Western Digital Corp (WDC) — Q3 2019 Earnings Call Transcript

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

Thank you Peter, and good afternoon everyone. With me today are Mike Cordano, President and Chief Operating Officer, and Mark Long, Chief Financial Officer. Also with us today is Robert Eulau, newly appointed Executive Vice President and Chief Financial Officer, who will formally take over the CFO role from Mark Long on May 9, 2019. Bob has more than 30 years' experience in various financial and operational leadership roles in the technology industry. And I'm pleased to welcome him to the Western Digital Team.

Thanks, Steve. I'm excited to be part of the Western Digital Team, and I look forward to working with all of our investors and analysts in the future.

Turning to our business, market conditions have generally been consistent with our expectations described in January. That being said, we are encouraged to see demand incrementally improve in certain areas such as capacity enterprise and client compute. Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged. Looking at the quarter from a product perspective, sales of hard drives were a bit stronger than expected. Higher demand for capacity enterprise products drove most of the upside, and we saw a nice rebound at higher capacity points. We are experiencing a very smooth product ramp with our 14TB product. Additionally, we also realized a significant expansion of our presence in the mid-range. Demand for flash-based products was slightly better than expectations; however, prices declined more than we anticipated. We are executing well on the plans we laid out last quarter, in terms of enhancing our product lineup, driving technology advancements, rightsizing our factory production levels, and lowering our cost and expense structures. We continue to make excellent progress toward commercializing our internally developed NVMe-based platforms. I'm pleased to report the commencement of initial revenue shipments of our enterprise NVMe SSD, and we are on track to accelerate the volume ramp of this product over the remainder of calendar 2019. We also commenced shipments of our NVMe client SSDs based on 96-layer, 3D flash, BiCS4 technology. The manufacturing ramp and commercialization of BiCS4, which we believe is the industry's lowest cost technology, is progressing well. In the second half of calendar 2019, BiCS4 will become our highest volume runner in terms of flash output. In HDDs, we continue to lead the industry in aerial density through technologies such as SMR and energy-assisted recording and are on track to ship our first energy-assisted capacity enterprise drives later this year. From a flash supply perspective, we are continuing our previously announced wafer output reductions without compromising our cost leadership position. We made substantial progress on realigning our cost and expense structure. The Kuala Lumpur manufacturing facility has largely ceased operations, and combined with other actions we are already realizing incremental cost savings. Our focus is on driving long-term value creation for Western Digital and its stakeholders while prudently navigating near-business conditions. Emerging technologies such as 5G open up new applications and use cases creating immense amounts of data. Further, applications such as artificial intelligence, machine learning, autonomous vehicles, mobility, and IoT will continue to generate growing data volumes that need to be captured, preserved, accessed, and transformed. The relentless pace of innovation bodes well for the long-term growth in the data storage requirements and the resulting opportunities for our company. I want to thank the Western Digital Team and our partners for their ongoing support. I would also like to thank Mark Long for his service to Western Digital. Mark has been instrumental in the transformation of the company, and I wish him the very best in his future endeavors. With that, Mike will now share our business highlights.

Thank you, Steve, and good afternoon. Starting with our highlights for the March quarter, within Data Center Devices and Solutions, our capacity enterprise drive category performed better than expected with demand strengthening as we move through the quarter. For the first half of calendar 2019, we now expect total exabyte shipments in capacity enterprise to be flat to slightly up on a year-over-year basis. Additionally, if current demand trends continue, we see an opportunity for the category to reach 30% year-over-year growth in exabytes for calendar year 2019. This updated industry forecast is a significant upward revision from our prior estimate that was in the low 20% range. Our 14TB capacity enterprise drive qualification and adoption have been seamless, and we are leading the industry in this transition. We are in the midst of a significant ramp of this product in the current quarter. We are on track to introduce our first energy-assisted 16TB CMR and 18TB SMR hard drives later this calendar year. Compared to competitive solutions, our new products will be cost-optimized offerings containing fewer disks and heads, showcasing our significant aerial density advantage. Our refreshed product line in the mid-range capacities also did very well and in total, we have meaningfully increased our presence in the capacity enterprise category. Just a few weeks ago, we were delighted to hear that the Western Digital storage solutions played a key role in unveiling the first-ever image of a supermassive black hole. The event horizon telescope project utilized our high-capacity helium drives, which performed reliably in harsh, high-altitude, and remote environments. This unique event highlights the fundamental role we play in the capture and transformation of data. In enterprise SSDs, NVMe product qualifications at hyperscale customers are progressing to plan. This product, built on our internally developed controller and firmware, complements our other enterprise SSD solutions that are already shipping. Consistent with the platform approach we discussed last quarter, we expect to expand our enterprise SSD product portfolio throughout 2019 in a cost-effective and predictable manner, including a version that incorporates BiCS4. In Client Devices, demand for hard drives for the PC market was slightly better than our expectations. In client SSDs, our exabyte shipments more than doubled from a year-ago quarter driven by strong price elasticity. Additionally, we've begun shipping our mainstream client SSD products based on BiCS4 technology. In client solutions, we are very pleased with the success of our external SSDs sold through retail, and we have continued to expand our presence in this category over the last several quarters. In the March quarter, we also launched the world's fastest 1TB microSD card, establishing an industry-first in the removable products category. Average capacity per unit for flash devices grew 44% year-over-year, reflecting significant price elasticity. From a flash supply perspective, we remain on track to achieve an overall reduction of 10% to 15% of our bit output in calendar year 2019. Despite seasonal softness in the March quarter, our flash inventory level was essentially unchanged from the prior quarter. As we look to our fourth fiscal quarter, we expect to see a full quarter impact from our reduction in wafer starts, which will help to further reduce our flash inventory levels. This combination of stabilized inventory and lower supply growth in flash will allow us to be more selective in how we pursue flash revenue opportunities going forward. In terms of longer-term planning for flash, the construction of the building in Japan is on track, with meaningful output from this fab expected in fiscal 2021. Based on this schedule and the planned slowdown in our capital deployments, we expect lower flash-related capital spending for fiscal 2020. If our 96-layer based products continue as expected, we are pleased to be shipping the industry's leading technology into retail products and client SSDs. In the June quarter, we estimate BiCS4 to represent more than 25% of our total shippable flash bits. We are on track to implement BiCS4 across our portfolio including mobile embedded and enterprise later this calendar year. As Steve mentioned earlier, we have largely stopped production activities at the KL facility. We have also consolidated our head manufacturing operations from Thailand to the Philippines. These continuing actions are allowing us to lower our cost structure and rightsize our manufacturing footprint to meet long-term demand. Turning to our outlook, we see a few additional data points indicating incremental improvement in current demand conditions compared to a very tough fourth calendar quarter. Flash pricing conditions remain challenging, but we anticipate the rate of price decline will moderate as the year progresses due to a slowing rate of industry supply growth, elasticity driving demand for higher capacity points, and seasonal strength in the back half of the calendar year. Based on recent industry announcements, we estimate flash industry supply growth to be slightly more than 30% in calendar 2019, somewhat lower than our prior forecast. To summarize, our current product portfolio is the best in our history. In HDDs, the migration to higher capacity drives plays to our strength in technology and manufacturing. In Flash, our product portfolio in 2019 has been significantly enhanced with the expansion of our NVMe product line for both client and enterprise SSDs, and we continue to have brand leadership in retail. We are taking appropriate steps in a challenging market environment to position ourselves for ongoing success. I will now turn the call over to Mark for the financial discussion.

Thank you, Mike, and good afternoon everyone. Revenue in the March quarter was $3.7 billion, in the middle of our guidance range. Flash revenue was $1.6 billion with a sequential bit decline of 5% and a sequential average selling price per gigabyte decline of 23%. The sequential decline in Flash revenue was primarily due to price, seasonality, and weaker sales of embedded mobile products. Our Drive revenue was $2.1 billion, which was similar to the prior quarter. Non-GAAP gross margin in the quarter was 25.3%, below our guidance of approximately 28% due to a $110 million charge or 300 basis point impact incurred for lower of cost or market LCM reserves. Flash non-GAAP gross margin was 21% due to the rate of price reductions and the aforementioned $110 million LCM charge, primarily related to an inventory write-down of multi-chip packages that contain DRAM. Hard drive gross margin on a non-GAAP basis rose to 29% compared to the prior quarter driven by an increased mix of capacity enterprise drives; excluded from the non-GAAP cost of revenue is a $148 million charge related to the under-utilization of our portion of the flash joint venture funds. Non-GAAP operating expenses were $742 million; lower guidance as a result of better progress towards our expense reduction targets. As a reminder, for non-GAAP cost of goods sold, we expect the full benefit of our $100 million per quarter cost reduction efforts to be reflected by the end of the December quarter of 2019. As for non-GAAP operating expenses, we expect to see the full results of our $100 million per quarter expense reduction efforts to be reflected within the September quarter of 2019. Our non-GAAP tax expense was $49 million, which was higher than estimated due to a quarterly effective tax rate true-up, and the fact that our tax expense is a relatively fixed dollar amount at this profitability level. Non-GAAP EPS was $0.17. The LCM charge impacted and diluted non-GAAP EPS by approximately $0.37. Operating cash flow for the March quarter was $204 million and free cash flow was a negative $110 million, primarily due to lower operating income. In the March quarter, we paid $146 million in dividends to shareholders. At quarter end, we had $3.8 billion in cash, cash equivalents, and available-for-sale securities, and our principal debt outstanding was $10.8 billion. Earlier today, we announced the successful execution of an amendment to the existing financial covenants under our credit agreements. The amendment provides Western Digital with significant additional financial flexibility to navigate market cycles. Turning to inventory, on a dollar basis, hard drive inventory decreased while flash inventory was essentially unchanged from the prior quarter after the impact of the LCM reserves. Looking into the June quarter, we expect both flash and HDD inventory to decline on a sequential basis. I will now provide our guidance for the fourth fiscal quarter of 2019 on a non-GAAP basis. We expect revenue in the range of $3.6 to $3.8 billion, gross margin of approximately 24% to 25%, operating expenses between $720 million and $740 million, interest and other expense of approximately $100 million, tax expense between $20 million and $30 million, diluted shares of approximately $295 million. As a result, we expect non-GAAP earnings per share of $0.10 to $0.30. Finally, for modeling purposes, please note that the September 2019 quarter will have 14 weeks instead of the normal 13 weeks. In closing, before I turn the call to the operator for the Q&A, I would like to thank Steve, Mike, and the entire Western Digital Team for the opportunity to serve as the Company's CFO. It's been a great experience working with all of you. With that, operator, please begin the Q&A session.

Steve or Mark, this amendment to the credit facility is prudent, but would you say this is just preemptive versus your expectations of EBITDA and free cash flow generation over the next few quarters? Has that changed in a material fashion?

Yes. We took the opportunity to amend our credit agreements because the markets were favorable, and this does give us a significant amount of additional flexibility, and we were able to do it with very low cost.

Do you anticipate the EBITDA generation as you consider the upcoming quarters? How would you approach pricing that?

This was not in response to any near-term concerns. This was just a prudent move that gives us good long-term flexibility.

Steve, you mentioned that demand trends have remained largely unchanged. Can you elaborate on what has changed regarding enterprise uptake? What do you think is driving this from a customer base perspective, and could you provide some insights by region as well? Thank you.

Sure. I will have Mike comment on it. I mean, provide a little bit more detail on capacity enterprise, but as I indicated, capacity enterprise was a bit stronger than what we expected, which we were very pleased to see. Client compute, as you will know, PC volumes continued to decline, but they declined at a more moderate rate than what at least we were expecting. One area of a bit of weakness from a demand perspective, which I think is largely known in the investment community is handset volumes were a bit lower than expected, so we did see a little bit of drawdown as a result of that, but Mike can comment a little bit more on the capacity enterprise upside that we saw.

Yes. Wamsi, I think capacity enterprise it was fairly broad-based. At the highest capacity, I think it would be viewed as sort of domestic hyperscale providers. We saw strength of demand both in our 12TB and 14TB products, and then in the mid-range, we saw strength in Asia. So, we saw a fairly broad-based strength across the capacity enterprise gateway.

Thank you for your questions. Firstly, could you clarify how you arrived at the guidance number you've provided, especially regarding gross margin? Considering the positive trend from the closure of the Kuala Lumpur facility and the demand for high-capacity drives, if we assume that hard disk drive gross margin remains relatively stable, it seems that your flash gross margin might be in the range of 17%, 18%, or 19%. Am I interpreting your guidance regarding flash gross margin correctly? Additionally, what assumptions are you making regarding pricing and cost reductions as we approach the June quarter?

I'll provide some overall thoughts, and then either Mike or Mark can give more details. One key point to mention is that in fiscal Q2, our gross margin for the hard drive business fell below our typical expectation of 27%. This quarter, we observed a significant rebound as we started to see some cost improvements and a better mix in capacity enterprise. We anticipate that this trend will continue, allowing us to move back to a more normalized gross margin level in the hard drive sector. However, this also suggests that we foresee a decline in flash gross margins for the current quarter due to ongoing price pressures. As Mike mentioned, while we can't be certain, we expect the decline in prices to stabilize as we progress through the calendar year. It may take some time for prices to reach a more acceptable decline range. I hope this provides some clarity, Aaron, regarding the overall situation.

Yes. The other thing I'll add Aaron is on the flash cost declines. We've kind of talked about being at the low end of long-term range at 15%-ish. So, you'll have to think about it that way on an annualized basis.

I have a quick follow-up. Considering how you view a long-term gross margin as we return to a more normalized trend in the product portfolio, what do you believe is a reasonable expectation for a normalized gross margin in the flash business? Thank you.

Talking about the margin range, I think is...

Yes. I mean, I think on an overall basis we are not changing our long-term model at this point. So, we just need to see the industry work off the inventory and the price declines to moderate as we've talked about and then as flash normalizes and Steve talked about the improvements in the hard drive gross margins through the back half, we should see the kinds of dynamics we talked about at the last Investor Day.

Yes. And to put a finer point on it Aaron, if you just look at our model that's high 30's, low 40's for Flash.

So you think you can get there in the back half of the calendar year?

We're not saying that Aaron.

No. We're talking about the long-term model. You said in the long-term, yes.

Hi, good afternoon everyone. I want to revisit margins for a moment. Your margins suggest that you're operating at a loss, but how much of the margin decline can be attributed to the near-term costs associated with ramping BiCS4 and your NVMe SSD, which may improve as volumes increase for the remainder of 2019? Additionally, you mentioned that the total underutilization cost would be between $250 million and $300 million, and it seems there's still about $75 million remaining. Can you remind us how much of the $400 million annualized benefit in COGS from your restructuring efforts will be realized in June? Considering both of these points, how should we qualitatively assess the margin trajectory for the second half? Thank you.

I'll talk to sort of flash cost downs and given the ramp of BiCS4, I just talked about the annualized rate that is more back half loaded, so we see a shallower cost decline in the first half more to come in the back half and Mark you want to.

Well, I think you are exactly right in terms of our underutilization charge with the majority of it occurring in the prior quarter and through this quarter. So, we haven't given a breakdown in terms of the amount of our Kuala Lumpur shutdown benefit that we're receiving in Q4. But as we said, we will be getting that full $400 million a year of cost benefit exiting calendar Q4 this year.

Yes. Our improved inventory position allows us to be more selective in navigating the market. When we talk about selectivity, we mean focusing on the quality of the business, particularly profitability as a key measure.

Yes. Let me provide some additional commentary that is largely consistent with what I discussed during the last earnings call. As we move through the latter part of the calendar year, we expect our top line to improve significantly due to increased demand, enhanced capacity, and seasonal demand growth for both flash and hard drives. This will obviously lead to higher revenue. Additionally, we will benefit from cost and expense reductions, particularly in the September and December quarters, which will help lift our earnings during the second half of the year. The key question is about our margin levels. I want to clarify that we anticipate our hard drive margins will improve as we progress through the year. Flash remains unpredictable; I mentioned this in the last call and I want to reiterate it. We are planning for continued pressure on our flash gross margins as we advance through the year. This cautious approach is primarily due to our desire to prepare for the worst while hoping for the best. We cannot predict exactly what will happen with flash gross margins since that is influenced by factors beyond our control, like our competitors' actions, production levels, and demand conditions. Therefore, we feel it is safest to assume our flash gross margins will continue to experience some pressure throughout the year, although potentially at a moderating pricing level as we approach the latter half of the year.

If I may, just ask more of a question on the hard drive business. Steve or Mike, would you endorse that part of the reason why nearline demand has been soft at least for the last two quarters, maybe due to a push out in storage raises until these higher capacity near-line drives progress through qualification? And secondarily, I'd appreciate hearing from your thoughts on how you view the competitive landscape changing if at all from your line draws as the industry providers offer slightly different near-line technologies in the back half? Thank you.

So, I think the principle driver of growth was actually broader inventory levels within the broad-scale hyperscale levels. So, yes I think there is some modest waiting for the next capacity point that played, let's call it, a secondary role, but the primary role for calendar Q4 and the drop we saw was really inventory levels in them and our customers making an inventory correction. Relative to sort of competitiveness in the back half of the year, I talked about that. I think there are multiple approaches, we're quite comfortable with our approach, it gets there at the next viable capacity point with less heads and disks, which will give us a cost advantage vis-à-vis our competition. So, that's the application of our leading technology in a way that gives us an advantage though, from our standpoint we've talked about energy assist being important to us. As a technology enabler, we continue to be confident that it will give us the benefits we expect and we'll see that in the next generation of products.

Good afternoon and thanks for taking the questions. The first question was on the NAND underutilization expenses and if somebody can be a bit more explicit about whether or not you still expect to be taking underutilization in the second half of the calendar year? And then related to that topic, my second question was asking both now, whatever point those underutilization expenses do stop getting excluded. Where do you think you'll fall within that 15% to 25% annual cost per bit target that the company has for NAND cost downs? Thank you.

In terms of the underutilization charge, the majority will be accounted for in the first half of this calendar year, with only a small portion remaining for the latter half. That represents the full extent of our current plan regarding this matter.

Yes. Relative to any changes as you would expect, we'll continue to monitor market conditions. But at this point, no additional plans beyond what we've already announced. And then relative to sort of the cost implication once, of course we're through that period that's reflected in our estimate of around 15% annualized cost down.

And our next question comes from the line of Mehdi Hosseini with SIG.

Two follow-ups; Mike, you said near line exabyte growth of 30% 19 versus 18. Is that for Western Digital or is that the industry guide?

Yes. Mehdi, we think that's an industry opportunity and obviously we would hope to do a bit better than that.

And then, in regards to the NAND bit shipment growth of low 30%. What is your expectation for NAND production bit growth?

That is production bit growth, not demand.

I see.

Supply growth.

And then, given your comment on inventory declining for both NAND and HDD into the June quarter, should we assume that days of inventory has finally peaked and is going to decline, looking-forward?

We would expect days of inventory to be roughly in the same range for Q4 and then to decline and begin to normalize in the backup.

I had one on capacity enterprise. You saw better demand this quarter. Have you seen any indications that the demand for second half could be stronger than what you initially thought, or do you see a risk that we can run into a similar situation as last year, where the first half is stronger, and then that can have could be softer?

No. Our view and the reason we commented on our expectations for calendar year growth is that we'll see some additional strength in the first half more, and we believe the second half will remain strong, so that drove our update in our forecast from the low 20's year-on-year total bit growth to approximately 30% year-on-year bit growth.

I guess I was hoping first question to focus on gross margins. I believe before you were thinking that you would take the cash charges most heavily in the March quarter and to be more bell-shaped and now it appears like June quarter based on your guide is similar at a roughly $185 million, and you're now taking further utilization plan charges into the back half of '19. So could you share with us.

So let's clarify that the largest portion of our underutilization charge occurred in the March quarter. We expect between $55 million and $75 million in the June quarter, which will account for almost all of it, with just a very small amount extending beyond the June quarter.

Yes. C.J. just To reiterate, we have not modified our production plan at all from the original announcement; so hence what Mark just said.

And I guess as you think about the adjustment on the leverage ratio amendment, that was really all about the higher rate that goes into January 20 right, so you still have the 4.25 times into September, December that's unchanged. So, curious as you look at adjusted EBITDA on an LTM basis and as you project into the back half, is that something that you're going to need to negotiate in your view today?

No. So that was the benefit of the amendment. The amendment really had two great features. One is what you talked about, which is we pushout step down for our total leverage maintenance covenant from 4.25 times to 4 times. We push out that step down by one year. So, it just provides that additional headroom. Now, the second important piece is, we changed the definition of adjusted EBITDA to increase adjusted EBITDA by the amount of the depreciation for our portion of the JV; CapEx basically that is.

That's billed to us in effect by TMC.

Exactly. But it was previously not included in the definition of adjusted EBITDA. So that provided us a significant benefit in the calculation of that leverage ratio.

If market conditions warranted basically how much work do you have to further reduce expenses beyond the $800 million annual reduction that you're targeting?

We haven't quantified that externally. One thing I will add is that when we examine our expense structure, we aim to avoid disrupting our future product roadmap. If market conditions become more challenging, which is difficult to assess without understanding the reasons behind the change, we would need to reconsider our product roadmap. Currently, we don't believe this is necessary based on our market and financial expectations, but it would be the next area we evaluate concerning expenses. As I mentioned, we have not identified any potential opportunities related to this.

And any commentary that you could provide in terms of NAND flash inventory that you see in the channel? So we know it's flat on your book, but what's your view in terms of what's sitting out there in the channel?

Well, I think we've seen the channel is getting in better shape. I think it's a little bit of a different story with certain manufacturers and there's a different story with each of them obviously, but our case has been that we wanted to get ourselves in a better position relative to flash inventory. We feel comfortable about the actions we took. We think it's put us in that position. So, we see things sort of trending down from here.

Last quarter, you talked about it previously and now wafer starts will reduce supply by 10% to 15%, which you kind of reiterated today. But then, you also said you will continue to assess the situation, with three more months of data, what are your thoughts today in terms of further lowering production and maybe remind us what portion of your best supply is in tuning in right now? Thanks.

So at this point, we don't see any need to reduce our output schedule. We talked about the industry supply growth rate being around 30%, we're at or slightly below that. We're comfortable with that position relative to our production plan given our current view of market outlook. We have not commented on the percentage of output on 2D planar. I'll give you this color, the remaining percentage of output tends to be in long life cycle businesses that have quite good economics. So, we're very comfortable with the remaining percentage of our output that's on 2D planar.

Maybe just to follow on that; I think you mentioned CapEx will be down in fiscal 2020. Are there any changes for this calendar year or maybe mixing calendar year versus fiscal year there?

So I think just to dimension it, we'd previously said for fiscal '19, our expectation for cash CapEx would be in the $1.5 billion to $1.9 billion range. And we believe will come in at the low end around $1.5 billion for fiscal '19. For fiscal '20, as Mike indicated, we expect our cash CapEx to be lower, and it should be in the $1 billion range at this point.

I wonder about your comments on utilization. You mentioned that utilization charges are decreasing now. Does that imply that supply will return in the third quarter, or should we anticipate a significant increase in production in the third calendar quarter?

Yes. I think the way you should think about it is our industry growth rate for the year will be at or slightly below the 30% we talked about. We chose to implement it in such a way; we took pressure off of our inventory position in the first half of the year, which is seasonally slow. So, I think generally speaking, we think we're well aligned with our view of market demand, and our inventory position is in a reasonably good position as we sort of go through this quarter into the back half of the year.

Yes. Let me add to that because when we announced the cuts in wafer starts, we had a straightforward goal, which was to reduce our inventory levels to a range we felt comfortable with. With the planned cuts we've made, we are progressing toward that goal. Our intent was not to completely eliminate all inventory within the system, as that would require additional actions. We are in a position where we believe we should be, and we've been discussing this as we approached the end of the June quarter. So, we are either in that position or getting closer, but I want to ensure everyone understands what we aimed to achieve with the adjustments to our production levels.

Can you discuss the lower cost of market inventory charge? What factors contribute to it triggering a charge, and do you anticipate this happening again in the upcoming quarters? Thank you.

Sure. So, with respect to the driver, it has to do with our multi-chip package product that goes into smartphones, and as we said, these carry the DRAM that we purchase, and it turned out one of the reasons it was a higher charge than you might have expected was just a function of the amount of DRAM we had in inventory. As it relates to future quarters, this is something we evaluate every quarter, and this one just was higher than much higher than typical. So we spend time explaining that.

All right. So thank you all for joining us, and we look forward to continuing our dialogue. Have a great rest of the day.