Western Digital Corp (WDC) — Q4 2023 Earnings Call Transcript

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, including expectations for our product portfolio, spending and cost reductions, business plans and performance, market trends, and financial results based on management's current assumptions and expectations, and as such, it does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and/or our other filings 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'll now turn the call over to David for introductory remarks.

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our fourth quarter and fiscal year 2023 results. Western Digital's fiscal fourth quarter revenue exceeded expectations as our access to broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end-markets, reaffirming our strength in a challenging market environment. We reported fourth quarter revenue of $2.7 billion and non-GAAP gross margin of 3.9%. Non-GAAP loss per share was $1.98. Before diving into the specifics of the quarter and the full fiscal year, I would like to take a moment to reflect on our accomplishments in fiscal year 2023. Importantly, we continued to optimize our operations and successfully executed our innovative product roadmap, priming ourselves for greater profitability when demand rebounds across hard drives and flash. Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility. In HDD, we have successfully qualified our latest family of capacity enterprise hard drives with all major customers and are shipping our 26-terabyte Ultra SMR drive in high volume. In Flash, we pioneered the use of wafer bonding and advanced 3D NAND manufacturing and introduced the groundbreaking technology in BiCS8, which sets the foundation for future 3D NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce quarterly operating expenses while continuing to deliver innovative products and technologies that address customers’ growing storage needs. Further, we have reduced our cash capital expenditure run rate by over 50% in the fiscal second half and consolidated our hard drive manufacturing footprint. These efforts enabled Western Digital to preserve capital while effectively executing on product strategies and aligning our supply with the post-pandemic demand environment. Notably, we reduced our inventory by nearly $300 million sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro dynamics. In summary, we continue to proactively take action to bolster our agility, enhance our liquidity position, optimize our inventory levels across HDD and Flash, and strengthen our position as an industry and market leader. We exited fiscal year 2023 well-positioned to capitalize on improving market conditions and capture long-term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing. We continue to make progress on this process and we'll provide updates as appropriate. Turning to the fiscal fourth quarter, revenue in both client and consumer end-markets returned to sequential growth led by normalized end-market demand and higher average capacity per unit in Flash. In consumer, retail flash exceeded our expectations across all major product categories. We saw similar results in client with upside in both HDD and Flash across almost all major product categories, including client SSD, gaming console, embedded flash, and client hard drives. In cloud, demand for both hard drive and flash products remained subdued. I'll now turn to a business update, starting with HDD. In the fiscal fourth quarter, ongoing cloud weakness drove the overall decline in HDD revenue. However, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end of the fiscal fourth quarter, we had successfully qualified all variants of our 22 terabyte CMR and 26 terabyte Ultra SMR hard drive platforms with all major cloud customers, setting the stage to improve shipments and profitability. In addition, we are about to begin product sampling of our 28 terabyte Ultra SMR drive. This cutting-edge product is built upon the success of our ePMR and Ultra SMR technologies with features and reliability trusted by our customers worldwide. We are staging this product for quick qualification and ramp as demand improves. Turning to Flash, revenue increased sequentially led by growth in both client and consumer flash bit shipments, which exceeded our expectations with total bit shipments returning to year-over-year growth. The stronger-than-expected bit growth is attributable to normalizing PC and consumer demand, as well as content growth. Average capacity per consumer and client SSD increased over 40% and 20% year-over-year, respectively. Moving to technology developments, we continue to aggressively productize BiCS8 based on a chip-bonded to array architecture. BiCS8 solidifies Western Digital and Kioxia's leadership in cost capital efficiency and I/O performance into the future. Before I turn it over to Wissam, I wanted to share some perspective on our outlook. In HDD, as we look to the fiscal first quarter, we expect overall demand to remain stable. Beyond the fiscal first quarter, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability. In Flash, we are encouraged by several indicators signaling improving market dynamics. Notably, our two largest end markets, client and consumer are returning to growth, inventories are normalizing, content per unit is increasing, and price declines have been moderating.

Thanks, David, and good afternoon, everyone. As David mentioned, fiscal fourth quarter revenue exceeded our expectations. Total revenue for the quarter was $2.7 billion, down 5% sequentially and 41% year-over-year. Non-GAAP loss per share was $1.98. Looking at end markets for the fiscal fourth quarter, cloud represented 37% of total revenue at $1 billion, down 18% sequentially and 53% year-over-year. Sequentially, the decline was primarily due to a decrease in capacity enterprise drive shipments. Nearline bit shipments were 59 exabytes, down 26% sequentially, driven by ongoing weakness at cloud customers. The year-over-year decrease was primarily due to declines in both hard drive and flash product shipments. Client represented 39% of total revenue at $1 billion, up 6% sequentially and down 37% year-over-year. Sequentially, the increase was driven by growth in bit shipments for gaming consoles. The year-over-year decrease was due to declines in flash pricing and lower client SSD and hard drive unit shipments for PC applications. Consumer represented 24% of total revenue at $0.6 billion, up 3% sequentially and down 19% year-over-year. Sequentially, the increase was primarily due to higher retail SSD shipments. The year-over-year decrease was driven by price declines in flash and lower retail hard drive shipments. For the fiscal year, revenue was $12.3 billion, down 34% from fiscal 2022. Non-GAAP gross margin declined 17.2 percentage points to 15.7%, and non-GAAP operating margin decreased 21.8 percentage points to negative 4.8%. Non-GAAP loss per share was $3.59. Looking at end markets for fiscal year 2023, cloud revenue decreased 34% year-over-year, primarily due to reduced shipments of capacity enterprise hard drives and enterprise SSDs. Client revenue decreased 39% year-over-year, primarily due to declines in flash pricing, as well as lower client SSD and hard drive unit shipments for PC applications. Lastly, consumer revenue decreased 26% for the year as growth in retail SSD bit shipments was more than offset by broad-based flash price decline and lower consumer hard drive shipments. Turning now to revenue by segment. In the fiscal fourth quarter, HDD revenue was $1.3 billion, down 13% sequentially and 39% year-over-year. Sequentially, total HDD exabyte shipments decreased 18% and average price per unit decreased 9% to $99. On a year-over-year basis, HDD exabyte shipments decreased 38% and average price per unit decreased 17%. Flash revenue was $1.4 billion, up 5% sequentially and down 43% year-over-year. Sequentially, Flash ASPs decreased 6% on a blended basis and 9% on a like-for-like basis. Flash bit shipments increased 15% sequentially and 7% year-over-year. Moving to costs and expenses. Please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal fourth quarter was 3.9%, down 6.7 percentage points sequentially and 28.4 percentage points year-over-year. This includes $272 million in costs or 10.2 percentage points for manufacturing underutilization, flash inventory write-downs, and other items. HDD gross margin was 20.7%, down 3.6 percentage points sequentially and 7.5 percentage points year-over-year. Sequentially, the decrease was primarily due to lower capacity enterprise volume, as well as higher underutilization-related charges. Underutilization charges were $76 million, or 5.9 percentage points. Flash gross margin was negative 11.9%, down 6.9 percentage points sequentially and 47.8 percentage points year-over-year. Underutilization charges due to the reduced manufacturing volumes were $135 million, and inventory write-downs were $27 million, resulting in an 11.8 percentage point reduction. We continue to tightly manage our operating expenses of $582 million for the quarter, down $20 million sequentially and $178 million year-over-year. Operating loss in the quarter was $478 million, driven mainly by underutilization charges, inventory write-downs, and other items totaling $272 million. Income tax expense was $57 million for fiscal fourth quarter and $237 million for fiscal year 2023. Despite a consolidated loss, we continue to have taxable income in certain geographies resulting in taxes payable in those areas. Fiscal fourth quarter loss per share was $1.98, inclusive of a $15 million dividend associated with the convertible preferred equity. Operating cash flow for the fourth quarter was an outflow of $68 million and free cash flow was an outflow of $219 million. Cash capital expenditures, which include the purchase of property, planning and equipment and activity related to our flash joint ventures on the cash flow statement were $151 million. Gross debt outstanding was $7.1 billion at the end of fiscal fourth quarter. Trailing 12-month adjusted EBITDA at the end of the fourth quarter as defined in our credit agreement was $1.6 billion, resulting in a gross leverage ratio of 4.5 times, compared to 2.8 times in the fiscal third quarter. As a reminder, the credit agreement includes $0.7 billion in depreciation add back associated with the Flash joint ventures. This is not reflected in the cash-flow statement. Please refer to the earnings presentation on the Investor Relations website for further details. During the fiscal fourth quarter, we executed an amendment to our credit agreements. These amendments include modifications to the leverage ratio requirements applicable through the fourth quarter of fiscal year 2025, which provide additional financial flexibility in the near term. We also extended the commitment under the delayed-draw term-loan agreement to August 14th, 2023. Please refer to our earnings presentation for details. At the end of the quarter, total liquidity was $4.9 billion, including cash and cash equivalents of $2 billion, undrawn revolver capacity of $2.25 billion, and an unused delayed-draw term-loan facility of $600 million. Before I cover guidance for the fiscal first quarter, I'll discuss our business outlook. For fiscal first quarter, sequentially, we expect both HDD and Flash revenue to be relatively stable. In the fiscal first quarter, we are continuing to adjust production to better match demand and anticipate underutilization charges to impact both HDD and Flash gross margins along with product mix pressures on Flash ASP. Beyond the fiscal first quarter, we anticipate both HDD and Flash revenue to improve through the remainder of fiscal year 2024, driven by normalizing demand in storage, as well as higher average content per unit in Flash. Gross margin is expected to gradually improve, driven by higher HDD volume and lower underutilization charges in both Flash and HDD. We will continue to tightly manage our cost structure and expenses as we navigate the challenging environment. For fiscal year 2024, we expect capital expenditures to decline significantly. I'll now turn to guidance. For the fiscal first quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $2.55 billion to $2.75 billion. We expect gross margin to be between 2.5% and 4.5%, which includes underutilization charges across Flash and HDD totaling $200 million to $220 million. We expect operating expenses to be between $570 million to $590 million. Interest and other expenses are expected to be approximately $90 million. We expect income tax expense to be between $30 million and $40 million for the fiscal first quarter and $130 million to $170 million for fiscal year 2024. We expect the loss per share of $1.80 to $2.10, assuming approximately 323 million shares outstanding. I'll now turn the call back over to David.

Thanks, Wissam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress and strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater profitability as demand inevitably rebounds across hard drives and flash. As we move forward, we remain confident in our ability to capitalize on emerging opportunities and deliver continued success. Before opening up for Q&A, I would like to take a moment to recognize Siva Sivaram, our esteemed President of Technology and Strategy. Siva will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain. Siva has made significant contributions to Western Digital and SanDisk over the past 10 years and he is a wonderful friend. We wish him all the best going forward. Peter, let's start the Q&A.

Great. Thank you. I wonder if you could talk to NAND in the current quarter looks like the underutilization charges are similar. Does that mean your utilization is unchanged? And I guess it seems like you're able to make some inventory progress. Does that mean that you can at some point have a line-of-sight to bring that back up?

Yes, thank you for the question. In the current quarter, we observed a positive market response in both the consumer and client sectors, with both returning to growth on an exabyte basis. They experienced sequential growth, which provided us with some positive momentum. However, we are still not fully utilizing the fab. I’ll ask Wissam to provide further details on that soon. We plan to continue operating below capacity for a few more quarters, but we are encouraged by the overall market indicators: price declines are easing, our inventory levels are decreasing, bit shipments are increasing, and we expect bit shipments to rise again by double digits next quarter. While we're not yet where we would like to be, the market is stabilizing, and many metrics are trending in the right direction.

Yes, Joe. Regarding underutilization, we observed similar underutilization charges in fiscal Q4 compared to Q3. On the Flash side, we experienced slightly more underutilization in HDD. In our guidance for fiscal Q1, we also anticipated similar levels, estimated in the range of $200 million to $220 million, with about 70% attributed to Flash and 30% to HDD. Looking ahead to fiscal Q2, I expect underutilization levels to remain similar to what we have now.

Great. Thank you. And if I could ask the follow-up. In terms of the uses of cash in the next few quarters, I know you've got the convert that comes due early next year. I think there's still some issues about a potential tax payment. Can you just update us there and sort of do you need to raise money to pay those out?

So with respect to uses of cash, as you noted, we do have the convert that matures in February ‘24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up, and we expect also this payment to be very likely this quarter. But with respect to liquidity, exiting fiscal Q4, we had approximately $4.9 billion of liquidity. And so if you recall, the delayed-draw term loan was put in place in the event we need to address the IRS settlement. So that will be drawn down to take care of the IRS settlement when it happens. And with respect to the convert, I mentioned we'd address it in the coming two quarters.

Great. Thank you very much.

Thanks, Joe.

You're welcome.

Yes. Good afternoon. I guess this question is supply perspective, we haven't seen any realization aggressively as we've seen. So how would you think about the current impact of supply-demand normalization in the next six, nine, 12 months?

Okay. Hey, C.J., it was a bit difficult to hear you, but I think we understood your question about supply-demand normalization. Is that correct in Flash?

Yes. Sorry about that. Yes.

No, that's correct. So, as I mentioned, we observed several market trends this quarter. We experienced sequential bit growth overall, with clients and consumers showing year-over-year exabyte growth. Specifically, consumer SSD content increased by 40%, and client SSDs rose by 20%. Our inventory levels have decreased. In the consumer and client PC markets, we believe we're now shipping to meet demand. For the fiscal year, our bit levels are about flat year-over-year, and we anticipate a low-single-digit decline for the calendar year. The industry may experience a slightly larger decline. We are implementing measures to improve the balance between supply and demand, and we are starting to see progress in our markets. While the cloud market is still a larger story that may take another couple of quarters to play out, we see improvements in the supply-demand balance in our two largest Flash markets.

Thank you. And my second question. You announced, I think there was a hope that maybe there might be some underlying deposits underneath that thing. How should we be thinking about training and hearing about?

Okay. I think that was the strategic review and timing, C.J. So as the process is active, we look forward to talking more about it when we reach a conclusion.

Thank you.

Thank you.

Thank you, everyone. This is Michael speaking on behalf of Aaron. I wanted to ask about your thoughts on the recent increase in AI investment in data centers. How do you think this affects the deployment of Flash compared to HDD capacity, and what implications do you see for the future? Additionally, could you provide an update on your enterprise SSD qualifications? Thank you.

Yes. I've been thinking a lot about generative AI. It's clearly a big topic these days and obviously, a lot of spend going on to build out the infrastructure in the cloud, which I think, quite frankly, is a great thing. The cloud distribution model of new technology is something that has been built out over the last decade, so we all get access to this technology very rapidly. And when I think about this in the storage domain, clearly, the compute infrastructure is being built out now, but what we're all going to be enabled with there are incredible tools to automate data creation at many different levels, whether it's text data, video data. Whatever it happens to be, I think that we're essentially going to really accelerate our ability to create information that needs to be stored. So I see this as kind of a catalyst for just a profound increase in the amount of data creation. I think that once those tools get distributed and we all start using them, that drives incremental growth across SSDs and hard drives. I mean hard drives are the foundational storage in the cloud. It's going to be that way for a very long time. So while Gen AI may have some disruptions on the business in the near term, as the compute infrastructure gets built out, I am very optimistic that this is, as I said, a catalyst for a profound increase in the rate of data creation. So quite excited about that. We don't know exactly how to model that just yet, except that new innovation drives new data creation, which drives the need for storage. So we look forward, as this infrastructure gets built out and rapidly adopted, to the impact it's going to have on our business. Now on enterprise SSD, we still have the qualifications. We've recently qualified BiCS5 in some of these places. That market along with nearline HDD or capacity enterprise HDD is depressed right now or subdued. So we're not seeing a lot of growth in that. But we fully expect that when that market comes back and that part of cloud in structured spending comes back that we'll be in a good position. We're still investing in the products and feel good about the position we have with the major cloud vendors.

I appreciate that. Thank you.

Thank you.

Good afternoon, everyone, and thank you for taking my question. I wanted to focus on the HDD side. There has been a variation in the timing of recovery throughout the industry. Could you provide your latest thoughts on when you believe the cloud segment of your HDD business will recover? You previously mentioned the fourth quarter; has there been any delay in that expectation? Also, could you comment on the overall health of the HDD business, especially considering its decline this quarter? I'm interested in the timing of the recovery and your current observations.

Yes, we expect to see sequential growth in enterprise HDD capacity throughout the fiscal year, with significant visibility into customer recovery starting towards the end of the first quarter. While we are having ongoing discussions with customers, many have been focused on inventory reduction for an extended period, and we are gaining clarity on when that will conclude. However, we anticipate that it will take a couple more quarters before we see full improvement. Next quarter should stabilize, though we expect some mixed impacts. The client side may face additional challenges this quarter, but as we progress through the year, conditions should improve. By early next year, we forecast a more positive outlook.

Helpful. And then also in the HDD business, your competitor talked about being more aggressive in certain areas on pricing. Have you guys also looked to be more aggressive on pricing and any comments that you have on just your strategy with clients on the pricing side? Thank you.

Yes. Pricing really starts with innovation. I think that's where we are with our 28T Ultra SMR product. We're very satisfied with the progress of Ultra SMR. We're incorporating EPMR and are already preparing our next product for growth in that area. This innovation supports our ability to offer a better total cost of ownership proposition to our customers. As we advance in this, we can also benefit as those drives are deployed. The rest of the market follows more traditional pricing driven by supply and demand. We operate across various channels and markets, and this pricing approach is what you would generally expect in any large market.

Thank you.

Thanks, Tom.

Yes. Hi, thanks for taking my question. I told them personally with some Flash side and June was. Just so that the pricing should improve after or revenue should improve after December. Is that a function of overall NAND pricing getting better, or your specific exposure to retail and PCs above BU? And then I have a follow-up.

I missed the first part of the question…

Yes. Sorry. Sorry, Krish. Could you please repeat?

Sorry, Krish. You know, we never agreed. There was a little bit of static on the line.

I apologize. I was just trying to clarify the pricing in June. We discussed the revenue improvement. Is it due to better NAND pricing or is it related to your targeted retail and PC segments improving?

NAND pricing showed a decline of 9% for like-for-like pricing and 6% for blended pricing in the last quarter, indicating a moderation from the previous quarter. In the next quarter, we anticipate an increase in volume, which may slightly affect margins moving forward. While we expect continued moderation, the increase in volume is a positive sign. I'm not sure if that fully addresses your question, Krish, as I didn't catch everything you asked.

No, no. I think it does. It does. I was just trying to figure out the specific and verticals, which is PCs and retail.

Yes, I understand. As we mentioned, we have seen growth return to the client and consumer markets, including exabyte growth and sequential revenue growth. These markets have gone through their inventory adjustments and are now shipping more to meet end demand, and we expect this trend to continue moving forward.

Thank you, David. I have a quick follow-up regarding the hard drive. You mentioned that you're sampling the 8-terabyte ePMR. Is the 32 terabyte ePMR still in your plans? Are you considering this by increasing the number of disks per drive? Additionally, how do you view the gross margin in relation to terabytes?

Okay. I believe I've addressed most of the questions. We are not increasing the number of disks. The Ultra SMR technology combines our ePMR, OptiNAND, and Ultra SMR advancements. The next phase in our roadmap, which we’ve discussed extensively over the past year, involves progressing from 20 to over 30 terabytes using our ePMR, OptiNAND, and Ultra SMR technologies. This is the next milestone in that journey. We still have a few more steps to complete, and we will introduce the products individually. We are pleased with our current position and will continue to foster innovation. As demand returns, we’ll be ramping up an excellent range of products that can be quickly staged and produced in high volumes using well-established technology. The 26-terabyte Ultra SMR drive saw widespread sales this quarter, and we anticipate significant growth in that area in the upcoming quarter as well.

Awesome. Very good update. Very helpful. Thank you.

Thank you.

Yes. Thank you so much. So we've had a few head fakes on phone recovery on the cloud side, particularly in HDDs. And wondering as you think through, sort of, this improvement starting in fiscal 2Q, what's underpinning some of the confidence? You noted demand recovery. Are you seeing particular signs from customers that are pointing to that? And your primary competitor also noted taking some changes, including a build-to-order philosophy. Curious if you guys are contemplating any such changes. And I have a follow-up.

Hey, Wamsi. Yes, we have ongoing and significant conversations with our customers, which supports our current outlook. While things can change, these discussions have been productive and positive. Regarding the build-to-order approach, I can say that Western Digital will emerge from this downturn, which is quite severe for our cyclical industry. We've implemented several strategies that will enable us to operate differently moving forward. We’ve reduced a substantial amount of capacity and have been transitioning from client to enterprise for a long time. This shift is nearly complete. Even considering the long lifespan of technology, we will have significantly lower spending on our infrastructure and the lowest fixed costs in over a decade in our HDD sector. Our focus will primarily be on the client enterprise business. We will still have a client segment, but the market will evolve into more of a build-to-order model rather than a build-to-forecast. That’s why we’re having these discussions with customers; HDDs have a long build time, and we want to ensure our infrastructure and components are ready to meet customer demands on time. So, to answer your question succinctly, Western Digital is definitely moving towards that kind of process.

Okay. Dave, and just a clarification on the underutilization charges, which look roughly flattish quarter-on-quarter. Are those charges roughly similar in Flash and HDD this past quarter? Or are there different moving pieces underlying that for September?

Sure, Wamsi. In the September quarter, we anticipate underutilization charges between $200 million and $220 million, with approximately 70% related to Flash and 30% to HDD. To clarify further regarding the next quarter, I expect underutilization-related charges to decrease by about 5% to 10%, with most or all of that decrease expected to come from HDD.

Thank you, Wissam.

You’re welcome.

Thanks, Wamsi.

Thank you. I wanted to ask about the cloud weakness again. I understand the cloud things could be lumpy. But curious about your conversations with the large hyperscale guys. How has that changed around a quarter ago? Are they giving you signals about when inventory will start stabilizing? Are they worried about supply in the second half given production cuts by all the suppliers? And are they more receptive to purchase commitments?

Yes. I would say that our discussions with the hyperscalers are always very thorough, especially considering the volume of business we conduct with them. It’s evident that some of these companies have experienced a significant inventory correction and momentarily paused their purchases. However, we are now re-engaging with these customers. They continue to grow, and there is an ongoing increase in storage requirements. We anticipate that purchasing will pick up again, and we are in talks about when this will happen and its potential scale to ensure our capacity is ready to meet demand. The response to our product roadmap has been very positive. Our 22, 24, and 26 terabyte platforms have been qualified by all major cloud vendors, and we expect substantial growth, particularly with the 26 terabyte product in the coming quarter. This product is becoming a critical capacity option for major cloud providers. Additionally, we are set to launch a 28 terabyte UltraSMR drive shortly. Our conversations remain strong, focusing on the need to align our manufacturing capabilities with their upcoming requirements.

Okay. Maybe a quick follow-up on the Hard Drive side. Clearly, you guys have been better than the competitor last quarter. But I just want to hone in on the SMR drives, which you said have qualified at all major cloud customers. Can you give us an idea what SMR adoption is today and where you think it will be in a few quarters from now? Thanks.

SMR, it's very idiosyncratic. I mean the intersection of adoption and inventory digestion makes it very lumpy. And if you look at the current quarter or last quarter, but I can say going forward that several of the major cloud providers are standardizing on an SMR deployment, UltraSMR for us, and we expect to have a significant ramp of that technology over the next several quarters.

Okay, thank you.

Thank you, Sidney.

Hi, guys. Good afternoon. Thank you so much for taking the question. I had one clarification and then a question. David, on NAND ASPs for the current quarter, I guess you talked about bids being up double digits sequentially, and you're kind of guiding revenue to flat sequentially. So I guess the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is the sharper price decline in September that's implied in guidance or embedded in guidance, primarily a function of mix? Or am I missing something there?

Yes, it may be a little lower sequentially than what you're expecting. I think that's the main point. Toshiya, we can provide more details in follow-up, but that should clarify things.

Okay. Got it. And then as my follow-up, maybe one for Wissam. You mentioned that for fiscal '24, you plan to cut CapEx significantly. Curious if it's purely impacting your capacity decisions in NAND? Or are there any changes or shifts to how you think about the roadmap? And related to that, I think on a bit shipments, David, you mentioned for calendar ‘24, you guys are going to be, I think, down low single digits. But how should we think about bit production in calendar '24 given the CapEx and production cuts that you're going through right now?

To address the first part of your question regarding CapEx, we've made significant reductions in our plans for fiscal '23 in order to preserve cash. Year-on-year, our spending has decreased by about 30% to 35%, nearly $1 billion less than we initially budgeted for the year. Looking ahead to fiscal '24, we expect our CapEx to remain substantially lower. This adjustment won’t significantly affect our product roadmap, as it reflects our current outlook concerning NAND and other investments, with no major transitions or new investments planned. We’re not making any drastic changes from what we had already anticipated. However, considering the changing macroeconomic conditions, we will continue to assess our situation quarterly, just as we have in fiscal '23, and make adjustments as necessary. Thanks, Toshiya.

Thank you for your question. I'm curious about your unique perspective since you deal with both HDDs and SSDs. I've noticed that there are comments from Pure and some other storage vendors suggesting an increased usage of SSDs in cloud environments and data centers, indicating a potential long-term shift. While Pure takes this idea to the extreme, I'm interested in your thoughts on how this mix might evolve over time, especially with the integration of AI. What concerns should we have, and what feedback are you receiving from your customers? I have a follow-up question as well. Thank you.

Yes, thanks for the question, Shannon. We've discussed this frequently over the years. Both technologies are indeed growing in the data center, with HDD remaining the primary storage method. We don't anticipate any changes to that expectation from our customers either. As we continue to advance our HDD roadmap, we're ramping up to 26 terabytes and are already launching 28 terabyte drives. We expect solid growth for HDD storage in the data center moving forward. Additionally, we foresee growth in enterprise SSD storage, which is likely increasing at a slightly faster rate than HDD. However, these technologies complement each other rather than replace one another. We expect this relationship to hold in the long term, even looking a decade ahead. The cost differences between the two remain significant, which is an important aspect we discuss with our customers as they plan their mass-scale data centers.

Okay. Great. And Wissam, can you talk a little bit about OpEx? How you're thinking about it relative to maybe a more normalized level? And how much loan for the model as revenues come back before you have to start spending more from an OpEx perspective?

Yes, absolutely. Regarding operating expenses, we have been managing them very closely in fiscal Q4. Our expenses totaled $582 million, which is about $180 million less than the same quarter last year. In the near term, I believe we are within the expected range. However, as the business begins to recover, we may see a slight increase as we add some variable costs. That said, we should not anticipate the rise in operating expenses to outpace revenue growth. We will keep a close watch on this, and any increases will be gradual. Additionally, if necessary, we have the flexibility to implement further actions to manage operating expenses tightly.

Michelle, can we have the next question please?

Thanks a lot. I had two, Wissam. The first one is on underutilization charges. And it's kind of like a two-part question. So the first is what's the current utilization in NAND? And then on the HDD side, is there kind of a mild post as to where these could start to go away? Because you're guiding $70 million for September for underutilization in HDD. It sounds like it goes to maybe 60 to 65 in December quarter. But when does it go away? Because you started to take underutilization charges, I think when HDD revenue went sub $2 billion per quarter. So do we have to get all the way back to $2 billion a quarter to have those HDD underutilization charges go away?

Okay. Regarding the Flash segment, we make these decisions continuously. The data indicates that the underutilization-related charges are expected to remain approximately the same from Q4 to Q1. For HDD, your calculations for Q1 align closely with our guidance. However, in the December quarter, anticipate that the underutilization charges will decrease by about 5% to 10% from Q1 to Q2, with the reduction primarily coming from HDD. It's still too early to discuss the second half of fiscal year 2024 based on our current observations. Regarding the $2 billion revenue target, achieving that mark is not necessary for us to fully utilize our capacity. We have made significant adjustments to our manufacturing capacity in the Hard Drive business and are actively optimizing the fixed cost component of our cost structure. Therefore, we can achieve full utilization at a revenue level below $2 billion given the current cost framework.

Thank you for that, Wissam. Regarding the cost of servicing debt, you have the convertible debt maturing in February, which has a favorable interest rate of 1.5%. The debt you will take on to replace that is likely going to be more expensive. My question is how this impacts your capital structure. It appears that debt service costs might increase by around $20 million per quarter when you issue new debt. Can you elaborate on how you plan to address this? Thank you.

The current rate on the convertible debt is 1.5%. Given the current interest rate environment, I anticipate that any replacement debt will likely be more costly. While it's still early to dive into specifics, we are focused on evaluating the various options available to us. In terms of refinancing, we will consider the potential cost of capital, as our objective is to maintain a lower cost of capital whenever possible. However, I do expect the cost to be slightly higher moving forward.

Thanks a lot, Wissam.

Thank you for taking my question. I have two quick inquiries. When do you anticipate the 26 terabyte and possibly the 28 terabyte models will be available? I have a brief follow-up to that as well. Thank you.

Crossover, there's a lot to discuss regarding the multiple capacity points we have now. It's not just a straightforward transition from 14, 16, to 18 like it was a couple of years back. We now have a diverse range of customers using different technologies, whether it’s 20s, 22s, 26s, 28s, or even some 24s. Looking ahead to the next few quarters, we expect to see a fairly balanced distribution across three or four different capacity points, all of which will be shipping 0.5 million or more drives. We're anticipating a significant ramp for the 26 terabyte drives. I want to emphasize that this ramp will be quick and substantial now that it is qualified, positioning it to be a leading capacity in the coming quarters.

Thanks for making the distinction. That's actually really helpful. And the follow-up is, do you guys have any view yet, any opinion, on when things normalize out in hard drives, if the hyperscalers return to what their classic utilization levels have been historically, how they run the capacity? Or do you think they settle in somewhat different on the utilization?

I believe that during periods like this, there is a focus on optimizing infrastructure and consolidation, and that is currently taking place. I expect that as we go through this, we will see incremental improvements. In the technology sector, continuous improvement and increased efficiency are the norms. This process will continue, and we anticipate sustained growth in exabytes as well. I expect to see 20% to 25% growth in the HDD business in terms of exabytes. While we haven't observed this growth over the past year, we recognize that it's a cyclical business and we look forward to returning to those growth levels.

Right. That’s awesome. Thanks a lot.

Thank you.

Could you discuss how we should think about a recovery in nearline units and unit pricing as you and your peer implement a build-to-order process? And as you address that question, can you discuss how this build-to-order process may differ from long-term agreements signed in 2021 that were a bit challenging to implement over time?

So units, I expect to recover, right? I mean we're going to get exabyte growth. We're at a low point on units. We expect units to recover and get back to where they were and eclipse that actually as we continue to get exabyte growth. I'll put in say, once again, I am very excited about generative AI. I know everybody is. But I think it's going to come to our world on storage once all this gets deployed. And so I expect to see units recover. I think the build-to-order process is going to be a fairly straightforward process because we have deep relationships with set of customers here. It's a big market. It's a big relationship. And I think it's just getting the business model to a place where there's better alignment between the infrastructure we have in place. Again, we've been talking about this for many years now that in a lot of ways, cloud has significantly benefited from the reduction in client and there's been a consistent availability of infrastructure to build hard drives. And we're at the end of that transition now, so we have to just have more planning around that. I think the long-term agreements were a step into that. I think this is maybe the next step into how do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important, the storage is an incredibly important part of the data center, and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model, and I expect it to be very positive on all sides. Thank you, Karl. All right, everyone. Thanks for joining the call. We look forward to talking to you all throughout the quarter. Take care.