Good afternoon, and thank you for standing by. Welcome to Western Digital's Second Quarter Fiscal 2024 Analyst Call. Presently, all participants are in listen-only mode. We will open the lines up for questions shortly. Now, I will turn the call over to Mr. Peter Andrew, VP of FP&A and IR. You may begin.

Well, thank you, and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on management's current assumptions and expectations. And as such, it does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, business plans and performance, market trends and dynamics, and financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. 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 David for introductory remarks.

Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our second quarter of fiscal year 2024 results. Western Digital's second quarter results demonstrate that the structural changes we have put in place over the last few years and the strategy we have been executing are producing significant outperformance across our Flash and HDD businesses. I am confident that building leading products across a broad range of end markets, closely controlling our product costs through focused R&D and manufacturing, and bolstering the agility of our business will allow us to improve through-cycle profitability and dampen business cycles. As a result, we reported revenue of $3 billion, non-GAAP gross margin of 15.5%, and a non-GAAP loss per share of $0.69, all of which met or exceeded the non-GAAP guidance ranges we provided in October. Before discussing the business details, I want to provide some comments on the emerging trends we are seeing and how the changes we have made position our Flash and HDD businesses to benefit. In Flash, we've been able to navigate business cycles by managing inventory proactively, offering a broad range of products, and optimizing capital efficiency through our joint venture partnership with Kioxia. These successful efforts are reflected in our best-in-class gross margin throughout the cycle. During the quarter, our portfolio strategy to dynamically allocate bit shipments drove upside in ASPs and gross margin. Looking ahead, we will continue to take a disciplined approach to our supply and capital investments. Consequently, we continue to proactively manage our bit shipments to structurally align our supply and inventory with customer demand and improve through-cycle profitability into the future. In addition to the recovery in both Flash and HDD markets, we believe storage is entering a multi-year growth period. Generative AI has quickly emerged as yet another growth driver and transformative technology that is reshaping all industries, all companies, and our daily lives. Importantly, industry analysts estimate that the edge now represents approximately 80% of total NAND bit shipments, an increase from approximately 75% in calendar year 2022, which is another indication that cloud demand was significantly pulled in during the pandemic. In addition, we believe the second wave of generative AI-driven storage deployments will spark a client and consumer device refresh cycle and reaccelerate content growth in PC, smartphone, gaming, and consumer in the coming years. Our Flash portfolio is extremely well positioned to benefit from this emerging secular tailwind. In HDD, Western Digital's leading EPMR platform and enhanced UltraSMR technology allow us to provide the highest capacity drives for mass market deployment. We believe this innovative technology and portfolio strategy enable us to offer the best TCO to our cloud customers and outperform our peers throughout the cycle. We are confident that the multi-quarter near-line demand headwinds have subsided as our major cloud customers have reengaged with us. We anticipate our financial outperformance resulting from profitable share gains to become more evident as nearline demand accelerates into the second half of fiscal year 2024 and beyond. Moving on to end market commentary. During the quarter, revenue in the cloud end market returned to sequential growth for the first time in six quarters. The sequential revenue growth was led by an increase in nearline shipments. In client, sequentially, revenue declined slightly as the increase in Flash ASPs was offset by a decline in bit shipments as we proactively optimized product mix. In consumer, the sequential revenue growth was led by seasonal strength in Flash bit shipments into retail and an increase in Flash ASPs. I'll now turn to business updates starting with Flash. During the quarter, the sequential revenue increase was due to stronger execution and driving price inflection by optimizing bit shipment across our broad go-to-market channels into the consumer and client end markets, resulting in stronger than planned ASP increase. In particular, our WD Black gaming SSD product, which offers high reliability, best-in-class performance, expansive storage capabilities, and a hyper-realistic gaming experience, achieved a new record revenue with bit shipment growth of over 50% year-over-year. On the technology front, we remain on track to ramp an array of QLC-based client SSDs utilizing BiCS6 technology. Our ability to combine this new high-performance node with our in-house controller development allows us to offer a portfolio of client SSDs with unmatched performance and value. We expect these products to lead the transition to QLC Flash in calendar year 2024. Additionally, BiCS8 yield is progressing well and we remain on track to productize this technology. Turning to HDD, the sequential revenue increase was driven by improving nearline demand and pricing. Moreover, we are encouraged by demand in China with revenue doubling on a sequential and year-over-year basis, both of which were ahead of our expectations. We anticipate year-over-year growth in HDD throughout this calendar year. In both the first and second quarters, we shipped approximately 1 million UltraSMR drives per quarter. We forecast UltraSMR hard drive shipments to increase significantly in the fiscal third quarter, and SMR drive shipments to continue to outgrow that of CMR drives going forward. Importantly, the adoption of UltraSMR is broadening to our major customers worldwide, including a third cloud titan in the US this year, as well as hyperscale and smart video customers in China. We expect to complete the qualifications of our 26 terabyte and 28 terabyte UltraSMR drives at these customers this quarter and throughout the calendar year and forecast SMR to comprise the majority of nearline demand by calendar year 2025. We have strong conviction that our portfolio strategy of first commercializing Western Digital's industry-leading UltraSMR technology, which will be followed by our transition from EPMR to Hammer offers the best TCO to our customers in both the near and long term while delivering leading portfolio profitability in the industry. Over the next several years, we will be introducing a number of exciting products, including multiple generations of nearline drives combining EPMR, OptiNAND, and UltraSMR technologies in the 30 to upper 30 terabyte capacity range, all of which will be ready for high volume production to support the explosion of AI training data and content. Before I turn over to Wissam, I wanted to share some perspectives on our outlook. In Flash, starting with demand in calendar year 2024, we estimate industry bit growth to be around the mid-teens percentage, similar to the growth rate in calendar year 2023. On the supply side, we estimate that fab-out bit production growth to remain in the mid-single digit percentage range. We believe our business agility and our highly capital efficient and low cost BiCS architecture have enabled us to align supply with demand via nodal transition much more quickly than our peers. We will continue our disciplined approach to dynamically managing our inventory capacities and capital expenditures to keep our supply aligned with end customer demand. Although Flash pricing has started to increase, our profitability and cash generation continue to be well below the levels that justify an increase in capital investments. We anticipate wafer equipment spending will remain at historic lows in the near term and Flash to be undersupplied for an extended period of time. Overall, we will continue to focus on allocating our bits to the most attractive end markets and anticipate Flash ASP increases to be the primary revenue growth driver throughout this calendar year. In HDD, our competitive portfolio strategy has enabled us to consistently achieve profitable share gain in the last two calendar years. We are confident that this trend will continue as nearline demand continues to improve and we continue to ramp our UltraSMR enabled products. Let me now turn the call over to Wissam, who will discuss our financial second quarter results.

Thank you, and good afternoon, everyone. Following on David's comments, the success of the strategy we have been executing is reflected in our financial performance. Non-GAAP results in the fiscal second quarter exceeded or were at the high end of the guidance ranges we provided in October. Total revenue for the quarter was $3 billion, up 10% sequentially and down 2% year-over-year. Non-GAAP loss per share was $0.69, as strong execution with our broad go-to-market channels benefited Flash ASP and gross margin. Looking at end markets, cloud represented 35% of total revenue at $1.1 billion, up 23% sequentially and down 13% year-over-year. Sequentially, the growth is attributed to higher nearline shipments to that of center customers and better nearline pricing. Nearline bit shipments were 67 exabytes, up 23%. The year-over-year decrease was due to lower eSSD bit shipments. On a year-over-year basis, HDD cloud revenue increased for the first time in six quarters. Client represented 37% of total revenue at $1.1 billion, down 2% sequentially, and up 3% year-over-year. Sequentially, an increase in Flash ASP was more than offset by a decline in Flash bit shipments. The year-over-year increase was due to higher Flash shipments, primarily driven by client SSD shipments into PC applications, more than offsetting a decline in ASP. Consumer represented 28% of total revenue at $0.8 billion, up 15% sequentially and 6% year-over-year. Sequentially, the growth was primarily due to seasonal strength in Flash bit shipments. On a year-over-year basis, the increase in Flash bit shipments was partially offset by a decline in Flash ASP, as well as lower HDD shipments. Turning now to revenue by business segment. In the fiscal second quarter, Flash revenue was $1.7 billion, growing 7% sequentially, as Flash ASPs increased 10% on a blended basis and 7% on a like-for-like basis, stronger than anticipated entering the quarter. Bit shipments decreased 2% after record shipments in the prior quarter. On a year-over-year basis, Flash revenue grew slightly with a 21% increase in bit shipments, offsetting lower prices. HDD revenue was $1.4 billion, increasing 14% sequentially. As total exabyte shipments increased 14%, an average price per unit increased 9% to $122. On a year-over-year basis, HDD revenue declined 6%, while total exabyte shipments increased 2% and average price per unit increased 23%. Moving to gross margin and expenses. Please note my comments will be related to non-GAAP results unless stated otherwise. Gross margin was 15.5% above the guidance range provided in October and improving 11.4 percentage points sequentially, while declining 1.9 percentage points year-over-year. The sequential increase was primarily driven by higher Flash ASPs as we proactively optimized product mix, which more than offset higher than anticipated underutilization charges of $156 million or a 5.1 percentage points headwind. Flash gross margin was higher than expected at 7.9%, up 18.2 percentage points sequentially, and down 6.6 percentage points year-over-year. This includes underutilization charges of $107 million or a 6.4 percentage points headwind to gross margin. HDD gross margin was 24.8%, up 1.9 percentage points sequentially and 4.1 percentage points year-over-year. This includes underutilization charges of $49 million or a 3.6 percentage point headwind. We continue to tightly manage operating expenses, which were $561 million for the quarter, down 15% year-over-year, and at the lower end of the guidance range. Operating loss in the quarter was $91 million, which included underutilization charges of $156 million. Fiscal second quarter loss per share was $0.69, inclusive of a $14 million dividend associated with the convertible preferred shares. Operating cash flow for the second quarter was an outflow of $92 million, and free cash flow was an outflow of $176 million. Cash capital expenditures, which include the purchase of property, plant, and equipment, and activity related to our Flash joint ventures on the cash flow statement represented a cash outflow of $84 million. The quarter ending inventory was $3.2 billion, declining $281 million from the prior quarter. Days of inventory decreased five days to 115 days. The majority of the decline was in Flash, where Flash days of inventory remained at a four-year low. During the quarter, we issued $1.6 billion in convertible notes, repurchased $508 million of the outstanding 2024 convertible notes, and paid down $300 million of the delayed draw term loan. Gross debt outstanding was $8.5 billion at the end of the fiscal second quarter. We expect to retire the remaining balance of approximately $600 million of the 2024 convertible notes at maturity in February 2024. At the end of the fiscal second quarter, cash and cash equivalents were $2.5 billion and total liquidity was $4.7 billion, including the undrawn revolver capacity of $2.25 billion. For the fiscal third quarter, our non-GAAP guidance is as follows: we expect revenue to be in the range of $3.2 billion to $3.4 billion; we expect sequential revenue growth to be mainly driven by an increase in HDD; we anticipate Flash revenue to be up slightly as we remain focused on optimizing bit shipments and ASP; we expect gross margin to be between 22% and 24%, which includes HDD underutilization charges of $30 million to $40 million; we expect operating expenses to be between $600 million and $620 million with the increase driven by the reinstatement of certain incentive compensation programs as the financial outlook has strengthened. Interest and other expenses are expected to be approximately $95 million. We continue to expect income tax expenses to be between $20 million and $30 million for fiscal third quarter and $80 million to $120 million for fiscal year 2024. We expect a preferred dividend of $15 million. We expect earnings per share to be $0.05, plus or minus $0.15, based on approximately 330 million shares outstanding. As the financial outlook has improved, we will remain disciplined in executing the business, proactively managing our supply and inventory to meet customer end demand, and controlling capital spending, all with the goal of improving profitability.

Thanks, Wissam. Let me wrap up and then we'll open up for questions. I want to emphasize that the steps the Western Digital team has taken to instill and deploy an industry-leading product portfolio, while also moving quickly to adapt to both volatile market dynamics and anticipate future trends have enabled us to capitalize on the upswing we see ahead. Through our product leadership and ability to dampen business cycles and improve through-cycle profitability, I am confident we are well positioned to execute on our current strategy, which will reaffirm our strength over the long term. Let's now begin the Q&A.

Our first question comes from Joe Moore with Morgan Stanley. Your line is now open.

Great. Thank you. I wonder if you could talk about the gross margin improvement in Q1. I guess, how would you portion that between the drive business and the NAND business? And I guess, I would think with being judicious on volume, you get some pretty good NAND pricing. I guess, I might have expected a little bit more gross margin improvement. So just curious what I'm missing there? Thanks.

We've noticed a positive shift in pricing. In Q1, we were pleased with the gross margin we achieved in the Flash business for the December quarter, which was at 7.9%. We managed to capitalize on the market turnaround effectively, providing us with a stronger base for the March quarter. In both businesses, while Flash will see a decrease in bits, there is an increase in price. We are observing significant price increases from one quarter to the next, although we are experiencing a decline in volume, around the low double digits. On the other hand, the HDD business is showing an increase in both volume and price.

Thank you.

Our next question comes from Aaron Rakers with Wells Fargo. Your line is now open.

Yes, thanks for taking the question. Just kind of building off that last question, I know you talked about hard disk drive underutilization, expectation in this current quarter kind of embedded in that 22% to 24% guide. What's the underutilization assumption you're making on the Flash business? And just in general, how do you think about the trajectory of Flash gross margin? Let's say, in theory of pricing and your implementation of price increases continues, how do we think about the return to kind of a 30% plus gross margin in Flash? So just trying to think about the puts and takes in the guidance and then the longer term kind of view at what you characterize as normalized gross margin?

Hey, thanks, Aaron. So for Flash, in our guide, we don't have underutilization for Q3. In fact, we executed ahead of schedule and reached our targeted supply and inventory goals faster than what we anticipated. And so, as you know, we continue to dynamically manage supply and inventory to meet our end demand and so the fab utilization reflects that. If you recall, in our results in Q1, Flash inventory was down almost $400 million, last quarter we saw another over $200 million decline in inventory. We exited the quarter at levels that we haven’t seen in a few years. So having said that, obviously, we will continue to be disciplined in how we manage our supply and inventory to meet end customer demand on Flash and also, of course, control our capital spend. With respect to your question at the 30%, let me clarify. Was your question 30% on the Flash or on the HDD side?

Well, I guess I'm going to say both.

Yes, I thought I heard you mention Flash. I was going to start discussing it. Let me begin with HDD. In HDD, we're very close to that level. If you look at what we delivered in the second quarter and consider the guidance, it indicates continuous margin improvement on the HDD side. I also expect that there will be ongoing improvement as the recovery progresses in that business. Achieving 30% is definitely within reach, and we should accomplish it relatively soon. Regarding Flash, much depends on our ability to keep optimizing the product mix to enhance that average selling price, along with ongoing cost reductions. We have made good progress on cost reduction so far, achieving mid-teens percentages, and I expect us to maintain that for this fiscal year. As pricing continues to improve, I anticipate that we will also reach those targets in the next few quarters.

Thank you.

Our next question comes from CJ Muse with Cantor Fitzgerald. Your line is now open.

Good afternoon. Thank you for taking my question. I wanted to discuss the NAND bit situation. While you're focusing on optimizing the product mix, it appears that bits were down in December and are expected to be down again in the March quarter. Can you elaborate on your plans regarding this? When do you anticipate improvement? Additionally, could you provide more details about the specific end markets you're targeting and how we should understand the timing and pricing implications when they come to market?

I'll begin, and Wissam can add to it. We experienced a decrease in bits; we had a record quarter two quarters ago, and then we saw a slight decline this past quarter, with a further decrease expected. This is simply a result of managing underutilization to keep supply and demand balanced. We've mentioned this frequently, and we’ve been effective in preventing our inventory from becoming excessive. Currently, we are at a four-year low in NAND inventory. So, CJ, our focus will remain on understanding demand, monitoring our inventory levels, and adjusting fab utilization to ensure everything remains aligned moving forward. As we mentioned in our script, you can expect that most of the growth in Flash throughout this calendar year will be driven by pricing.

Go ahead, please.

Now, I was going to move on to the second part of your question.

Yeah, please go ahead.

Okay. So mix is a very dynamic process, literally day-by-day, week-by-week in the business. We have a big consumer franchise, we sell all over the world, we have hundreds of thousands of points of presence and retail platforms. We have a big channel business where pricing can get adjusted weekly, then all the way up to, obviously, the quarterly negotiated markets. So we're just always dynamically understanding where pricing is going to be. And then again, in each of those segments, we have different products. We have client SSDs that are WD Black all the way down to WD Green. So in different segments of the market, all with different price points, all with different margins, all with different demand profiles. And it's a constant process of just making sure we put the supply where we're going to get the best return. This last quarter we talked about, we mixed a little bit out of client and into consumer, as you would expect in a strong consumer quarter. And we'll continue to do that. The place where we're still waiting for it to come back is enterprise SSD, that’s still been pretty depressed and as that market starts to come back, we expect to mix into that as well.

Very helpful. If I could ask just a quick follow-up. Wissam, can you shed some light on how to think about OpEx into June quarter and beyond? Thank you.

Yes, of course, CJ. So on the OpEx side, for the June quarter, I expect us to be more or less in line. Beyond that, as the business profitability continues to improve, I expect a gradual increase. But we're laser-focused on profitability and so I don't anticipate increasing our OpEx faster than revenue growth, of course. And when you look at where we've come from and where we are today, we're still at or maybe more than 20% lower than where we were at the beginning of the cyclical downturn.

Thank you.

Thanks, CJ.

Our next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Yes. Thank you. I have two questions if I may. First, why do you think there was a doubling of China demand for applications this quarter? And how sustainable do you think that is? I ask because the Chinese economy hasn't been robust for some time, so any thoughts on that would be helpful.

Yes, I wouldn't attribute it to the smart video market. It's more of the China hyperscalers coming back and better demand there.

Got it. Okay. Thank you for that. I guess, if I may, it's nice to see an improving outlook for March. Showing one quarter ahead of many of our expectations. However, I'm a bit surprised to see your NAND ASP trajectory in December below that of peers. So is there any reason why your NAND prices or ASPs would fall behind peers from here? And/or maybe there would be a catch-up opportunity as well. Thank you.

Yes. Your price deltas obviously have a big dependency on your starting point and we were starting from a better gross margin position than anybody else in the industry by quite a bit. And then on top of that, you have mix based on what's happening in the quarter and kind of where the product is going. I think if you look at the profitability of the franchise, it's still leading the industry.

Thank you.

Thank you, Karl.

Our next question comes from Tom O'Malley with Barclays. Your line is now open.

Hey everyone, this is Tom O'Malley from Barclays. I want to ask about the competitive landscape. Your competitor recently reported one million unit shipments of Hammer in the first half of the year. I’m interested in your thoughts on any changes in your customer interactions. Are they considering Hammer as a viable solution early in the year? Can you share insights on the overall ecosystem and whether you are noticing a transition, or is it the opposite? It seems you’re still seeing positive trends with your UltraSMR drives, so any details on this transition with your customers would be appreciated.

I believe customers want to gain insight into everyone's roadmap rather than seek a specific solution. For instance, we've been providing EPMR drives for years alongside PMR drives without receiving any requests for EPMR drives. Customers are primarily interested in capacity, total cost of ownership, and reliability that can meet their demands. This is how we've tailored our portfolio. We've successfully commercialized EPMR and are pleased with the technology, especially with the addition of UltraSMR, which allows us to offer the highest capacity and best total cost of ownership at a significant scale. We can manufacture millions of those drives each quarter. Customers are keen to understand this roadmap and our capability to enhance the total cost of ownership, especially as they are investing heavily in large data centers. Our customers express substantial confidence in our roadmap and current products, which is reflected in our business performance—accelerating growth, improved profitability, and increased market share demonstrate that customers are satisfied with our offerings. Regarding the transition from EPMR to Hammer, I understand this has garnered considerable attention. For our portfolio, the market has embraced our UltraSMR technology. However, moving to Hammer only makes sense when we reach 4 terabytes per platter since it significantly increases product costs. We expect to maintain a robust total cost of ownership proposition at scale with our EPMR and UltraSMR platforms that have already been clearly adopted by our customers.

Perfect. And then just one quick one on HDD gross margins. I think, when you look at the underutilization charges that are still present, you can look at just taking that out and what that means to the gross margins over the next couple of quarters. But is there any way to frame like a revenue level that gets you back to that 30% gross margin target for the HDD business or is it kind of just a wait and see when utilization takes back up and it will get there eventually? Any way to frame that from a modeling perspective as to when that can get back to your range? Thank you.

So, Tom, if you look at our numbers and adjust for the underutilization charges, we’re almost there. Instead of providing a specific number or movement in quantifying it, I expect us to reach the 30% level, which is lower than our typical run rate from past through-cycle periods. We've significantly reduced our cost structure, which will help us achieve this more quickly. Regarding underutilization, I anticipate that we may experience more underutilization in future quarters beyond this one, and we will reassess in the June quarter. We can discuss it then.

Thank you very much.

Thanks, Tom.

The next question comes from Krish Sankar with TD Cowen. Your line is now open.

How do you view the sustainability of NAND pricing for the second half, considering the belief that pricing in the first half could be up significantly? In the first half of the calendar year, we have seen an increase of over 50%. What would indicate to you that it's time to expand capacity? Additionally, regarding hard drives, you mentioned that Hammer adds costs, which makes sense given the technology involved. If you were to implement it, would you start with 10 disks? And if the market demands a Hammer solution from WD, how quickly could you deliver it?

There's a lot to unpack here. Regarding NAND, we consider numerous factors, including utilization rates, nodal transitions, and capital investment. It’s a complex situation. Currently, we believe that NAND will be undersupplied for a significant period, which aligns with our profitability objectives. As I mentioned earlier, we are pleased with the recent improvements in pricing and business performance, which have exceeded our expectations. However, we still have a considerable journey ahead before we reach the profitability levels that would justify further investments. To answer your question, we require clear visibility into through-cycle profitability metrics that align with our financial model. Given that we are recovering from a challenging situation, it suggests that we need to operate above the through-cycle level for some time to achieve our goals. This is the focus of our analysis. We anticipate good pricing increases for the next quarter, and we remain committed to managing supply and demand effectively. As for the bits, they have decreased sequentially. Regarding HDD, could you please repeat your question about it so I can address it properly?

Yeah, sure, Dave. I was just trying to figure out on the HDD side. A, number one, in Hammer, would you be doing it with 10 discs? Second one is, if the market wants a solution from Western Digital, a Hammer solution, how soon can you get it?

Thank you for your question. We'll hold off on the specifics of the Hammer product launch and the number of discs until we approach that phase. We're satisfied with the current progress of the project, as I mentioned earlier. We've established a technology roadmap that will enable us to achieve 40 terabytes using cost-effective, proven manufacturing technology, and we're excited to introduce this to the market in the coming years. It's important to note that customers don’t specifically demand a particular technology; instead, they look for a certain capacity, total cost of ownership, reliability, and performance level. Our technology roadmap is designed to meet these requirements. The components inside the product are less critical than the need to deliver all the attributes mentioned while also being capable of producing millions of units per quarter to meet market demand. This is what our customers seek. Our EPMR and UltraSMR technologies are designed to fulfill these expectations. Our goal is to achieve improving total cost of ownership, which will enable us to raise prices while maintaining high-scale production, rapid qualification, and exceptional reliability and quality. Our customers are increasingly embracing this technology, as reflected in our forecasts.

Thanks, David. Very helpful.

Thanks. The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Hi. Thank you so much. Dave, I appreciate the answer you just gave around pricing, but if I could ask this in a slightly different way. How would you think about pricing, the runway that you have in Flash relative to past cycles? I mean, given that your commentary on how you managed your inventory, given your comments on expectations to be undersupplied for a long time, would you venture to say that the pricing runway that you have should be longer than what you had in past cycles?

On NAND, I think we're still in the cycle, but we're beginning to emerge from it. We're taking initial steps out of an unusual cycle, particularly in the 3D era. Our focus is on aligning supply and demand, managing our inventory effectively, and maximizing profitability with our current portfolio while optimizing it for the best possible mix. Predicting future pricing is challenging, but while things are improving, we're not yet at a stage where capital investments will return significantly, which is crucial for understanding future supply. Some utilization will recover, but it’s necessary, and we'll be cautious and wait for clear profitability visibility before reinvesting in the business.

Okay thanks. If I could, you mentioned about entering a multi-year growth period with Generative AI and especially at the edge, the demand for NAND bits. When do you think that the industry will start to see this demand NAND bits at the edge start to reflect higher?

Yes, I believe we will observe this as we enter PC refresh cycles. We acknowledge that we are still in the early stages. The key right now is ensuring that the cloud can effectively deliver Generative AI to everyone, and then extend that architecture to the edge. We are beginning to notice in some markets the upcoming specifications of products that are incorporating more NAND, which gives us optimism. Over the next few years, as this architecture is deployed and embraced, we expect to see progress. While I can't pinpoint a specific quarter for you, it's clear that the pace of new technology launches and adoption is accelerating faster than I've witnessed in a long time.

I think we're starting to see in some of the markets some of the future specs of products where they're increasing the amount of NAND, so we're optimistic about that. As we go through the next couple of years when this architecture gets deployed and adopted. I can't pinpoint a specific quarter for you, but certainly as new technology launches or adopts, it's moving at a faster pace than any technology I’ve seen in a very long time.

Thanks, Wamsi.

The next question comes from Mehdi Hosseini with SIG. Your line is now opened.

Yes, thanks for taking my question. Just wanted to make clarification. David, did you say that demand is tracking to mid-teens and that compares to bid supply growth of 5%?

Yes, we see demand around mid-teens and that's fab out. What we see is kind of fab production of mid-single digits. And obviously, there's inventory between those.

Okay. Now what got me confusing is, you also said your NAND inventory is a multi-year low, did I misunderstand you?

You did not misunderstand me.

If your inventory is at a multi-year low and demand is outpacing supply, you will not be able to ship to meet either supply or demand throughout the year.

We'll ship to our share demand throughout the year.

Okay. Would that impact your market share or are you focusing on more profitable segments than the overall market?

No, we don’t anticipate that to impact our market share. The stats that you mentioned on the supply and production were for our estimates and what we see from third party estimates on the overall market.

Okay. That’s overall market, not a reflection of the speakers.

Go ahead, Mehdi. I’m sorry. No, please go ahead.

So these are market trends, not so specific to Western Digital. And then, if I may just have a quick follow-up. In terms of the NAND cost down, should we assume that long-term trend of down 10% in terms of CAGR, cost per…

No, we're comfortable with the 15% cost reductions. We believe that we are currently ahead of that target for FY 2024. However, when you consider the entire year, you can still project a 15% reduction for the fiscal year.

Okay. All right. Thank you.

Thank you.

Our next question comes from Steven Fox with Fox Advisors. Please go ahead.

Hi, good afternoon. I was wondering about enterprise SSDs. You mentioned that the market is still down, and you'll adjust the mix accordingly. Given the current supply situation and where we are in the cycle, how do you see re-entering that market? Also, could you remind us what a typical mix of enterprise SSDs looks like in your Flash business? Thank you.

For us, it's an emerging part of the portfolio. Right as we entered the downturn, we qualified with several major cloud providers for our NVMe-based enterprise SSDs. However, we then entered a market where enterprise SSDs have been the most affected segment of the NAND market during this downturn, and we haven't seen a recovery yet. As that segment starts to improve, it will present more opportunities for us. The extent to which we participate will depend on the pricing in that segment compared to other options we have. We don't have a specific percentage target; we have the product qualified, and as demand returns, we will factor that into our overall portfolio strategy.

Would the overall situation be that it generally lags behind enterprise HDDs by a certain amount of time? Do you have a vision for when that product cycle might align with the anticipated recovery in enterprise spending?

It is indeed trailing enterprise HDD. I hesitate to generalize because this is just one cycle, but there is clearly more inventory digestion in the hyperscale market for enterprise SSD than there was in capacity enterprise HDDs. We see continued growth in capacity enterprise HDDs; we initially projected sequential growth throughout this fiscal year, and now we're discussing sequential growth throughout the calendar year. Hence, we observe positive demand trends returning for capacity enterprise HDD, which suggests that enterprise SSDs will also rebound, although there's still some inventory digestion to address.

Got it. Very helpful. Thank you.

Thank you.

Our next question comes from Mark Miller with The Benchmark Company. Your line is now live.

Your cash flow significantly improved during the quarter, but still there was an outflow. When do you expect to be positive from a free cash flow perspective?

Yeah, Mark. So turning free cash flow positive is a top priority for us. We are very much focused on it and we have a line of sight to achieving it. We expect to achieve free cash flow positive in the second half of the fiscal 2023, either this quarter or the next. As you know, we typically don’t guide for cash flow.

Do you expect to draw on your revolver, or do you think we won't have to?

I don't see that at this point.

Thank you.

Thanks, Mark.

Thank you.

The last question comes from Ananda Baruah with Loop Capital. Please go ahead.

Yeah, thanks guys. Good afternoon. Thanks for taking the question. Hi, David. Thanks a lot. Just wondering do you guys have an early opinion on if NAND bit rate increases, as GenAI sort of impact, not just edge cycles, but sort of corporate cycles, Fortune 1000 and hyperscaler storage as well. And all the other sort of end market constituencies, do you have any opinion on if there's a sort of increase to NAND supply over time? And if you do, do you think the increase could be material and noticeable? Thanks.

It's a valid point. My earlier comments discussed the cycle and our investments in NAND. We strongly believe in the NAND market's potential for significant bit growth in the future. One of the advantages of the NAND market is the ability to produce new nodes more efficiently, minimizing the required capital for that growth. Our fundamental belief in the ongoing growth of NAND is supported by a long technology roadmap that will allow us to continually decrease costs. We expect that generative AI will enhance this, especially on the edge. During this downturn, the NAND market has shifted towards being more edge-centric, which aligns perfectly with our diverse portfolio, including our consumer business, client SSDs, gaming, and partnerships with PC OEMs. We're well positioned to meet rising demand as the industry economics improve. Therefore, I am quite optimistic about this outlook.

That’s a useful context. Thanks a lot.

Thank you. All right, thanks everyone. I appreciate your time today. We will see you throughout the quarter. Take care.

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