterprise SSD and gaming—those are product segment related gains. We're not going to talk specifically segment-by-segment. You can calculate our expected enterprise SSD growth given our comments.

Further context: we're trying to place our bits in markets that offer higher value and stickier, less volatile business—primarily enterprise and gaming. Gaming is incremental from a flash perspective and tends to be stickier and more predictable, which is attractive as we look to place business in more favorable parts of the market rather than more transactional, price-driven areas.

Got it. Understood. And then last one, you mentioned 40% NAND gross margin as a goal. How does that ramp — is that something you can exit the calendar year at, or will it take longer? Any help on timing would be great.

Given the trajectory of our business and where we see it playing out this calendar year, we expect our flash gross margin rate to move into the 35% to 40% range as we get into the back half of the year. We're not specifying exact quarters, but we believe the 40% range is the right level and we expect to begin approaching that in the back half of the calendar year.

Perfect. Thank you.

Our next question comes from C.J. Muse with Evercore.

Yes. Good afternoon. Thank you for taking the question. First, you talked about industry bit supply growth in the low-30s and you would be in line with that. Can you share what you expect for revenue on a bit basis? And as part of your thinking, how are you contemplating bits for mobility versus elsewhere?

We don't comment specifically on that, but we would expect our inventory positions to be in a quite balanced state entering the year and exiting the calendar year. You can calculate that to get a feel for it.

Okay. And your thinking on the mobility side — is that something you'll stick more to enterprise and consoles?

The mobility side is not all equal. Part of our effort over the last several years is getting more product diversification. We will continue to maintain exposure to mobility but we will manage that exposure and make good choices as the market evolves. We see it as a long-term area of investment with some attractive parts, so we'll continue to invest while managing bit allocation through the year.

Excellent. Thank you.

Our next question comes from Steven Fox with Cross Research.

Hi, good afternoon. Just a couple of quick questions. First, you mentioned that you became supply constrained on the NVMe SSDs during the quarter. Can you talk about how you worked that through and what it implies for future growth this quarter or next quarter? And secondly, you mentioned pockets of tightness currently. What exactly would you call out besides enterprise, and where might those pockets expand in the coming quarter?

On the NVMe supply constraint, it was not a flash supply issue. Demand was better than expected and it was some components used in our NVMe SSD product. We've worked to resolve those and it should not be an issue as we move through calendar 2020.

In general demand has been very strong across higher-performance SSDs. In some parts of the world there are constraints and that's reflected in pricing movements in a positive direction.

Great. Thank you.

Our next question comes from Harlan Sur with JPMorgan.

Hi. Good afternoon. Given the strong momentum on NVMe SSD platforms and the strong cloud spending environment, do you think you actually exited the calendar year tracking at low-double-digit percentage market share or are you still somewhat constrained on supply exiting the year?

We actually saw demand in excess of our availability because of component constraints. Had we been able to fully realize that demand, we had been in the low-double digits on share. That remedies itself as we're now inside lead time. We continue to see strong demand and expect to double revenue in that category year-over-year.

Great. Thanks. And on the HDD side, your outlook for capacity enterprise exabyte shipments up about 35% year-over-year seems conservative; some are hearing mid-40s or even 60% in the first half. Can you lay out your assumptions here for exabyte consumption in the first half given the cloud and hyperscale spending?

We haven't been too specific on that. I will say we do see a bias up in demand, so that is reflected in your comments. Relative to a roughly 35% annual expectation, our current view is a bias up from there.

Great. Thank you.

Our next question comes from Ananda Baruah with Loop Capital.

Hi, thanks guys for taking the question. Congratulations on a solid performance and it's good to see the guidance amplification. I'll stick with nearline, Steve; could you give us a little more context about how you see the outlook? And Mike, do you see the cloud cycle potentially continuing exabyte demand up into the back half of the year? Any context would be great.

Let me try to clarify. We certainly see the first half of the calendar year remaining strong. On an annualized basis we've been talking about 35% annualized growth and we do see a bias up from there. I wouldn’t want to comment further on the specific shape of each quarter.

Okay. That’s helpful. I appreciate that clarification. Thank you.

Our next question comes from Srini Pajjuri with SMBC Nikko Securities.

Thank you. Just to follow up, we've had pretty strong two quarters from the cloud end market and there's some concern that there may be a digestion period heading into the first half. Intel said they expect some digestion. You tend to have pretty long visibility, especially on the drive side. Are you seeing any signs of slowdown that would cause a digestion period?

All customers are different. There are some that are doing that, but when we aggregate it, demand remains quite strong through the first half of the calendar year.

Our next question comes from Vijay Rakesh with Mizuho.

Hi. I saw your CapEx is down for fiscal 2020. Are you seeing any aggressive CapEx elsewhere in the ecosystem? Also, on the China side with YMTC continuing to expand, what are your thoughts in terms of supply coming in with increased aggressive CapEx given how NAND pricing has been trending?

In terms of the overall industry, based on public information, we're all circling around a bit supply growth rate in a similar neighborhood. Samsung talked about high 20% growth and we're talking low 30s. We’re not seeing anybody adding capacity that would concern us on the short term because it would take up to 18 months to become productive capacity. So we feel pretty good about that. Regarding YMTC, no material change to our expectations. We do not see them having a material impact on the market over the next several years. We'll continue to evaluate based on their ability to ramp both production and technology, but no concerns over the next two to three years given the visibility in our planning cycle.

Our next question comes from Sidney Ho with Deutsche Bank.

Thanks. Looking at your calendar Q1 guide being roughly flat quarter-by-quarter, which seems better than seasonal especially on the NAND side, can you talk about your expectations by product — hard drive versus flash? How much of that above-seasonal guide is a function of ASP improvement for NAND?

At a high level: if you look at our quarter-on-quarter gross margin improvement, which is significant, almost all of that is driven by an improving flash environment—namely pricing. Yes, there's mix improvement and that impacts revenue. Improving pricing helps us keep revenue roughly flat quarter-on-quarter. Beyond that, the overall demand environment is solid, which is both a flash and hard drive statement. Those two big factors help counter normal seasonality and result in a flatter Q1.

Our next question comes from Nehal Chokshi with Maxim Group.

Yes, thank you. Great to see the accelerated NAND flash recovery in gross margins. Do you expect your own NAND flash inventory to decline quarter-on-quarter for the March quarter? Micron commented they expect NAND flash inventory to accumulate but NAND flash prices to increase. Any color on your expectations?

I don't want to give quarter-by-quarter inventory guidance, but we're not satisfied with where we are on inventory despite the reduction this quarter. Our goal over the next few quarters is to get to at least five turns, and that's what we're focused on. It won't be strictly linear, but we think we can achieve that fairly soon.

Our next question comes from Patrick Ho with Stifel.

Thank you. As a follow-up on the 18- and 20-terabyte drives, can you discuss how the gross margin acceleration or your target gross margin is impacted by your ability to get those out sooner in terms of development? You talked last quarter that the nine-platter was pulled in somewhat. How does that help accelerate gross margin progression?

Our gross margins are already very good in capacity enterprise. As mix shifts more toward capacity enterprise, that will pull up our overall hard drive mix. Our mix was not as strong as prior quarters this past quarter, but you still saw margin improvement and ASP stayed flat despite tougher mix. Overall, margins on capacity enterprise are solid and as we introduce new products that trend should continue.

And our final question will come from Mark Miller with Benchmark.

Thank you. I believe the questions I wanted to address about the second half strength in data center and nearline have been posed. So, I don't need to pose those again.

All right. So thank you all for joining us today and we look forward to seeing you at the upcoming Goldman Sachs Technology Conference in San Francisco. Have a good rest of the day.

This concludes today’s conference call. Thank you for joining. You may now disconnect.