Western Digital Corp (WDC) June 2, 2026 Conference Transcript

Morning, everyone. Welcome to the first day of the BFA Global Tech Conference. Delighted you could all make it, see a lot of familiar faces here. Welcome again. I appreciate you all joining us today. I'm Wamsi Mohan, and I cover IT hardware and supply chain for the bank. Today, I'm delighted to welcome WD CFO Chris Senesal. We also have the WDIR team. We have Umbrish and Amitesh sitting back here as well if you have follow-up questions after the session's done. And Pris, glad you could join us. I know you have a little bit of a quick spiel on your disclaimer to go through first, and then we'll kick it off.

Yeah, good morning, Wamzy, and thanks for hosting us here at your conference. And before we start, I just want to remind everybody that today I will be making some forward-looking statements based on my current assumptions and expectations, including related to our product portfolio, your business plans, performance, and future financial results. These forward-looking statements are subject to risk and uncertainties, so please go look to our SEC filings, our Form 10-K, and that provides more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making some reference to non-GAAP financial measures, so please go to our website where you can find a reconciliation between GAAP and non-GAAP. All right. Let's dive into it.

Right.

That was read quickly, so I appreciate that.

Well, Chris, it's been a phenomenal year for you guys. And I would say that the market is starting to look at HDDs somewhat differently. You're seeing that in your results. You're seeing that in the numbers. The question that we generally get is sustainability of this. And so maybe to kick it off, right, I think for baseline HDD exabyte growth of 25%, you know, it can be a little bit higher, lower, somewhere in that range. But when you think about that growth rate at these kind of levels where now we're starting to ship, you know, materially more exabytes, I mean, we're talking about a one and a half zettabytes going to closer to two zettabytes, which is just an incredible amount of storage. What are some of the underpinnings that you're looking at that give you confidence around the fundamental premise of this growth in data?

Yeah, no, it's a great time to be at WD and be part of the storage environment. That's part of the bigger AI data center build out. And let's just go back a little bit. In February of 2025, just on or about the time when the company separated their flash business and became a strategically focused hardest drive company, the company did an analyst day. And at that time, we were expecting the exabyte growth to be mid-teams, and that was mostly driven by the cloud, right? The cloud, which is 8 billion people taking pictures, taking video, uploading that into the cloud, multiplying that through social media, as well as every company on the planet that stores all their data more and more into the cloud. We also indicated at that time that there was a possibility for stronger growth if and when AI kicks in. And we didn't have really good visibility into that. But a lot of things has happened since then. First of all, we've created a lot better visibility by deeper customer engagements, right? Having deep ongoing conversations with all our customers, mostly the hyperscalers, that provided a lot better visibility to us also longer term, multi, multi years out. And as a result of that, in February of 26, at our Innovation Day, we've indicated that we think Exabyte growth is going to be in the mid-20s, call it on or about 25% CAGR for the next three to five years. Although, since then, we had further discussions with our customers, and at our last earnings call, we've now indicated that we believe Exabyte growth could be well above 25% CAGR for the next three to five years. And so, what is that common word? Well, first of all, the cloud continues to be a strong growth driver, just a traditional cloud. But in addition, yes, we have seen AI kicking in, and AI kicking in in multiple ways. First of all, it started by training, and vast amounts of data lakes were created to support the training of the multi-model large language models, right? I say multi-model because it was not just only text-based, but also pictures, still pictures and video. And so massive amounts of data was being stored to create those large language models. By the way, that is not over, right? The hyperscalers continue to train, retrain, relearn, create new data sets to create the next generation of large language models. But we've also started moving into inferencing. And for us in the beginning, it wasn't clear what is inferencing going to do for us. But now, as we see more and more inferencing, probably two-thirds of the compute power that's being installed is being used today for inferencing. We see a huge demand for data storage because all the data that's being generated while doing inferencing and the output of it with much of the logic, how they got to the output is all being stored. It's being stored. And that's the case for simple chat box activity, but also more and more agentic AI, where you have a lot more complex inferencing interactions, a lot more rich output, and all of that is getting stored. That is not being stored, it's being fed back into the models for retraining and relearning as well. And then last but not least, and that's just the beginning, it's physical AI. Physically, I think about autonomous cars, robotics, all the way to humanoids. What does those devices have in common? They have multiple cameras on it, and they constantly shoot video. All that video footage is being stored for training and upgrading and learning of the algorithms. There is actually not enough data that's being or video footage that's being captured so that now those companies use AI to create synthetic data to feed into their learning algorithms. And so the amount of data just keeps keeps growing exponentially. And again, as we talk to our customers, we get more and more conviction about the plus 25 percent exabyte growth for the next three to five years.

Yeah, no, a lot of incredible drivers of data growth over here. So maybe just to, you know, you mentioned sort of the visibility that you're getting from your customers. Can you talk a little bit about how is this different from what you've seen in the past in terms of visibility? How do we ensure that we're not getting ahead of ourselves in some way that, indeed, we are shipping to demand and not sort of shipping in excess of demand anywhere? Because that's generally how these cycles tend to tend to get broken in some ways. And not that there are any signs of that at the moment. But can you just talk about visibility, the type of contract structures, the things that you're looking at to ensure that, you know, we're shipping sort of maybe even below demand levels, probably. But like if you can maybe elaborate on that.

Yeah. So first of all, I mean, today, our hardest drive business is totally different than compared what it was three or five or 10 years ago and the multiple cycles that we have gone through. I mean, it's not that long ago, three, five years ago, more than 50% of our business was still consumer and client, PC. And fast forward to today, 90% of our business is with the cloud, with the hyperscalers. And so that's a different business. That's a business where it's almost like a plant economy. Those guys, they think three, five, 10 years out and how much data centers, gigawatt compute power, but also exabyte or zettabytes of storage they have to build over the next three, five, 10 years. So it's really a lot longer visibility, a lot more planned in advance, which takes out somewhat of the cyclicality. And so that is a big change. Again, like 90% of our revenue tied to hyperscalers. With those hyperscalers, they are, again, they think ahead a long time. And it's actually the customers that came to us who wanted to secure the supply. We were not the suppliers that were pushing long-term agreements onto our customers. It was a collaboration, customers, again, who see that the demand is growing extremely strong. The supply is there, but it's tight. It's a very tight environment. And so customers wanted to secure supply, but in a collaborative way, right? So for them, it's important that they provide the visibility about the data centers they build, about their technology and product needs that they have. And we did the same thing. We shared our capacity expansion plans, which we can talk more about that later. It's based on technology and product roadmap, right? And so it's a very collaborative environment where you create a lot more visibility multiple years out. But I'm not nervous about overbuilding or inventory builds. I mean, everything what we ship today is getting deployed right away. And I think there's multiple industry reports out there that indicate that demand is, at least today, is bigger than supply. supply, and even in the next couple of years, many industry analysts expect that demand supply will continue to be very tight, again, part because the demand growth is so strong.

So maybe to touch on that a little bit, right, you mentioned sort of this multi-year visibility. These are, you know, customers who are planning out well in advance. Can you talk a little bit more about the specifics around that? Like, for instance, if you have a hyperscale customer, do they talk about, you know, in the next one year, we want 100 exabytes and the next following year, we want 100 exabytes. As you think about the planning for that, what is the variation or variability around these demand levels that you and your customers kind of talk about on average? And then what about pricing? So those are obviously the two big variables that, as you're managing the business, you're looking at how many exabytes and what you can charge for that. These long-term agreements that you have, how does that play out across your entire set of customers?

So, I mean, today there is, in terms of variability, every time we talk to them, they seem to be asking for more. So that's kind of the variability we see today. But let's, I mean, we, again, we changed our business model drastically. Again, if you look at it three, five years ago, I mean, we were getting orders for shipment within current quarter, right? That is no longer the case. We've educated our customer base that it takes 52 weeks to end-to-end to manufacture a hard disk drive. it takes nine months to produce the wafers that go into the heads and then three months to put everything into the box and create a hard disk drive so it's it's end to end it's it's 12 months and so our customers realize that and and now most of our larger hyperscalers and larger customers they place their orders 52 weeks in advance right and so we have pretty good visibility for the next 12 months or so. Now, again, some of those customers, they wanted to secure supply longer out, 27, 28, 29. Some of them would love to sign LTAs all the way till 2032. Now, for us, it's not important necessarily the structure of the agreement. It's all about the visibility, right? We and our customers, we want visibility about the exabytes multiple years out. We also want to have some visibility about the pricing and the pricing environment. Now, again, it's slightly different customer to customer, and there is some variability there. Again, the most important thing for me for the LTAs is the mutual increased visibility, predictability of the business.

Yeah. So as you think about, I mean, we get this question often around pricing, right? So if really demand is so much in excess of supply, then why is it that pricing is, and pricing has been very strong. I mean, relative to history, you know, we've seen dollars per terabyte decline 15 percent, 10 percent. Now, you know, for the rest of the year, it's probably going to be a high single to like maybe potentially higher than that. So we're entering a new phase of pricing. But when you look at other areas within the industry that have kind of become some kind of some type of bottleneck for whether it's NAND or DRAM, You know, your pricing is going up, you know, 100% quarter on quarter. Optical, like, pricing is going up a lot. So it feels like pricing potentially has the potential to go up a lot. So how do you manage that balance of visibility versus pricing and being able to capture some of the upside, which you are, but is there room to do more?

And so we definitely, as WD, like a strategically focused hard disk drive company, we play it differently than what you see in the memory where you have multiple participants that sell into multiple end markets and where you actually do have some spot pricing. And demand and supply is really dictating what the price are and prices go up and prices go down all the time. That's not how we play it as WD and the hardest drive business. We really want to create long-term value for our customers, for ourselves, and our shareholders. And that means being very thoughtful in the short, medium, and long term. And our pricing, I would really say, is value-based. The more value we provide to our customers, the more we can charge to our customers because the more value it creates for our customers. And we do that, again, based on a technology and product transition, right? As we move to higher capacity drives and or higher performance drives, that creates more value for our customers. And customers are willing to pay for more value, right? We actually can charge a little bit more on a price per terabyte and still increase better total cost of ownership for our customers, right? And so that's what we have been doing. And you look at in February of 2026, I indicated that I expect price on a price per terabyte to be mid to high single digits increase year over year for all four quarters. We announced our March results and ASP per terabyte was up 9% on a year over year basis on a price per terabyte basis. So mid to high, we're definitely at the high end. And so that really indicates that, yes, the environment is very strong. And we see it continue to be strong for multiple years, again, based on the fact that we have a technology and product roadmap that will continue to deliver more value over time as we move to higher capacity and higher performance drives.

Okay. One more question on pricing, which is when you think about, you know, the 90% of the bits that are going into the data center, there's probably 70% of that that's hyperscaler and then 30% of that that's enterprise centric. These long-term agreements that you're striking are generally with the hyperscaler capacities. The enterprise, you have more discretion in pricing where the demand could be up or down a little bit more cyclical relative to the hyperscalers, but then pricing could also have more upside. Is that the right way to think of it?

Yeah, absolutely. I mean, we have been raising prices as well in our consumer and client business, and we have been raising prices across the board. Again, as we provide more value to all those customers. But in certain areas, think about consumer and client, the ASP increases actually were above the company average. So, yes, there's definitely opportunities there. And we're constantly testing the market and see what value can we extract for the value that we provide.

Yeah. I mean, you're in a completely different regime when you look at gross margins, right? Like in the sense of putting a historical lens on it seems absurd at this point because historically the targets were in the low 30s and you're at the 50% gross margin levels. Incremental margins are even more impressive. Incremental gross margins can be 70% to 100% range. So, what is it about your roadmap that gives you confidence and comfort around very strong, continued both gross margins and incremental gross margins?

Yeah, gross margins. I mean, last quarter we entered the new zip code, starting with a five.

Yes, congratulations.

Which is great. But again, to me, it starts with our technology and product roadmap. As we move to higher capacity drives and work on performance improvements, but especially move to higher capacity drives, that provides more value for our customers. And as we provide more value for our customers, that translate in a better price per terabyte. And that, again, despite a higher price per terabyte, you still, for our customers, creates more value. At the same time, moving to higher capacity drives lowers the cost per terabyte. Because it doesn't cost that much more to produce a 40 terabyte drive versus a 32 terabyte drive, right? It's all by increasing the aerial density per platter that gets you to the higher capacity drives. And so that results in a lower cost per terabyte. And we have a roadmap in front of us for many years. I mean, as you know, today, the highest capacity we ship is 32 terabytes, but we are qualifying our next generation EPMR at 40 terabyte, as well, in parallel, we're qualifying our first generation Hammer at 44 terabyte. But we have a roadmap to drive that to 50, to 60, to 70, to 100, 200 plus terabyte, and not too far distance, right? And just a combination of that, again, will provide more value to our customers, allow us to increase price per terabyte while at the same time reduce cost per terabyte. And that results in those, yeah, very nice incremental gross margins. The last couple of quarters, to your point, incremental gross margins was in the 70, 75 percent range. That's how we have moved the overall gross margins now in the low 50s. But I think for many, many years, there is further improvement possible there.

Yeah, that's definitely exciting. Maybe just to talk a little bit about the technology end of things, right? You mentioned aerial density increases, effectively our water driving capacity increases. So as you think about your roadmap here, you kind of have a dual roadmap with having both continued PMR, but also Hammer, which you just spoke about. How do you think about, as you go over the next two, three years, the mix shifting between these? Would you be standardizing on one over time? What does that time frame look like?

And so, I mean, customers don't really, let's start with that, right? Customers don't really care what the recording technology is. They don't care if it's EPMR or Hammer or CMR or Ultra SMR, the two flavors of EPMR and the two flavors of Hammer. They want reliable, scalable, high-performance exabytes of storage, right? And so that's the most important thing for our customers. But we, again, we have an industry-leading technology roadmap, right? And we are, again, today we ship in 32 terabytes. We are in qualification with EPMR with three customers. that will ramp in the second half of calendar year 26 in a pretty steep ramp because, again, EPMR is a known technology. Our customers have 10 years of experience with that technology. It comes in a CMR and an ultra-SMR version. And so we and our customers can actually scale that very quickly. And again, that comes all the way up to 40 terabytes. In parallel, we have been working for many years on our hammer technology, great progress being made. We're in qualification with four customers right now, and we intend to ramp in the first half of calendar year 27, initially coming at up to 44 terabyte hammer drives. We still believe that we can continue to drive further capacity improvements on EPMR, 50, maybe 60, but probably that's where EPMR recording technology will, it's going to be hard to do more than that. I mean, you never know engineers. We have a lot of smart engineers. They always try to find more, but that's kind of like the current understanding. And that's why we need Hammer, right? Hammer for us is the path not only to get to 50, 60, but to get to 70, 100, 100 plus. And it's all, again, driven by aerial density. That's the most important part, right? We want the industry-leading aerial density. Today, we're at 4 terabyte per platter, but we have a path to get that to 5, 6, 7, 10, 10 plus. In addition to that, and that's a little bit unique to WD, We always look at the opportunity as well to add more platters per hard disk drive, right? Because there is economics. If you can get from 10 to 11 platters, which today we are at 11 platters, that gives you an additional cost advantage, right? If you can get it to 12 or 14 or more than 14, there is an additional benefit. But for sure, the most important one is driving that aerial density from the four terabytes we have now to 10 and more than 10 terabytes in the future.

So I know a lot of investors in the room probably thinking about, you know, sustainability from a different standpoint, too, right? The CapEx levels that we're seeing are from hyperscalers or events. I mean, notwithstanding the Google announcement from yesterday, right? Like, so this commitment to go build more, it seems to be extremely strong at the moment. As we think about the next few years, if we enter into a domain where CapEx, let's say, from hyperscaler starts to plateau, how do you think about the business and managing the business in that scenario? And how coupled should we be thinking is your growth to cloud CapEx directly? Because data is different than compute and CapEx intensity could be different in different areas. So how do you think about that? And if it plateaus, then how do you manage that?

Yeah. To me, I mean, there is a certain link, right? The more data centers are being built and the more compute power is being built, that results in more data being generated and the need for more data storage. And so there is somewhat of a link there. But you look at, I mean, the spend on hard disk drives by the hyperscalers is probably on or about, what, 30 billion or so out of their 700 billion of CAPEX. So it's relatively small. Having said that, right, sometimes I worry as well. I mean, are they going to continue to spend six, seven hundred, maybe soon a trillion dollars on mostly compute power and so on? And what will happen if that starts to slow down? Well, again, there is a difference between compute and data storage. Compute power is being reused all the time. I mean, it takes whatever, three seconds to generate a token, you generate the token, the compute power is available again for another six seconds or 10 seconds of compute to generate something. That's not the case with storage, right? Storage keeps compounding. Every time you generate a token and you generate an output, that gets stored. And the next six seconds that that compute power is being used to generate something, that gets stored. And so every time you use compute power, you get more and more storage out of it. And so in my mind, even if the CAPEX on compute and memory, which is really closely tied to the compute cycle there, slows down over time, who knows, that does not indicate to me that the spend on storage will slow down. It's decoupled.

And so as you think about managing that, right, there is an underlying assumption of this exabyte growth that sort of is also predicated somewhat loosely maybe on this growth in CapEx. But if, let's say, that we were to see a change in the trajectory in the exabyte growth, what are the levers that you can use? And the visibility, I think, that you're trying to establish in this pricing, sort of more deterministic pricing in some ways, all sort of feeds into that, right? So as you think about a potential maybe deceleration in growth, the ways to manage that, like what are some of the levers sitting in your seat as CFO you would take?

Yeah, so we're definitely a lot more disciplined than compared to three, five, or ten years ago on multiple factors, right? First of all, disciplined from a pricing point of view. Again, we want to get paid based on value, right? It doesn't matter what the cost is of the product. It's based on value. And wherever you are in the cycle, you have to remain very disciplined on pricing. Second, of course, is on capacity. In the past, and other industries have made the mistake, the demand is strong, you go spend a couple billion dollars and add more capacity. We are not doing that. We as WD are not doing that. We are not spending CapEx dollars to support unit capacity expansion. But we do believe that we can support the strong demand growth, which I talked about it earlier, of plus 25% exabyte growth through our technology and product roadmap by moving to higher capacity drives. That will require some capex because we need to invest in our head and media operation, right? Because we might also, if we not only work on aerial density, but on more platters per box, you need more heads and you need better heads and you need different media and better media and maybe more media as well. But we are not spending capex to add unit capacity, right? And so that, I think, sets us up really well. I mean, again, I don't see it slowing down in the next three to five years based on the inputs I get from my customers. But, I mean, every business on the planet is somewhat cyclical, right? Although it's a secular growth business, but it will be somewhat cyclical. If things slow down or speed up, we will adjust that by working on our technology and product roadmap. And we are not adding unit capacity. And that, I think, is a lot different compared to what happened three, five or ten years ago.

Yeah, and I think maybe an analogy, like I often get asked this question about like, well, when the transition happened from 2D to 3D NAND, it brought a lot more bits on there and that kind of killed it. Is Hammer going to bring a ton more capacity online? I guess the difference is you don't need to run at the same utilization rate of your fabs like the NAND does. So you do have more flexibility in managing your output. So maybe to close, and I know there's a lot to talk, but it's already out. We're out of time. Maybe to close, Chris, I would love to get your thoughts from your seat on you're generating tremendous amounts of cash. You've kind of gone through this liquidation of, well, or disposition of your stake in C&D. It's been amazingly great for you guys. So as you think about putting all of those things together, how should investors think about capital return, allocation of capital? What do you think we should look forward to when you're throwing off so much free cash flow?

Yeah, first of all, I mean, the free cash flow is extremely strong. We are approaching 30% free cash flow margin, which is only about $1 billion of cash per quarter. So very strong free cash flow. Second, the balance sheet is clean and strong. At the end of last quarter, we were down to $1.6 billion of debt, and we have $2 billion of cash. So we're actually in a positive net cash position. And at the end of last quarter, I still had 1.7 million of Sandus shares, which we still are working on a monetization as well. So strong cash flow, strong and healthy balance sheet. What do we do with all the free cash flow we generate? We return it back to the shareholder through a combination of our dividend program and share buyback program. The dividend, we've already increased it twice, and we will in the future continue to increase it. But the vast majority of the free cash flow is being returned through the share buyback program. And there, there is no hesitation. I know we have seen a nice run in the stock, but I do intrinsic value. I look at the intrinsic value of the company. I look three, five years out based on my projected revenue growth, my growth and operating margin expansions, my strong free cash flow that will continue to expand. And so there's no hesitation to return all the cash back through share buyback.

Excellent. Unfortunately, we have to end it over there. Chris, thank you so much. Really appreciate you being here. Thanks for having us. Thank you.