Good afternoon and thank you for joining us. Welcome to Western Digital's Fiscal First Quarter 2025 Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later. This call is being recorded. I will now hand the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analysis and Investor Relations. You may begin.

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, does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, the separation of our Flash and HDD businesses, ongoing market trends and our future 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.

Thanks, Peter. Good afternoon, everyone, and thank you for joining the call to discuss our first quarter fiscal year 2025 performance. Western Digital delivered revenue of $4.1 billion, non-GAAP gross margin of 38.5% and non-GAAP earnings per share of $1.78. Our dedication to lasting quality and reliability through our industry-leading innovation and diversified portfolio have allowed us to proactively mix bits into the most profitable end markets, resulting in sequential revenue growth and margin improvement across both Flash and HDD. These growth opportunities are bolstered by the AI Data Cycle, substantially increasing the long-term need for storage across both our Flash and HDD markets. In Flash, the proactive measures we took during the downturn along with our disciplined capital investment strategy have significantly enhanced Western Digital's business agility and structural margin potential. Combined with our flexibility and bit allocation and continued progress in bringing highly compelling enterprise SSDs to market, we mitigated headwinds in certain core end markets, achieving sequential and year-over-year revenue growth and improving Flash gross margin beyond our through-cycle target. In HDD, the strength of our portfolio lies in our UltraSMR technology, which empowers us to deliver the industry's highest capacity hard drives while ensuring unmatched reliability, quality and performance. Western Digital has achieved record HDD gross margin and the highest revenue levels in 11 quarters, driven by the growing adoption of our UltraSMR drives to meet the demand for scalable and cost-effective storage solutions. This technology is a key driver of our continued gross margin improvement with wide adoption of two cloud customers and a third expected to ramp shortly. We anticipate UltraSMR will continue to grow across the US and beyond, solidifying our leadership in the market over time. Now, I would like to provide an update on our business separation plans. We are on track with the separation of our Flash and HDD businesses. At the start of the fiscal second quarter, we completed our soft-spin phase. Through meticulous planning and project management, this massive initiative has been executed exceptionally well and the businesses have hit the ground running, thanks to the dedicated efforts of numerous teams over the past year. In the fiscal second quarter, we continue to execute our soft-spin stage and are working diligently on the critical work streams needed as we make significant progress on the regulatory filings required in connection with the spin. Financing activities are anticipated to start soon, which will set the stage for us to execute the separation, which we expect will occur once we close the second quarter. I'll now turn to business updates. Starting with Flash, revenue reached its highest level in nine quarters. Sequentially, revenue growth was driven by continued recovery in data center fueled by strong demand for our enterprise SSD applications, which grew 76% sequentially, reaching the highest revenue level since fiscal fourth quarter of 2022. The cloud tailwind in the quarter was offset by ongoing weakness in consumer and in client with PC OEMs working down inventory and pushing out the refresh purchase cycle. On the technology front, we made significant progress with several hyperscaler and storage OEM qualifications including developments with PCI Gen 5 data center enterprise SSD and our 30 and 60 terabyte high capacity offerings. In addition, we continue to enhance our premium SanDisk brand by delivering on our leadership blueprint and core devices roadmap, expanding our platform capabilities with product partnerships developing robustly. I'll now turn to our Flash outlook. As we look ahead to the fiscal second quarter, we expect the continued ramp of our new enterprise SSD offerings to supplement seasonal strength in our consumer end market. Within client, we expect PC OEM demand to stabilize while gaming declines as we have successfully met the demand for the holiday season. We anticipate a recovery in our consumer and client end markets as we move through calendar year 2025. Furthermore, we are seeing high demand for enterprise SSD product offering and anticipate it to serve as the primary driver for revenue growth for the full fiscal year, with qualifications doubling since the start of the fiscal fourth quarter 2024. We now expect our enterprise SSD mix to comprise over 15% of our overall portfolio bit shipments in fiscal year 2025 growing at a pace significantly faster than previously anticipated. Our overall view of the Flash market remains positive as we maintain supply and demand balance by remaining committed to disciplined capital spending and improving profitability through a proactive bit allocation across our most high value end markets increasing our exposure to enterprise SSDs. Turning to HDD, in the fiscal first quarter, we achieved record revenue in data center, reflecting the strength of our nearline portfolio and our ongoing efforts to capitalize on market tailwinds. We are operating in an environment where demand for our products exceeds supply. To address this, we are working with our customers to improve our visibility into their future needs with our largest customers on a two to six quarter agreement cycle, aligning seamlessly with our proactive supply management strategy that supports predictable business operations and sustainable profitable growth. This long-term visibility allows us to not only better serve our customers, but also mitigate volatility while structurally improving our through-cycle profitability. On the technology front, we see increasing adoption of our UltraSMR technology showcasing strong confidence in our products' capabilities and benefits. In the fiscal second quarter, we launched our 32 terabyte UltraSMR and 26 terabyte CMR drives, marking the world's first commercially available hard drives with 11 disks. Developed with our time-tested and reliable ePMR and UltraSMR technologies, we expect these products to complete customer qualifications and ramp in the coming quarters, delivering a compelling TCO to our customers and improving portfolio profitability. Turning to the HDD outlook, as we head into the fiscal second quarter, we anticipate continued momentum in data center to drive growth across our nearline portfolio. Adoption of our UltraSMR product line is expanding, particularly among cloud customers. The HDD business continues to undergo a positive structural transformation. Our thoughtful approach to commercializing our product line, especially our UltraSMR technologies has enabled us to drive record revenue in the midst of AI's emergence as another pivotal growth driver for the industry. And with improved visibility into future demand, a focus on operational excellence, efficient cost structure and a strong commitment to maintaining a balanced supply-demand dynamic, we are well positioned to continue delivering the most profitable and innovative product portfolio while establishing long-term industry leadership through our earnings potential.

Thank you, David, and good afternoon, everyone. In the fiscal first quarter, Western Digital delivered great results with gross margin and earnings per share above the midpoint of the guidance range. Total revenue for the quarter was $4.1 billion, up 9% sequentially and 49% year-over-year. Non-GAAP earnings per share was $1.78. Looking at end markets, cloud represented 54% of total revenue at $2.2 billion, up 17% sequentially and more than doubling year-over-year. On a sequential and year-over-year basis, the increases were driven by higher nearline shipments in HDD and enterprise SSD bit shipments to datacenter customers. Client represented 29% of total revenue at $1.2 billion flat sequentially and up 5% year-over-year. Compared to last quarter, Flash bit shipment growth in gaming and mobile was offset by a decline in PC OEM, while HDD revenue was flat. Year-over-year, an increase in Flash revenue was primarily due to higher ASPs as bit shipments declined and was partially offset by lower HDD revenue. Consumer represented 17% of revenue at $0.7 billion flat sequentially and down 7% year-over-year. Sequentially, a slight growth in HDD offset a decline in Flash, driven by softer consumer demand. Year-over-year, the decrease was due to lower Flash and HDD bit shipments, partially offset by improved pricing in both Flash and HDD. Turning now to revenue by segment. In the fiscal first quarter, Flash revenue was $1.9 billion, up 7% from last quarter and 21% year-over-year. Continued recovery in data center drove strong demand for enterprise SSD products. Sequentially, Flash ASPs increased 4% on a like-for-like basis and decreased 6% on a blended basis. Bit shipments were up 14% from the previous quarter and down 12% compared to last year. HDD revenue was $2.2 billion up 10% sequentially and 85% year-over-year. Sequentially, strong performance in the nearline portfolio led to a 14% increase in HDD exabyte shipments. On a year-over-year basis, total HDD exabyte shipments increased 107% and average price per unit increased 46% to $164. Nearline bit shipments were at a record level of 141 exabytes, up 12% from the previous quarter, and 157% compared to the fiscal first quarter of 2024. Moving to the rest of the income statement, please note my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal first quarter was 38.5%, which was at the higher end of the guidance range. Gross margin increased 220 basis points sequentially due to improved mix, better pricing and continued focus on cost reduction. Flash gross margin was 38.9%, up 240 basis points sequentially driven by a higher mix of enterprise SSD bits, improvement in like-for-like pricing and continued cost reduction. In HDD, strong demand for nearline drives as well as efficient manufacturing operations and cost structure have driven continued margin expansion, resulting in gross margin of 38.1%, up 200 basis points sequentially. We have structurally changed the way we operate our businesses. Combined with our strong product portfolio, this has enabled us to generate gross margins above our long-term target ranges in both Flash and HDD. Operating expenses were down sequentially to $691 million including the synergies of $8 million. These results demonstrate continued focus on cost discipline, while making progress on the execution of the business separation plans. Operating income was $884 million, up 33% sequentially driven by better gross margins and disciplined spending. Operating margin was 21.6%, up 390 basis points sequentially, which is the highest in five years and was previously achieved at a higher revenue level. Income tax expense was $124 million and effective tax rate was 16.1%. Earnings per share was $1.78. Operating cash flow for the fiscal first quarter was $34 million and free cash flow was an outflow of $14 million. Operating and free cash flows included payments of $418 million for the company's repatriation tax installment along with IRS settlement payments. Cash capital expenditures, which include the purchase of property, plant and equipment and activity related to Flash joint ventures on the cash flow statement, represented a cash outflow of $48 million. Fiscal first quarter inventory increased sequentially to $3.4 billion with days of inventory declining by 5 days to 121 days. A decrease in HDD inventory was more than offset by an increase in Flash inventory. Gross debt outstanding was $7.5 billion at the end of the fiscal first quarter. Cash and cash equivalents were 1.7 billion and total liquidity was $3.9 billion including undrawn revolver capacity of $2.2 billion. After the close of fiscal first quarter, we completed the previously announced sale of 80% of equity interest in SanDisk Semiconductor Shanghai to JCET, thereby forming a joint venture between SanDisk China and JCET. Proceeds from the sale will be reflected in the fiscal second quarter's cash flow. I'll now turn to the fiscal second quarter non-GAAP guidance. We anticipate both Flash and HDD revenue to grow on a sequential basis. In Flash, we expect the ramp of enterprise SSD products and seasonality of consumer demand to drive bit shipment increases in the mid-single-digit percentage points. In HDD, we expect continued growth momentum in the nearline product portfolio. We anticipate revenue to be in the range of $4.2 billion to $4.4 billion. Gross margin is expected to be between 37% and 39%. We expect operating expenses to increase slightly to a range of $695 million to $715 million including the synergy costs of $25 million to $35 million as we continue to make progress executing on the business separation plans. Interest and other expenses are anticipated to be approximately $110 million. Tax rate is expected to be between 15% and 17%. We expect EPS of $1.75 to $2.05 based on approximately 357 million shares outstanding. As shown in our guidance, we remain committed to executing our business, driving higher profitability and cost discipline, while making great progress towards the completion of our business separation plans. I'll now turn the call back over to David.

Thanks, Wissam. Let me wrap up and then we'll open up for questions. Our results this quarter are a testament to our efforts to optimize our business for the long-term and execute on our strategic initiatives. We are confident in our product roadmap across both our Flash and HDD businesses and are excited by the significant opportunities ahead that each present, especially with the continued proliferation of the AI Data Cycle. As we continue to work towards the completion of our business separation plans, we are confident in our ability to drive long-term shareholder value and deliver the most compelling and innovative products to our customers. Let's begin the Q&A.

Thank you. Ladies and gentlemen, we will now start the question-and-answer portion of today's call. Our first question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead.

Yes, good afternoon. Thank you for taking the question. I guess first question, you raised your enterprise SSD as part of the mix to 15%, which I think is a pretty important inflection. So I was hoping you could speak to the qualifications that you've seen and in particular would love to hear more around the recently announced qualification with NVIDIA's GB200, NVL72 rack system. If there's any way to kind of quantify how to think about the ramp and magnitude of incremental dollars to your business would be great.

Hey, C.J., thanks for the question. Yeah, we feel really good about where the portfolio is. We've talked I think for a quarter or so now about this, our compute focused PCIe Gen 5 product that's what was qualified by NVIDIA in their reference architecture that allows us to go to all the folks that are building those products for customers and be in a good position to have those conversations as we drive that product more broadly in the market. We also have a very deep engagement with one, well, a couple of large hyperscalers on that product as well. So to your point, we've got more confidence in the growth of the portfolio. It's a very good demand environment. That's I don't think that's new news for enterprise SSDs and it's nice to have the portfolio where we can play into that. And as you said we expect our mix of bits when we add it all up the end of fiscal year last quarter when we were having this conversation we thought it would be around 10%. Now we're more in the 15% to 20% range. So demand keeps going up, the number of qualifications we've doubled in the last quarter. So the traction with the portfolio is good. It all aligns well with the AI Data Cycle we put out there both for the compute focused SSDs and then the high capacity data lake focused SSDs 30 and 60 terabytes. And again the traditional products that we were selling to the hyperscalers are also doing well also. So just I think that portfolio is something we've been working on for quite some time. As you know we got qualified before the downturn. We came out of it with a better portfolio. I think we really did a good job, teams did a great job throughout the downturn of staying focused on building those products and building a stronger portfolio and now we're seeing the results of that.

Very helpful. Thank you. And I guess as a quick follow-up, you talked around the ongoing transformation of the HDD industry and now two to six quarters of customer visibility. Would love to hear kind of how perhaps pricing negotiation is evolving and within that construct do you have visibility today for pricing beyond one quarter in the DRiV business? Thank you.

Sure. I believe we have reached a point where there is a better supply and demand balance in the industry. Our business has benefited from the actions we took after the downturn, supported by a strong portfolio that continues to gain traction. We have discussed this extensively. Our UltraSMR technology is gaining significant traction with customers who have adopted it on a large scale. Once the technology is implemented, customers can achieve an additional 10% capacity with each drive they deploy, which encourages them to continue implementing these drives. Recently, we received official qualification from our third hyperscaler, and we anticipate a rapid ramp-up in the coming quarters. These developments provide us with increased visibility into our business, which is beneficial, especially for a vertically integrated operation. I have always emphasized that pricing is linked to total cost of ownership; delivering a better product reduces costs for our customers, and we benefit from that investment in research and development. We have also launched a 26 terabyte CMR and a 32 terabyte UltraSMR drive. We expect these products to ramp up as we move through 2025, which should lead to improved pricing and margins for our business.

Thanks so much.

Great. Thank you. I just want to make sure I understand the steps towards separating the companies. You talked about having kind of prepared the soft-spin. So you're going to report you'll have two separate sets of numbers for the December quarter. And assuming that goes well, you'll be able to file the Form-10 at some point during the March quarter. Is that the plan and kind of what are the anything that could cause that to come later?

Yes, let me clarify that, Joe, because it's a bit different from what you mentioned. We are currently in the soft-spin stage, meaning we are still operating as Western Digital. While we are one company, we have functionally separated our systems into essentially two distinct categories. For instance, customers must submit two separate orders for HDDs and Flash due to these two different systems, each with its own vendor ID. Internally, our teams are using these different systems to manage the flow of products through the business. Essentially, we are managing Western Digital while working on this separation behind the scenes. We plan to operate in this manner for the entirety of the second quarter because we want to ensure that all financial processes function well for a complete quarter before officially proceeding with the spin. We will close the December quarter under the Western Digital name and only report one set of numbers for that period. All the groundwork is being laid to ensure we can operate as two separate entities confidently. In the next couple of months, we will file the Form 10 publicly as we complete the final phases with the relevant authorities. Once that is done, we will initiate financing activities for both businesses, ensuring everything is in place for the eventual distribution. Overall, we have significant work ahead, but everything is on track. You should expect to hear more about this around the time of our earnings call for the December quarter.

Great. Thank you so much for that. And I guess I get a lot of questions from more event-driven types of investors about the resolve to do this in the wake of things that are happening with our JV partner and things like that. So just maybe if you could just kind of state how focused you are on getting this done, any impediments? Any chance that this doesn't happen from out of your discretion?

We're very focused on completing this, Joe. As you know, we underwent a comprehensive strategic review and announced the outcome on October 30th of last year, which set us on this path. We recognized it was a significant undertaking, but the results of the strategic review indicate this is the right decision for our shareholders. We're not trying to time the market or anything similar. Our intention is to proceed when we're ready. The goal is to build confidence in our ability to operate two independent companies, and that's what we are working towards. While I can't predict everything that will happen in the future, we are committed to getting this done as quickly as possible.

Great. Thank you very much.

Yes. Thank you. I have two, if I may. First off, how much room do you have in your existing facilities to expand capacity of heads and media for hard disk drives? I asked because you just reported record exabytes and hard drives, it was about 180. And as you address that question, you spoke of a third hyperscaler that is qualified SMR, Dave, and you will ramp in the coming quarters. Is that for your 32 TB offering or is that just a broad statement? Thank you.

I believe that, generally speaking, most customers aim to adopt the highest capacity drives once they begin deployment. Therefore, we anticipate that customers will transition to the 32 terabyte drives fairly rapidly. Our product strategy is effectively unfolding, and these drives can be qualified quickly since customers are already familiar with the technology, which has been in their settings for some time. I am referring to the base ePMR technology and architecture of these drives, which allows us to increase capacity swiftly. Overall, customers prefer to implement the densest drives available. We expect the 32 terabyte drives to begin deployment as we progress through 2025, following their qualification. Regarding your question on the capacity for heads and media, we typically do not disclose specific capacity figures. We have sized our infrastructure for the number of units we believe will meet market demand and will continue to enhance exabytes by driving innovation and increasing density per unit. You can see this development in real-time with our recent drive launch. We have adequate capacity throughout heads and media, testing, and assembly to support this level of output. This was a significant adjustment during the downturn to ensure we maintain control over costs. The real focus is to gain better visibility into our customers' plans so that we can align our capacity with their demand and reduce the typical volatility associated with large ingestion cycles followed by digestion cycles. Our goal is to achieve a more predictable business model, which hinges on having insights into customer demand.

Very clear. Thanks.

Thank you for taking my questions. I will keep it to two as well. First, regarding the operation of the two entities separately starting this October, could you remind us how to consider dissynergies? What factors contributed to your guidance for the December quarter, given that you are managing two company cost structures? As a follow-up to Karl's question, I see you're shipping nearline capacity approximately 25% higher than your previous peak levels. How quickly can you introduce new capacity? Can you provide more context on whether technology and aerial density expansion are significant drivers? Do you foresee any constraints in the next few quarters? I would like to explore Karl's question further.

Let me begin with the first part of the question, Aaron. I believe your question was about dissynergies. In the first quarter we reported, we had roughly $8 million in dissynergies within our operating expenses. The guidance indicates an estimated $25 million to $35 million in dissynergies assumed in our operating expenses. Specifically, the midpoint of our operating expenses, which is about $705 million, includes approximately $30 million in dissynergies. As we mentioned previously, we expect these dissynergies to be roughly split evenly between our two operating businesses. In terms of our steady state, it remains unchanged from what we discussed last quarter; we anticipate it to be around $40 million, evenly distributed across both businesses. This is how we should view it moving forward, but for this quarter, it is approximately $30 million, plus or minus $5 million. Maybe for the second part of your question, I don't know, David. I'll start making some comments and then ask David to add his thoughts. Regarding the manufacturing capacity, our focus in the hard drive business has always been on driving profitability and maintaining the supply-demand balance. From our current standpoint, with the good visibility we have from our customers and the implementation of build-to-order, we believe we are in a strong position in terms of manufacturing capacity, and we do not see the need to expand our manufacturing footprint.

I think that's right, Aaron. I mean, look, I mean at least the way I think about this capacity if you look at the units we've shipped in the last two or three quarters, it's all converged pretty closely. So there's not a lot of variability in that number. It goes up and down some like less than a million units. But for an industry that shipped hundreds and hundreds of millions of units, not that long ago, that's a pretty tight window. I think the way we're thinking about this is what's demand going to be a year from now? It takes a year to build a hard drive once we start a wafer, no matter what our wafer capacity is for heads. Once we start a wafer, it's going to be a year before that shows up in a hard drive. So what we really are working to understand is what demand is going to be a year from now and how our customers are thinking about that and that's something new for them, right? And we're working through that process with them.

Very helpful. Thank you, guys.

Thanks.

Thank you.

Thank you. Our next question today comes from Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. Can you just talk about bookings on the HDD side? I mean they see pricing going higher. They see you and Seagate talking about not adding capacity. So why would they not just place shadow orders to make sure they get what they need a year from now? I mean that's often how it works in memory. I certainly understand that the cycle times here are much, much longer. But can you talk about that? And sort of what is this two to six quarter agreement cycle mean? Are these take-or-pay so that they can't just place shadow orders that they'd be on the hook to take the stuff when you build it? Can you talk about all that? Thanks.

Yes. Tim, I would say, the industry is evolving, right? This is something new. I mean this is an industry that wasn't that long ago while the business transacted every quarter. So we're asking customers more visibility understanding what their demand is. They haven't particularly thought about this franchise that way and getting that much visibility into it. So and they're big relationships, especially with the big hyperscalers like very, very big relationships. Nobody wants to yank each other around unnecessarily. So I think it's in all of our best interest to have as much visibility as possible so that we can supply the market. We don't want to short the market, but we also don't want to basically build capacity that we don't have visibility into how it's going to be used. So at this point, it's not a take-or-pay. It's just about getting visibility into kind of how they're thinking about their infrastructure and what their demand is going to be. So we know how much supply we're going to have the ability to produce from a unit perspective that we get that aligned with their demand.

Thank you.

Thank you. And our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thank you so much. Your guidance suggests a slight tick down in gross margins at the midpoint sequentially. Can you just help us think through the drivers of that? And you obviously launched your 11 platter mass capacity drive too. How should we think of margins of that scale higher as you go through the course of fiscal '25? Thank you.

Yes. So you got it right, Wamsi, that as we introduce new products, we have the opportunity to drive margin higher. We just launched a new product. It will just start qualification, so it's not going to start deployment for another couple of quarters. So in the HDD business, we're going to see margins basically flat Q-to-Q. Flash, we'll see a little bit down driven by some the cost in the next quarter are a little bit up from what they usually would be probably what you guys model on a 15% down year-over-year. We're going to get a quarter. We have a little cost increase just given the way the expenses are flowing. So I think that should help you understand the way the margins are going to work.

Thank you. And our next question today comes from Harlan Sur with JPMorgan. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So on enterprise SSD, it's taken a while, but now there's clarity on the really strong tie in, right, to these AI and accelerated compute clusters. I think you gave us your view on bit mix. But I think according to my calculations, I think June quarter, I think, enterprise SSD was about 7%, 8% of your total Flash revs. It looks like in the September quarter, it stepped up to about 12%, 13% of your Flash revenues. Is that about right? And then on some of the recent specs on your high-capacity 64 terabyte, 128-terabyte platforms targeted for AI. Looks like the team has really set up their competitiveness here. Like what have been the biggest drivers of that better performance? Is it controller technology? Is it firmware? Is it reliability quality metrics? Like any color here would be great. Thank you.

Yes. Let me start with the first part of the question, Harlan. With respect to where we are from an enterprise SSD as a mix, we're basically with in the Q1, we've exceeded a little bit the 15% of that mix. And as David mentioned in his comments a bit earlier that we would expect for the year, the mix of enterprise SSD as a percent of total for the Flash business to be between 15% and 20%.

So, Harlan, regarding the competitive aspect, you understand it well. It’s about getting the controller technology right. As I mentioned during the downturn, we remained focused on this. We have developed the right controllers and have always had strong underlying NAND technology. We've discussed the BiCS roadmap extensively, and we feel optimistic about it now. Looking ahead, we have all the BiCS8 plans and the 2 terabit die, which will aid in building higher-density enterprise SSDs by reducing the number of dies needed for that density. We aren’t at that point yet, but it is on our horizon. It’s crucial to ensure everything is aligned, and we have been concentrating on that for the past two to three years since I joined. This was a significant focus from when we restructured the company into a business unit model, bringing in a general manager dedicated to overseeing our development, staying on top of all projects, and ensuring we deliver the right products that yield the highest ROI. We are confident in our current position as we address this AI Data Cycle. It's the ideal time for our portfolio to come to the forefront. There’s more work ahead, but we feel positive about our current status and trajectory.

Thank you. And our next question today comes from Krish Sankar with TD Cowen. Please go ahead.

Yeah. Hi, thanks for taking my question. And Dave thanks for the color. When I look at December quarter, you said Flash revenue should grow, while bit shipment should be up mid-single-digits. So what does it mean for ASPs? The reason I'm asking is that while eSSD is strong, you keep hearing the non- eSSD data points are not good. So that's why I'm wondering how to think about ASP. And if I may extrapolate, how do you think about March quarter for both Flash and Hard Drives, given there is some seasonality aspect for both those segments in March? Thank you.

Yes. Chris, so you got, I mean, again I think you've got it in the way you framed your question. The Flash market is a big market. There's a lot of submarkets inside of it. The PC market is some inventory there and those customers restocked and have not replenished inventory. They're just building to demand at this point, same with smartphone, the consumer business has just been a little bit soft. So you've got kind of that dynamic. And then on the other side of it, you've got very, very strong enterprise SSD. Now we expect, as we go through '25, we expect those smartphone and PC markets to recover as we go throughout the year and be stronger. We can talk about that in more detail. But I think that's a well-understood topic. And we expect enterprise SSD to stay very strong. But when you look at it on a sequential basis, you're looking at basically flat blended pricing and a little bit of cost headwind which is where you get a little bit of sequential decline in margins. Going it's a little early to talk about the March quarter. But again you got it right on seasonality there. There might be some seasonality hit. I would expect some seasonality headwinds going into the March quarter. But we'll have more to say about that as we move through the quarter and especially get to this time next quarter.

Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Thanks for taking my question. I guess, David, if I just go back to this 100, the exabyte shipment of 163 on the HDD side. How do you get confidence that this is not sitting in inventory versus actually getting deployed by your customers? Is there any metrics in the UC internally that gives you confidence that this is actually getting used up and not piling up as inventory potentially. Anything on that front would be really helpful to understand. And then Wissam, you just touch on your CapEx expectations for HDD and the Flash business for the rest of the year, that would be helpful. Thank you.

Yes. We don't see a lot of inventory at the major players. We are still in a cyclical recovery from a significant downturn, and we maintain a close relationship with our customers due to the size of our partnership. Therefore, we don’t believe there is excessive inventory accumulation or double ordering taking place. Everyone is just trying to assess their future demand so we can effectively meet it, and they provide us with the most accurate signals regarding that demand.

And with respect to the CapEx, Amit, what we started doing last quarter is, we're talking about CapEx for the quarter. So for this quarter, I expect our gross CapEx to be more or less in line with the last few quarters, the average over the last few quarters. So there's no real inflection.

Thank you. And our next question today comes from Thomas O'Malley with Barclays. Please go ahead.

Hey, Dave, Wissam. Thanks for taking the question. I just wanted to ask for you to help quantify the benefit on the eSSD side versus the traditional NAND portfolio. Obviously, you're saying that grows from 15% today to 15% to 20%. So nice tailwind throughout the year. But just on a like-for-like basis, could you just try to help describe what that tailwind means? Obviously, you're not going to give an exact pricing away, but just give us a flavor for how beneficial that is for the business. Thank you.

Yes. It's accretive to the portfolio. Let's put it that way. And that's a good starting point. You probably knew that. It tends to be one of the better if not the best price markets in the Flash business. So it provides a nice tailwind to the portfolio.

Thank you. And our next question today comes from Srini Pajjuri with Raymond James. Please go ahead.

Yes. Thank you, David just to follow-up to the previous question. I'm looking at your Flash ASPs being down 6% on a blended basis. But on a like-for-like basis, it's only down 4%. So it seems somewhat counterintuitive because your eSSD mix is growing, but the blended ASP is actually worse than like-for-like. So just trying to understand those dynamics as to why that's the case. And as I guess eSSD grows, how should we think about the blended ASP going forward? Thank you.

Yes. So I think it's even a little different than what you said. I think you said down 4% on like-for-like. Like-for-like was up for blended, it was down 6%. So it's all mix related. I think we said going into this quarter, we were mixing more into mobile. Clearly, as we mix in more enterprise SSD that helps, but that's an emerging story and an ascendant story for us. And so that's why you see that dynamic there.

Thank you. And our next question comes from Ananda Baruah with Loop Capital. Please go ahead.

I appreciate it. Thanks for taking the question.

Hey, Ananda.

Hey, Dave. I wanted to ask if you could remind us of your roadmap for conventional technology aerial density leading up to HAMR. I know you've mentioned HAMR in general terms regarding the next few years. How should we view the conventional tech aerial density roadmap until then? That would be helpful. Thanks a lot.

Well, that's a very interesting area to explore. One thing is as it changes over time as you keep getting better. And I think a good example of that is we just introduced an 11 platter drive, I think for a long time, people thought 10 was probably the limit given the form factor, but advances in material science and things like that allow us to build thinner platters. And we can put in 11th in and there you go, you get 10% more just by doing that. So it's always an evolving story. But we clearly see the ability to drive our current platform, the 40 terabytes to make that bridge from 30 to 40. We're driving through that now. And that's where we expect HAMR to be introduced to carry the portfolio from there. We still have a generation or so left to go. We just launched a new generation this quarter, and customers are excited about it. They are testing it in their labs and looking to qualify it for deployment. While I won't announce a new product right now, you can expect another generation to follow. We have plenty of runway with this portfolio. The drives are well understood by customers and are already part of their infrastructure, making the qualification process straightforward. They are familiar with the performance, reliability, and quality of these drives. We feel confident about the technology decisions we've made to support this market and with the AI trends boosting it. The portfolio is exceptionally well positioned to continue driving business growth and increasing profitability.

Thank you. And our next question today comes from Asiya Merchant with Citigroup. Please go ahead.

Great. Thank you for taking the call taking the question. So just in terms of HDDs, I understand that the strength here, continued strength here in the December quarter, we typically see some seasonality on the Flash side in the March quarter, just given the strength you're seeing on the HDD side, should we expect some seasonality here in the March quarter on the HDD side as well both in terms of bit shipments and then also on the ASP side. Thank you.

Yes. I mean it's a little early for March, but I don't think that's a bad assumption to make at this point from where we are to see that on the HDD side as well.

Thank you. And our next question today comes from Steven Fox with Fox Advisors. Please go ahead.

Hi, good afternoon. I was just wondering if you could provide a little bit more color into the manufacturing efficiencies you think you get on a regular basis out of the HDD business. I would imagine there's debottlenecking still going on. And also as mix changes, it helps the utilization on the heads and platters. So I don't know if there's any Rule of Thumb we can think about or just maybe a little more color on that would be helpful. Thank you.

I mean the way to think of it is we typically have obviously many programs in terms of cost reductions, which would drive manufacturing efficiency as well as things like improving yields, et cetera, at various parts of the supply of our manufacturing sort of process. The typical, I mean, I don't know if there's a typical, but the way to think of it is we will still be getting in the cost improvements and the probably mid to high single-digit percentage on an annual basis. That will be probably a fair assumption. But of course it varies of course with respect to how we move from one capacity point to another as well. So it's not like a linear thing.

Thank you. And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead.

Thanks. I have a quick question about the UltraSMR 32-terabyte. With the 11 disks, can we still achieve accretion on the margin side for your current portfolio? Additionally, regarding the Flash segment, I’d like to know what the capital expenditure looks like for next year. This year, there was a low cash outlay of around 0.8 for CapEx, so I'm curious about the outlook for next year. Thanks.

Yes, I mean the 32-terabyte UltraSMR drive is a perfect example of us delivering a drive to our customers. It drives our TCO down. So as we drive their TCO down, it will drive our profitability up. And so we're very anxious to get that drive deployed just like our customers are and we expect that will provide some profitability tailwinds to the business.

Yes. And with respect to the Flash CapEx, as I mentioned earlier, we're not providing sort of a longer-term view in terms of quantitatively, but what I would say is we're continuing to be focused on the profitability of the business. And so our focus is really to drive cost down. But when you look at CapEx, last fiscal year, our CapEx was very, very low. So we'd expect it to be a little bit higher from there.

Thank you. And our final question today comes from Matt Bryson with Wedbush. Please go ahead.

Thanks for taking my question. What I was wondering is your hard drive pricing was relatively stable quarter-over-quarter. I would have thought with the greater shipments into the cloud as well as the mix up towards high capacity drives, you would have seen a little bit of a benefit there. And then just one more point. I know you've talked about there being production constraints. One of the things that I've heard as being a constraining factor is test, paradigm telling us that they're not seeing any test orders. Should we take that as a sign that the hard drive industry is adding in a more rational fashion than in the past? Thank you.

Yes. Regarding the second part of your question, we have been clear about our manufacturing capacity set for a certain number of units. We believe that our unit production combined with our product roadmap will meet the exabyte growth in the industry, and we are comfortable with our current situation. If we receive strong signals from our customers within the next four to six quarters, we can begin discussing what that means for our production capacity, but we still have some time before that happens. On the pricing side, we observed a slight increase in like-for-like pricing, in very low single digits this quarter. It was a positive quarter for margin improvement again in HDD, reaching 38.1%, which is another record. Over the last four quarters, we have increased our margin by more than 15 points. Overall, it's been a successful period. We may take a brief pause for a quarter, and as new products are launched, we anticipate more favorable conditions moving forward. We believe our business is in an excellent position, largely due to our technology, which is being strongly embraced by our customers. They are clearly demonstrating their support for the architecture we are promoting. Additionally, during the downturn, our teams did an exceptional job of adjusting costs to maintain a supply-demand balance. We feel optimistic about our business and look forward to advancing it in the coming years.

Thank you. That concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

All right, everyone. Thanks for joining today. I really appreciate the interest in the business and all the great questions and we look forward to talking to you throughout the quarter. Take care.

Thank you. This concludes today's conference call. We thank you all for joining. You may now disconnect your lines and have a wonderful day.