Western Digital Corp (WDC) September 9, 2026 Conference Transcript

Good morning, everyone. Asia Merchant here, day two of Citi's Global TMT Conference. Asia Merchant here again. I lead the tech hardware and tech supply chain research here at Citi. Really delighted to host Chris Senesol here. He is the CFO of Western Dig. We also have members of Western Dig's IR team here in the audience with us. Before we begin, I'm going to hand it over to Chris to have a few opening remarks. This is a fireside. You know, I'll leave a couple of minutes towards the end for questions. If you do have questions, please do raise your hand so we can bring the mic to you.

Over to you, Chris. Yeah, and thanks, Asha, for hosting us at this great event. And so today I will be making some forward-looking statements based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends, These forward-looking statements are subject to risk and uncertainty, so please refer to our Form 10-K and other filings with the SEC for more information on the risk and uncertainties that could cause actual results to differ materially from expectations. We also will be making some references to non-GAAP financials, and the reconciliation between GAAP and non-GAAP can be found on the Investor Relations section.

Great. Sam, back to you, Asya. All right, thank you. So, Chris, clearly it's been a great cycle, right, for storage, for HDDs in particular. I think investors, you know, who are kind of maybe still waking up to what's happened in the HDD space, often ask this question about what makes this cycle different? I mean, you've lived through many other cycles before. You've been in a semiconductor space as well before. But, you know, what makes this current HDD cycle different than maybe prior cycles?

Yeah, that's a great question to start. And I've said this many times before, you can basically forget everything about hard disk drives and WD until I joined in May 2025. And so when you look at three years or five years or 10 or 20 years ago, the business was mostly consumer and PC client, where you have a lot of cyclicality. It depends on GDP, consumer confidence. It depends on the PC cycles and IT spending. And it's really a unit-based business. Fast forward to today, 90% of our business is with the cloud, driven by massive amounts of data being stored in the cloud. You layer the AI cycle on top of that, and the understanding by many of our customers that data becomes a lot more valuable. And so you're not really looking at cycles anymore as you've seen it before. It's more a secular growth business. We have great visibility in the demand side. We talk to our customers. We have earned our seat at the table being a critical component to this AI data center build-out. And we have longer-term visibility, right? Customers are asking to sign LTAs all the way till 2030 and 2031. We haven't signed them yet, but that's the visibility that we have, again, being a strategic component and having earned that seat at the table. And so this is a totally different business.

And then, you know, we've been asking pretty much everyone here who's at the conference, like the AI, the build is so huge, right? And then how do you think about a digestion period perhaps for this AI infrastructure spend? Are you kind of looking at that and saying, okay, a lot of demand here, but at some point we kind of see the digestion of all this infrastructure, including the HDDs that are going into these data centers for data storage?

Yeah, so currently we don't see a digestion. It's actually the opposite. Every time we go and talk to our customers, myself or my CEO or our salespeople, they come back with a stronger demand signal, right? A stronger demand signal and better visibility for longer term, right? Today, and we have been very clear about that, we do believe that the exabyte demand growth, compound annual growth rate, for the next five years is greater than 25%. Actually, currently, I think it's a lot greater than 25%. We can't supply more than 25% right now, year-over-year growth in exabyte, but the demand is there, the demand is strong, the visibility is good and so we don't see any digestion right now. I mean, there is a lot of compute power that's being put in place and the CapEx spending of the hyperscalers keeps going up and will soon hit more than a trillion dollars. The vast majority of that goes to the compute side. Now, data and hard disk drive storage is slightly different, right? Because compute, you need a certain amount of compute to handle all the compute that needs to be done. But every time you use compute, the output of it is being stored. And so the data that's being generated by AI keeps compounding, even when you, so to speak, would stop adding more compute power to it. And so you will have to continue to add more HDD and storage. By the way, as you know, 80% of all data that's being generated is being stored on HDD. And when you combine all of that, we continue to see strong demand for a very long period of time.

Okay, great. And then maybe just coming back to your most recent quarter that you guys reported, I think investors were a little, you know, surprised that maybe exabyte growth just fell a little bit short of 25% year on year. Just, you know, there were some dynamics at play, in the most reported quarter? Maybe you can just help investors understand what were those dynamics? And then, you know, given that you're seeing demand much stronger than that, obviously you guys are supply constrained as well there. How do you think about the customer ramps and the product mix driving towards the 25%?

Yeah, so first of all, again, I've been very clear about that. We do see Exabat demand greater than 25% compound annual growth rate over the next five years. By the way, this is a compound annual growth rate. That doesn't mean each and every year. But I do believe the demand will actually continue to grow more than 25% each and every year. But to your point, we are somewhat supply constrained today. And so my revenue is not gated by the demand. My revenue is gated by the amount I can supply. Now, the good news there is, I think, over the next 25 years, we do believe that we will be able to grow the exabyte supply compound annual growth rate greater than 25%. Now, again, that doesn't mean each and every year, right? If you look at last year, last fiscal 26, we grew exabyte on or about 25% year over year. Now, that had one quarter where we had 34%, which we had an easy year over year compare. But we were on this kind of, call it, low 20s, 22%, 23% year-over-year exabyte growth in supply right now. We are obviously working really hard to accelerate that. And the way how we are going to accelerate our supply year-over-year growth is through technology and product transitions as we move to those higher capacity drives. Now, that is not a linear progression. We are currently somewhat in between two product transitions over the last four or five quarters. We flawlessly executed on a big product transition, our 32 terabyte EPMR solution that we progressively shipped more and more over four or five quarters. We're now somewhat in between the next product transitions, but we basically have three product transitions in front of us. We are going to start shipping. We've actually shipped already a little bit in last quarter our next-generation EPMR up to 40 terabytes, then followed with our first-generation Hammer up to 44 terabyte, and then followed by our 50, 50 plus terabyte next generation as well. And so as we execute on those technology and product roadmaps, we will be able to accelerate the exabyte supply year-over-year growth as well.

Okay. And then we hear a lot about KV caching on the storage side. That's like, you know, a big buzzword, I guess, these days for AI-led storage, especially as we're talking about inferencing workloads and the context that you need to store in order for the inferencing workloads to meet certain requirements. So how does Western Ditch think about that market? Like, you know, is that something that could be addressed with HDDs as well? Is that more for, you know, memory or storage that is maybe higher performance than HDDs? How do you think about KV caching as an incremental perhaps demand driver for HDDs?

Yeah. And so let's start at the highest level. As I said before, roughly 80% of all data today and in the future is and will be stored on hard disk drive. There is a small percentage that's being stored on tape, and then you get 15 to 20% that's being stored on SSDs or Flash. So why is it not 100% hard disk drives? Well, Flash has some performance advantages. You can get faster to the data, input, output, read, and write. And so they have a performance advantage. However, we have been investing not only on getting to higher capacity drives, but also have been investing technology and product advancements to get to higher performance drives, getting the better throughput, faster read and write to the data as well. And as we continue to execute on those high performance drives, we will be able to encroach into what's today the flash segment, right? As we get to higher performance, KV caching is one of the opportunities out there. Obviously, we need higher performance there, but as we execute, there is an opportunity there.

Okay, all right. Would that require a partnership with some flashmakers, or in that case, you would just be, you know, maybe buying some components, or maybe it's just pure HDD solutions that you're talking about? Higher performance HDDs. Okay, all right. Great, thanks for that clarification. Maybe just on pricing. I mean, clearly, you know, you've talked about demand significantly exceeding supply here. You've gone from an industry where you used to have like some price declines to rising pricing environment, clearly on a per gigabyte basis. When we looked at your recent results, you've talked about further pricing improvements. So maybe just talk about, you know, you have these bill to order requirements and then you're putting in this upward pricing. Potentially there's some upward pricing. So how are you kind of balancing those two out?

Yeah. So in terms of pricing, we look at it from a value base. We continue, as we move to higher capacity drives, we continue to add more value to our customers. Higher capacity drives results in better rack density, that results in lower real estate costs, that results in better power consumption or lower power consumption. And so that all improves the total cost of ownership, despite the fact that we are charging a little bit more on a price per terabyte. The price per terabyte two quarters ago was up 9% year-over-year. Last quarter was up 18%, 19% year-over-year. And I think there is still a little bit more room there to grow that. Again, as we continue to add more value, moving to higher capacity drives, adding more features, higher performance to our drives, that will enable us to further improve the overall pricing environment.

Okay. And then you often talk about, you know, if there is demand that comes in intra-quarter from your customers that's above sort of the commitments that you've already made to them, there is upward momentum in pricing in those situations as well.

Yeah, yeah. So we do build to order, right? So we, I mean, it takes 52 weeks to produce a hard disk drive. And so we ask most of our customers, but not all of it, to place purchase orders at least 52 weeks in advance. Now, some of the business is being still quoted and priced in three, six, or nine months. But the vast majority is within that 52 weeks. Now, even there, we have now entered into LTAs with many of our customers. I think the vast majority of calendar or fiscal year 27 is under LTA. some of fiscal or calendar year 28 is under LTA, and even a smaller part of fiscal or calendar year 29 is under LTA. I mean, customers want more LTAs. Customers want a secure supply in 2030 or 2031. When we do LTAs, we typically have, we commit to a certain base volume, which is typically less than what our customers want, And so we keep a little bit of volume flexibility to the upside at a certain base price. But that also means that if there is upside, if we can supply more, that will be at a different price as well. And so there is both flexibility on a volume as well on the pricing side. And again, that's why you have seen some further ongoing improvements on a price per terabyte basis. Okay.

And you talked a little bit about earlier in your commentary about the value that you guys are driving, the TCO for the customers that's beneficial as you guys move to higher capacity drives. Just, you know, and help us understand, like, you know, the value, the alternative to HDDs is significantly priced higher, right? I mean, that's part of the equation if I'm sitting there looking at what storage media do I want to purchase. So just how is that, when you think about that TCO and the price per gigabyte that you guys are probably charging, maybe just help us understand how that relationship's kind of evolved, like where it was, as you're thinking about it now, and then obviously when people are looking at the alternative, saying, well, in this case, it makes obviously a lot more sense to continue on HDD.

Yeah. And so, again, the name of the game here for us is to move to higher capacity drives, right? And we have been executing really well, going from 24 terabytes to 26 terabytes, all the way up to 32 terabytes. We're now at the cusp of introducing the 40s and the 44 terabyte drives. And then we do actually have a roadmap to get to 50 plus, eventually 100 plus terabytes per drive. And again, that adds a lot of value to our customers, right? Lower real estate costs to better rack density, better power consumption, and the ability to manage fast amounts of data in a very predictable, scalable, reliable way. And at the same time, as I said before, we're also adding more performance to the hardest drives. And the combination of all of that creates a vast amount of value creation for our customers that they need, right? Because let's be clear, there is no AI without HDDs, right? HDDs might only be 4% or 5% of the total capex spending of the big hyperscalers, but it is a critical component, right? And without HDDs, there is no data centers, there is no AI. Again, and that's why 80% of the data is being stored on HDDs. It's the most economical, scalable, reliable way of storing data.

As we talk about Hammer, you guys have laid out, you know, you're doing quals, you expect to ramp here. What are the most important customer qualification milestones that investors should look out for as you're continuing your, you know, going into Hammer as well?

Yeah, we're doing really well with our Hammer technology and product roadmap. We've been working on for almost 10 years by now. And we're getting to the point where soon we will start shipping our first generation Hammer. We're currently in qualification with four large hyperscale customers, and the qualifications are going really well. We are getting great feedback from our customers. They like the product. They like how it behaves inside their production environments. They like the aerial density, the reliability, and the quality of the product. And so we are ready to go. What we've said before, we intend to start shipping in the first half of calendar year 27, probably a little bit in Q1, a little bit more in Q2, and then continue to ramp that in Q3 and Q4 of calendar year 27 and beyond that as well. And so things are well on track, and so can't wait to start shipping the first hammer drives.

And just, again, from those who kind of follow the HDD qualifications, Like, could you, like, double-click a little bit what exactly needs to happen right now? You know, just because, you know, one of your competitors is already up there on Hammer, could the fact that these hyperscalers have already tested Hammer before, could that speed it up a little bit? There's obviously demand for more capacity. Could that speed it up? Like, what are some things that have to happen for those qualifications to be met before you do volume production?

Yeah, it definitely helps a little bit that we're not the first one introducing Hammer. So our customers are familiar with Hammer Drives as well. Having said that, our customers are, I think rightfully so, very conservative as it comes to qualifying new products. They don't want to lose my data or your data or anybody's data here in the room. And so they have a very rigorous process. They're not cutting corners or anything like that. They just follow the process. And so we are going through it right now. Again, we're executing well, great feedback, and all of that. In the meantime, we are at the cusp of ramping the 40-terabyte EPMR, right? And so customers love that product. They have more than 10 years of experience with that product. but there as well we went through the same lengthy qualification cycles as well it's just a little bit earlier in terms of the timeline and and as I said we shipped a little bit last quarter it will start ramping this quarter and then progressively more over the next couple quarters as well okay all right and then just from a competitive opportunities you know you guys did talk about high bandwidth drives at your innovation day.

You talked about dual pivot architecture. You talked about opportunity within AI data lakes. Just to help investors understand, you know, where has there been adoption on some of those innovations that you've talked about? Are they part of some qualifications? And when do you see that ramp for some of the additional technologies?

Yeah. So our high bandwidth drives was very well received by most of our customers. We are shipping, I believe, five of our customers. We're shipping engineering samples as well. And again, so far, the feedback is really great. They like the characteristics and the features of the product. We will continue to further enhance, right? We are now targeting a 2x improvement on the performance, but we have a 4 and an 8X that's in the works. And it's just like so far, customers really like the product. The introduction of the high bandwidth drives will be in the plus 50 terabyte range. We're not introducing that in the 40s or the 44 terabyte, but once we move to the higher terabytes, there, it becomes even more important to have those features of high performance.

Okay. All right. So, yes, you're saying it will be timed with when you do the 50 terabyte drives. Okay. That's great. Maybe I'll just turn it around to the questions. If there is any in the audience, please do raise your hand. We have one here in front.

Thanks very much. You talked a lot about maybe some of the differences today versus maybe prior cycles. and HDDs. It's clearly more structural demand for exabytes, higher capacity drives. It seems like the industry is a little bit more focused on no new supply. And so it would be interesting to hear from your perspective, three, four, five years down the road past this huge surge in capital spending. What does the industry look like? Is there sort of more of a predictable algorithm of volume and pricing growth over time, or do you expect there to continue to be cycles as there have been in the past?

Yeah, again, the cycles in the past were totally different, right? It was consumer PC cycles and other things. Here, this is a lot more structural. This is a planned economy. Our customers, they plan their data center builds more than five years in advance because they need to go and secure the land, they need to go and secure the permits, they need to go and secure all the XPUs, they need to secure the memory, and they need to secure, of course, the storage side on the SSD and the HDD side. And so they really need to plan many, many years ahead. And they are doing that. And again, we have, with our deep customer engagements, we have earned our seat at the table. We do get insights, and we are able to challenge them and ask them to explain. And that's why they want to secure the supply for up to five years out, right? Because they have this all planned out. As I said before, data is still somewhat different than compute because data keeps compounding, right? When you have compute power installed, every time you use your compute for three or five or 10 seconds, you can recycle it and reuse it. But every time you use it, you spit out data that needs to be stored, and that typically gets stored forever.

Maybe you can switch a little bit to talking about margins, Chris. I mean, incremental margins, 70% plus, I think you guys have talked about. And on top of that, you have operating leverage as well. So just help investors understand, like, you know, margin expansion, sort of what you're thinking about over the next several years? Is there some theoretical limit there that investors should keep in mind, clearly, as supply continues to undershift demand here?

Yeah, no, we've done a great job at improving the profitability. Again, the name of the game is move to higher capacity drives. You move to higher capacity drives, you add more value to your customers. That's reflected in a better price per terabyte. At the same time, higher capacity drives also lower your cost per terabyte. And so the result of that, the gross margins have continued to increase. And we're now in the mid-50s with operating margins now in the mid-40s. And so this is a very highly profitable business. And I get the question a lot, is there a ceiling to the gross margin? This is like a magical number where gross margins could not get over. I don't see it. Again, we need to continue to execute, continue to drive the technology and the product, move to higher capacity drives, and continue to add more value, which will also continue to lower the cost. So I think we are very well positioned. We are obviously very thoughtful in terms of supply. We want to make sure that we fulfill the needs of our customers, right, with the strong exabyte demand growth. But again, as we execute on our technology and product roadmaps and introduce the 40s and the 44s and the 50 and the 50 plus and eventually down the road, the 70s and eventually the 100 plus terabyte drives, we will be able to continue to grow the exabyte supply somewhat in line with the exabyte demand growth that we see as well.

Okay. And then as you're talking about transitions towards these higher capacity drives, 40, 44, 15, you know, how should we think about these cost per terabyte reductions? I think historically was around 10% or so roughly in terms of cost per terabyte. As you're transitioning towards these higher capacity drives, you have SMR, ultra SMR as well on that. How should we think about the cost per terabyte reductions?

Yeah. So in the long term, we do believe that we will be able to reduce cost per terabyte on or about 10% year over a year, right? That's very clear, and we've demonstrated that in the past as well. Now, you need to be careful. That doesn't mean each and every year or each and every quarter it will be down 10% year over year. Again, the biggest driver for cost per terabyte to be down is move to higher capacity drives. As we explained before, currently we are somewhat in between two product transitions, and so when you're in between two product transitions, that slows down temporarily a little bit the cost per terabyte reductions that you see. In addition to that, I mean, we do see input cost increases, right? As you probably know, inside the hard disk drive, we use a little bit of DRAM and we use a little bit of NAND, and that has become a lot more expensive. And across the board, across the board, the supply in, you do see a little bit of input cost increases. And so that's, again, not each and every quarter you will see the 10% cost down per terabyte. And currently, we are facing a little bit of headwinds. But then again, in the long term, mid to long term, as we move to those higher capacity drives, as we continue to execute on our value engineering initiatives, taking out cost on the drive as well, I have strong conviction that over time, cost will be down on about 10% year over year on a cost per terabyte. And even in the near term, given where the pricing dynamics are and where the cost dynamics are, gross margin will continue to increase at a pretty good space.

All right, great. And then just, you know, you do have, even though your CapEx is very small, as a percentage of your revenues. You are still investing. What are some of the areas that you need to invest in, especially as you're going towards the 40, the higher capacity drives? Maybe they have more heads or platters in there as well. Just help us understand the investments that you're making right now. How are they in line with the technology roadmaps that you have?

Yeah, so our long-term CapEx forecast is in the range of 4% to 6% to revenue. Now, again, that doesn't mean each and every year it's going to be within that range. Actually, the last couple of years, we've been below that range. I believe the next couple of years, we might be actually slightly above that range. But when you look at it over five-year periods, it should be in or about that 4% to 6% CAPEX to revenue. And so where do we spend the CAPEX? Well, most of the CAPEX spending goes to head and media as well as automation. All right. And why do we have to continue to invest in head and media? Well, as we execute on our technology and product roadmap, right, and as we move to those higher capacity drives, how do we get to higher capacity drives? There's two factors. The most important one is aerial density, right? Get to 3 terabyte or 4 terabyte or 5 terabyte. Eventually, way down the road, 10 terabyte per platter, right? In order to do that, you need better head and media, right? And so we need to continue to invest in the head and media. Now, secondly, we also, the way we get to higher capacity drives is to add more platters in the box without changing the form factor of the box. And so as you add more platters in the box, you also have to make sure you have more capacity for media and heads as well. Media, by the way, for us is two sides. We do our own substrate and then turning substrate into media, into the magnetic platters as well. And so there's no hesitation there. We will make the necessary investments in there. And then, of course, we also focus on automation. We are big believers in AI. We use a lot of AI inside our factories as well, but that also requires a lot of automation. All of that translates into better yield, better productivity, more uptime of the equipment. that actually enables us to produce a little bit more units each and every quarter without actually having to spend major capex in expanding the unit capacity. We are able to produce a little bit more units just by investing in automation and productivity inside our manufacturing sites, which, again, all helps us to further drive down the cost per terabyte over time as well.

Okay. And then just, you know, all of that comes back down to great free cash flow generation. And you guys have been, you know, great at that. There's a net cash balance sheet right now. You've been talking about an optimal, you know, you've been generating a lot of free cash flow, returning that to shareholders. Just help us understand, you know, what is that optimal capital structure for West Indige?

Yeah, first of all, I mean, the free cash flow is very strong. Our target free cash flow margin is plus 30%. We've already a couple quarters operating at that level. Now, there again, each and every quarter might be a little bit up and down, depending on how much capex and what's going on in the business as well. But we have a business model that throws off a lot of cash. That's one. And second, the balance sheet is in really good shape right now. We've completed the monetization of the SanDisk shares. We've cleaned up most of the debt on the balance sheet. As you've seen from some of the filings that we've done, we're still working on the convertible debt and cleaning that further up. But we are already in a positive net cash position right now. And so there is no hesitation. All the remaining accessible free cash flow is being used to return back to the shareholder. And we do that through a combination of our dividend program and share buyback program. The vast majority of the cash goes to the share buyback program. But we are, of course, fully committed to our dividend program. we've already increased the dividend a couple times and will continue to do so. And so when you put us all together, I think we have a very shareholder-friendly capital return policy in place that on top of the strong revenue growth for many years based on long-term demand visibility, the strong gross and operating margins improvements that all translate to very strong free cash flow as well as strong earnings per share growth that's being further accelerated with our shareholder-friendly capital return policy. I think that's a great setup.

That's a great reason to own West Indige. Yes. Thank you very much. That wraps up the call.