Western Digital Corp (WDC) — Q4 2024 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 based upon management's current assumptions and expectations and as such, does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, the separation of our Flash and HDD businesses, ongoing market trends and our future financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I'll now turn the call over to David for introductory remarks.

Thanks, Peter. Good afternoon, everyone and thank you for joining the call to discuss our fourth quarter and fiscal year 2024 performance. Western Digital delivered strong results with fiscal fourth quarter revenue of $3.8 billion, non-GAAP gross margin of 36.3% and non-GAAP earnings per share of $1.44. For the fiscal year 2024, revenue totaled $13 billion. We have maintained our strategic focus on aligning our portfolio of industry-leading products with growth opportunities across a broad range of end markets to mitigate volatility while structurally improving our through-cycle profitability for both Flash and HDD. Before we discuss our performance, I want to provide our views on where the storage market is heading and how we are well positioned to capitalize on these growth opportunities. Our diverse portfolio, coupled with the structural changes we have made to strengthen our operations, is enabling us to benefit from the broad recovery we are beginning to see across our end markets. In addition, the AI Data Cycle is increasing the need for storage and creating new demand drivers across both Flash and HDD. These AI systems process and analyze existing data, generate new data and require substantial storage for training, operating in a continuous cycle of increasing data consumption, processing and generation. As AI technologies advance, data storage systems must deliver the capacity and performance necessary to support the computational demands of large sophisticated models while managing vast volumes of data. Given this landscape, we expect Flash to benefit from both AI training and inference while HDD is poised to benefit at both the input and output stages of these AI models. To address the growing performance, power and capacity requirements, we have developed our Flash and HDD product road maps to meet our end customer storage needs across the entire AI Data Cycle. We introduced the industry-leading high-performance PCIe Gen 5 SSD to support AI training and inference. A high-capacity 64 terabyte SSD for optimizing the build-out of rapid AI data lakes in the world's highest capacity ePMR UltraSMR 32-terabyte hard drive for cost-effective and deep content storage at scale. These new offerings demonstrate our continued commitment to innovation and market leadership. As we enter fiscal year 2025, we are well positioned to capture the long-term growth opportunities in data storage and believe the AI Data Cycle will be a significant incremental growth driver for the storage industry. Before I dive further into business updates, I want to update you on our separation plans. I am pleased with the progress our team has made as we continue to drive to completing the work required to separate the company at the end of the calendar year. As part of the ongoing preparation for the separation, we anticipate beginning to incur separation dis-synergy costs in the second half of the calendar year. Wissam will briefly discuss the anticipated impact of these costs. I'll now turn to business updates. Starting with Flash, the growth in revenue was driven by the recovery in cloud and a shift of our client mix to gaming and mobile, partially offset by a decline in consumer. Our focus on driving higher through-cycle profitability is reflected in our results as we proactively mix bits across our end markets. Our innovative offerings remain at the forefront of the market, reinforcing our competitive position and bolstering our growth prospects. For example, our new QLC-based client SSDs, which grew 50% on a sequential exabyte basis, offer significantly better performance than our previous generation TLC products. Combining this high-performance node with our in-house controller development enables us to provide a portfolio of client SSDs that deliver unmatched performance and value. We believe these products will lead the industry's transition to QLC flash. During our New Era of NAND webinar last month, we introduced the world's highest capacity BiCS8 2-terabyte QLC memory die, specifically designed to meet growing data center and AI storage needs. Built on a chip bonded to array architecture, BiCS8 reinforces Western Digital and Kioxia's leadership in cost and capital efficiency as well as superior I/O performance by integrating wafer bonding in advanced 3D manufacturing to establish a groundbreaking foundation for future scalability of 3D NAND. In addition, our 64 terabyte enterprise SSD is now being sampled with plans for volume shipment later this calendar year. Furthermore, our PCIe Gen 5-based enterprise SSD delivers best-in-class read performance as well as power efficiency. We are seeing significant interest in this product, which is currently qualifying at a hyperscaler with ramp expected in the second half of this calendar year. We'll talk more about our Flash road map at the upcoming Flash Memory Summit in early August. Turning to the Flash outlook. Throughout the fourth quarter, our product mix was dynamic as we proactively mixed bits between our end markets in response to the softness we are seeing in the more transactional markets such as consumer and channel. Our success in identifying the most profitable approach to allocating bits is reflected in the growth of both our revenue and gross margin. As we look into the first quarter, in addition to the mix environment we saw in the fourth quarter, we expect the continued ramp of our new enterprise SSD offerings and seasonal strength in mobile to drive mid- to high-teens bit growth on a sequential basis. For the full fiscal year 2025, we expect enterprise SSDs to represent a double-digit percent share in our portfolio mix. The new era of NAND is driving a period of change and we are going to remain disciplined in managing our capital spending. The layers focus race is behind us. The emphasis is now shifting towards strategically timing the economic introduction of new longer-lasting nodes. Innovation now means enhancing power efficiency, performance and capacity within these nodes, while capital decisions increasingly prioritize opportunities for margin expansion and revenue growth. Turning to HDD; revenue growth was driven by strength in nearline demand and improved pricing. By leveraging our SMR leadership and lean cost structure, we have surpassed our target gross margin range, underscoring our ongoing commitment to improve future profitability. The HDD business has undergone a remarkable transformation in recent quarters, marked by strategic initiatives aimed at introducing the most innovative, high-capacity products to market. We have increased our profitability meaningfully by restructuring our manufacturing footprint and optimizing our cost structure to drive operational efficiency. All while qualifying and ramping our SMR technology. We continue to structurally change the way we are operating our HDD business. With better visibility into future demand, operational excellence and a commitment to sustaining supply-demand balance, we are poised to continue our trajectory of bringing highly innovative products to market while increasing profitability into the future. On the technology front, we ship samples of our 32-terabyte UltraSMR/ePMR nearline hard drives to select customers. These drives feature advanced triple-stage actuators and OptiNAND technology which are designed for seamless qualification, integration and deployment in hyperscale cloud and enterprise data centers while maintaining exceptional reliability. With this in mind, we are well positioned to deliver the industry's highest capacity hard drives and the best TCO. Turning to the HDD outlook. As we look to the fiscal first quarter, we expect further growth driven by greater demand and more favorable pricing. Our cloud customers continue to transition to SMR, and we anticipate a third major cloud vendor to begin the ramp of adopting SMR in the fiscal first quarter. Our leading products and lean cost structure have supported ongoing profitability improvements in our HDD business. We remain focused on driving higher margins to reflect the significant innovation and TCO improvements we deliver to our customers. Our strategic approach to commercializing ePMR, OptiNAND and UltraSMR technologies has proven to be the winning strategy, enabling us to surpass our gross margin target for HDDs in the midst of AI's emergence as another pivotal growth driver for the industry.

Thanks, David. And good afternoon, everyone. In the fiscal fourth quarter, Western Digital delivered great results with gross margin and earnings per share exceeding the high end of the guidance range. Total revenue for the quarter was $3.8 billion, up 9% sequentially and 41% year-over-year. Non-GAAP earnings per share was $1.44. Looking at end markets, Cloud represented 50% of total revenue at $1.9 billion. The sequential growth of 21% is attributed to higher nearline shipments and pricing in HDD, coupled with increased bit shipments and pricing in enterprise SSD. The 89% year-over-year increase was due to higher shipments and price per unit in nearline HDDs along with higher enterprise SSD bit shipments. Nearline bit shipments were at a record level of 125 exabytes, up 16% from the previous quarter and 113% compared to fiscal fourth quarter of 2023. Client represented 32% of total revenue at $1.2 billion. The sequential increase of 3% was due to the increase in flash ASPs, offsetting a decline in flash bit shipments while HDD revenue decreased slightly. The 16% year-over-year growth was driven by higher flash ASPs. Consumer represented 18% of total revenue at $0.7 billion. Sequentially, the 7% decrease was due to lower flash and HDD bit shipments, partially offset by higher ASPs in both flash and HDD. The 5% year-over-year increase was driven by improved flash ASPs and bit shipments. For fiscal year 2024, revenue was $13 billion, up 6% from fiscal year 2023. Non-GAAP gross margin increased 7.1 percentage points to 22.8% and non-GAAP operating margin increased 8.7 percentage points to 3.9%. Non-GAAP loss per share was $0.20. Looking at end markets for fiscal year 2024, Cloud revenue increased 2% year-over-year due to higher demand for capacity enterprise HDDs and improved pricing. For the year, client and consumer revenue grew by 7% and 9%, respectively, due to higher flash bit shipments. Turning now to revenue by segment. In the fiscal fourth quarter, Flash revenue was $1.8 billion, up 3% sequentially and 28% year-over-year. Compared to last quarter, Flash ASPs were up 14% on a blended basis and 11% on a like-for-like basis. Bit shipments decreased 7% sequentially and 3% compared to last year as we proactively mixed Flash bits to maximize profitability. HDD revenue was $2 billion, up 14% from last quarter as exabyte shipments increased 12% and average price per unit increased 12% to $163. Compared to the fiscal fourth quarter of 2023, HDD revenue grew 55%, while total exabyte shipments and average price per unit were up 72% and 64%, respectively. Moving to the rest of the income statement. Please note, my comments will be related to non-GAAP results unless stated otherwise. Our focus on improving through-cycle profitability in both Flash and HDD has shown great progress. In the fiscal fourth quarter, total gross margin reached 36.3%, well above the guidance range. Gross margin improved by 7 percentage points sequentially and 32.4 percentage points year-on-year due to better pricing and cost reduction as well as higher volume. Within Flash, by proactively allocating bits between end markets and executing on our cost reduction initiatives, we have improved gross margin for 4 consecutive quarters. Flash gross margin was 36.5%, up 9.1 percentage points compared to last quarter and 48.4 percentage points year-over-year. In HDD, by offering a leading product portfolio and running efficient manufacturing operations focused on cost discipline, we continue to make progress in improving profitability. We delivered a gross margin of 36.1%, exceeding the long-term target range, up 5 percentage points sequentially and 15.4 percentage points compared to fiscal fourth quarter of 2023. Operating expenses were $700 million for the quarter, above our guided range, primarily due to higher variable compensation associated with better-than-expected profitability. Operating income was $666 million, tax expense was $17 million, earnings per share was $1.44. Operating cash flow was $366 million and free cash flow was $282 million. Cash capital expenditures which include the purchase of property, plant and equipment and activity related to Flash joint ventures on the cash flow statement represented a cash outflow of $84 million. For fiscal year 2024, cash capital expenditures were $244 million or 1.9% of revenue, excluding the proceeds from the sale leaseback of our Milpitas facility. Year-over-year, this represented a 69% decline. Fourth quarter inventory was up from the prior quarter at $3.3 billion. With days of inventory increasing from 119 days to 126 days. A decline in HDD inventory was more than offset by an increase in Flash inventory. Gross debt outstanding was $7.5 billion at the end of the fiscal fourth quarter. Cash and cash equivalents were $1.9 billion and total liquidity was $4.1 billion including undrawn revolver capacity of $2.2 billion. During the quarter, we paid down the remaining $300 million of the delayed draw term loan. I'll now turn to the fiscal first quarter non-GAAP guidance. We anticipate both Flash and HDD revenue and gross margin to improve on a sequential basis as we continue to drive improvements in profitability across our businesses. We anticipate revenue to be in the range of $4 billion to $4.2 billion. Gross margin is expected to be between 37% and 39%. We expect operating expenses to increase slightly to a range of $695 million to $715 million. A decrease in variable compensation will be offset by the synergy costs as we continue to make progress executing on the separation plans. Included in this range are dis-synergy costs of $15 million to $25 million. We expect the synergy costs in the fiscal second quarter to be between $35 million and $45 million. Interest and expenses are anticipated to be approximately $110 million. The tax rate is expected to be between 15% and 17%. We expect earnings per share of $1.55 to $1.85 based on approximately 360 million shares outstanding. As shown in our guidance, we remain committed to driving higher profitability while maintaining focus on cost and capital discipline.

Thanks, Wissam. Today's results and guidance underscore Western Digital's strong execution with promising growth opportunities ahead. We delivered solid results as we doubled down on our strategic initiatives and product roadmap, capitalizing on robust growth prospects for both Flash and HDD. The emergence of the AI Data Cycle marks an incredibly exciting transformation in our industry, driving fundamental shifts across our end markets. Looking ahead to fiscal year '25, we are well positioned to leverage our leadership positions to spearhead innovative technologies and deliver unparalleled value for our customers. Peter, let's begin the Q&A.

I guess I would like to focus my question around HDD gross margins, truly impressive outlook in the actual results. I was hoping you could speak to your contracted supply today, your pricing visibility into the second half of the calendar year, and whether that extends into calendar '25. And as part of that, how we should think about the progression of HDD gross margins as we go into September, December and beyond.

We are very pleased with the current state of the HDD business. We have dedicated considerable time to optimizing our manufacturing operations, and as volumes resume, we find ourselves in a strong position. The ongoing adoption of UltraSMR drives has been beneficial for us and our customers, as they offer leading capacity points. Overall, we have surpassed our gross margin targets in this sector, with some indicating that it could be the best gross margin we've ever achieved. Additionally, our margins are expected to continue increasing. We have a favorable supply-demand balance that provides us good visibility for the remainder of the year, and we have a clear understanding of where our drives will be allocated. Recently, we successfully requested our customers to provide a 52-week visibility on their HDD needs. This is crucial because it usually takes about 50 weeks to manufacture an HDD. We have been focused on enhancing technology and manufacturing processes, as well as adjusting our business practices to align our investments with customer demand. Our customers have responded positively, giving us visibility for the entire fiscal year from many of our largest clients while we continue to work with others. In conclusion, we are very satisfied with our margins and expect them to rise as we continue to innovate. By improving total cost of ownership for our customers, we will drive margins higher, supported by a strong roadmap, while also ensuring we maintain a balance between supply and demand for the future.

I wanted to ask about NAND. You experienced weaker volume in Q2, but pricing has been good. We're seeing this trend where volumes are disappointing, yet prices remain strong. Typically, good demand is needed for prices to increase. Can you discuss this dynamic? What do you anticipate will happen with supply and demand for NAND in the latter half of the year?

As you know, Joe, it's a very dynamic market. We're continuing to see good pricing increases in the negotiated markets, especially for enterprise SSD, which we find very encouraging. We experienced strong sequential growth in enterprise SSD and expect to see further growth in the next quarter. In some of the more transactional markets, where there are numerous competitors and some do not produce their own raw NAND, pricing is more variable, and demand in the consumer segment is somewhat weak. In those markets, we face a bit of demand headwind and less aggressive pricing moves, but in the negotiated markets, pricing remains strong. When you consider all these factors, there's quite a bit of variability in our quarter-by-quarter numbers. However, as we approach the latter half of the year, we continue to observe robust demand for enterprise SSD. The PC market may be experiencing some inventory rebalancing in the next quarter, but we anticipate improvement as the year progresses. This seems to be a normal phase, considering the strong performance in the early recovery of NAND pricing. We continue to see demand exceeding supply through the second half of the year, and our models suggest this trend will persist into the next calendar year as well.

This is Grant Joslin on for Tim Arcuri. I was hoping you could talk a little bit about how you view the balance sheet and how you want to prioritize the free cash flow generated between now and the separation? And any updated thoughts on the appropriate leverage for each of the 2 segments?

Yes, sure. As I noted in the prepared remarks, in Q4, we paid down the remaining $300 million of the delayed draw term loan. And so as we generate cash, our focus is to continue to strengthen the balance sheet. Regarding the second part of the question related to capital structure. Obviously, we're making good progress as we prepare for the separation, we will be, as we get closer to the time of the separation, hosting Capital Market Days or Investor Days to discuss that in more detail. But as we've always said, our aim is to create 2 world-class companies that are competitive in their own spaces. And so their capital structures would reflect their profiles from a profitability, cash generation and market dynamics as well.

Yes. One clarification I just want to throw out there. Is the dis-synergy costs all in operating expenses? Or is there anything in COGS? And then from a question perspective. When I look at the NAND business and I think you guys talked about in the prepared remarks of growing kind of mid- to high teens sequentially on a capacity ship basis this next quarter. I guess where my math leads me is to think that your underlying assumption would be maybe more of a flattish ASP trend in the September quarter. I guess my question is, is that kind of how you're thinking about that? And if so, why would we think that pricing would be flattish? Is there a mix dynamic, something that we should consider in that?

I'll take the second part of the question. Kind of remember the first part now.

Let me address the first part regarding the dis-synergy costs. The question was whether these costs were included in operating expenses or if there was any allocation in COGS. The $15 million to $25 million I mentioned are all part of operating expenses. There will be some dis-synergy costs in COGS, but they are not significant, which is why we didn't highlight them. They are also included in our guidance for Q1.

Yes, Aaron, regarding the NAND pricing, you've mostly answered your question. Just to clarify, there is a significant mix dynamic. Similar to others, we're experiencing some consumer weakness, which constitutes one-third of our Flash portfolio. This segment is substantial and has historically higher than average through-cycle margins, presenting a bit of a challenge. Additionally, this quarter is typically strong for mobile, further influencing the mix dynamic. You're approaching it in the right manner.

One clarification question and a question, if I may. For my clarification question, is the PCIe Gen 5 Enterprise SSD at a hyperscaler separate or in addition to your sampling of 64 terabyte SSDs in the second half of this calendar year? I guess as you address that question, could you speak to the breadth of customer design wins you have on enterprise SSDs which are indicative of your growing share of SSD relative to your overall portfolio mix.

Yes. They are two distinct products targeting different segments of the AI data cycle. The compute product you mentioned is designed to channel data into GPUs and maintain a full pipeline. It offers very high performance and is qualifying with a hyperscaler, generating substantial interest across the AI ecosystem among those building AI training infrastructure. We believe this product provides the best read performance and excellent power efficiency, which is what the market demands. The 64 terabyte drive is a separate product aimed at creating high-performance data lakes for AI training and is also appealing to similar customers. This complements the qualified enterprise SSD products we had before the downturn, and those are picking up again now. We are pleased with our portfolio and continue to expand it. These products are well-suited to meet the demand in enterprise SSDs, especially among those developing AI training infrastructure.

This is Eddy for Krish. Two-part question, if I may. On nearline HDD congrats on great progress there. This is the second quarter of above 50% market share for you guys versus historically your share being in the low 40s. I wonder if you think this has anything to do with your main peer transitioning from PMR to HAMR? Or do you think this is more tied to specific customer exposure? And also, I wonder if you think you'd have that capacity within fiscal '25, given that your exabyte shipments are at all-time high.

We believe our market share is due to the quality of our products. We provide the best total cost of ownership and have had a clear roadmap for a long time. Our customers are well aware of this roadmap, often knowing it years in advance, and we collaborate closely with them. We are delivering the highest capacity drives at scale, which are easily qualified, and our architecture is familiar to our customers, ensuring the best total cost of ownership. For those building large data centers, total cost of ownership is crucial. We've introduced a 32-terabyte drive, a milestone in scaling, showcasing excellent total cost of ownership. Our UltraSMR technology can offer 20% more capacity compared to standard SMR drives, which add significant value for our customers. This benefit reflects positively on us as well, allowing for higher margins without increasing costs. We are now seeing the third hyperscaler adopt our UltraSMR technology in the latter half of the year, and we feel confident about our portfolio's development, which has been ongoing for decades. Customers are responding positively to our high-quality products, and the increase in total cost of ownership helps us manage supply and demand, as well as pricing. Regarding capacity, we have established a 52-week lead time, which is crucial for receiving customer forecasts a year ahead, enabling us to better plan for capacity. As we analyze these forecasts with customers, we will determine if we need to increase capacity. However, we are cautious about adding capacity for short-term volume spikes; we believe the demand will be sustained. The growth in the AI Data Cycle will also significantly drive demand for HDDs in the future. We are seeking solid commitments from our customers for visibility, which we now have. As we gather insights from the entire market in the coming quarter, we will have a clearer understanding of our capacity planning. For now, we are satisfied with our current capacity and our ability to increase shipping and mix, allowing us to deliver more exabytes per quarter based on that mix.

I guess maybe just focusing on the HDD side again. I think the fear everyone is going to have is, are you sitting at close to peak performance at this point, both from how much exabyte you are shipping versus the last week, which I think was within 10 exabytes of that? And where the gross margins are. So maybe if you can just focus on gross margins. Can you just talk about what is the right way to think about HDD gross margins assuming exabytes keep growing and your conviction that pricing can remain favorable on the HDD side or through the back of this year and potentially into '25?

Yes. I think the whole key to that question is to continue to innovate. It's just as simple as that. If we continue to innovate and build a better product and deliver a better TCO to our customers, we're able to continue to participate in the value of that R&D that we're spending. We just announced a new drive that's 32 terabytes, which is 13% more capacity than the next biggest drive on the market, which is our 28-terabyte drive. So as long as we continue to do that, we go to our customers and they get a better value proposition, and we're able to participate in that. And as long as we continue to drive the roadmap forward, and I have a tremendous amount of conviction that's the case, we're going to do that. We will continue to drive margins higher in this business.

Maybe just help me clarify this. Is the performance on the HDD side, more a reflection of your peer not having HAMR come out yet? And once that comes out, perhaps market share and gross margins normalize? I guess the feeling would be, is this all durable? Or does it go away from a margin perspective once Seagate has HAMR in volume production with the hyperscalers?

No. Like I said, I don't think it has to do with continuing to deliver greater TCO. The underlying technology that you're delivering on the product I don't think matters that much, right? It's like customers want more density in the same slot, and we're able to deliver that. We have a roadmap to deliver that. Other people in the industry have a roadmap to deliver that and we're going to continue to drive TCO down. I think hard drives have been an industry that's been persistently oversupplied given the client to cloud transition. We're past all of that now. I think we're seeing what the dynamics of the industry are like when we get the supply-demand balance right. We get our manufacturing footprint the way we want it. We deliver world-class leading products that provide enormous amounts of value to our customers. And that drives margin higher because it's a great value proposition for our customers. It's a good deal for them. It's a good deal for us. And I think that is incredibly durable.

There has been very solid execution on the gross margin side, which is the highest we've seen in five years. Looking ahead, could you share your expectations for hard disk drive and NAND margins? In the past, NAND margins have reached around 45% to 50%, and we've seen hard disk drive margins at approximately 38% to 39%. Can you guide us on how we might project the margins going forward?

I believe that in the next quarter, margins in both businesses will increase, which is our goal. As long as we keep innovating in the NAND business, our product portfolio has never been stronger. We've consistently performed well in the consumer sector, which has always been a reliable part of our business for a long time. Our client and gaming portfolios are robust, and while we've always excelled in mobile, we're now enhancing our enterprise SSD offerings just as the demand from the AI Data Cycle is rising significantly. From a technology standpoint and given our portfolio's positioning, we are in a strong situation. When we assess the long-term supply-demand balance, we acknowledge that this is a cyclical business. Significant capital expenditures are needed to increase capacity, and transitions in technology give us more capacity. We discussed this in our new era of NAND, where the previous emphasis on merely increasing node sizes and relying on elasticity to absorb increased production is behind us. The future of NAND entails a more strategic approach to introducing new nodes that enhance capacity and focus on innovations in performance, power, and capacity. Our management approach will differ from past practices. Moreover, the overall supply-demand balance is favorable since there has been limited capital expenditure in NAND following the downturn. We anticipate ongoing positive momentum in our portfolio. Regarding HDD, this business has undergone a significant transformation over the past year, and we're beginning to see the outcomes of changes that have been in progress for quite some time. We've successfully navigated the transition from client to cloud, a shift that has been occurring industry-wide for about 15 years. The client segment now represents a much smaller portion of our portfolio compared to previous peaks, as it has transitioned to a predominantly cloud-based business. Our technology roadmap continues to yield strong total cost of ownership improvements for our customers. The demand side is also promising, particularly with the AI Data Cycle, where HDD will play a crucial role in data storage and content creation. We're focused on managing capacity in a way that prevents oversupply in the market. I believe the HDD business has undergone structural changes, and I expect margins to improve sustainably. The value proposition is solid, and as we continue to lower TCO, we will drive margins higher.

I was wondering if you could square your comments a little bit on proactively mixing bits across end markets in a quarter where your bit shipment declined below what you had originally expected. But at the same time, you also had inventory build in the quarter. And as a clarification from a prior question, could you just help us think through in the September quarter, what is the like-for-like ASP trajectory for NAND as well.

Okay. So first of all, the mix, I think, the first one was the mix question. So was the question in the quarter?

Yes, in the fourth quarter, we are focusing on how to proactively adjust our mix to improve profitability.

When bits were declining. Okay. So yes. I mean, look, I mean, I guess, in a big picture, we're always just looking at every market that we're in and what demand is on a week-over-week basis and what our customers are telling us, and we're trying to put the bits to where we're going to get the highest return. We saw some headwinds in consumer, so we mixed into other parts of client business. And we also saw really good growth in enterprise SSD. I think we saw 60% sequential growth in enterprise SSD, so that provided a floor on kind of how we think about the mix side of it. And the second part of the question?

Yes. Regarding the inventory comments, it's typical for us to build inventory as we exit the June quarter in preparation for the consumer-oriented second half, which usually sees an increase in shipments. We're comfortable with this approach. For the September quarter, we expect the average selling prices in NAND to rise slightly in the low single-digit percentage range.

I had one quick clarification and one question. On the clarification, the dis-synergies, we saw the $35 million to $45 million you guided to for the December quarter, is it fair to assume that's kind of a steady state for the combined business going forward post-separation? Or do those costs go away? Or do those costs potentially go up beyond separation? That's my clarification question. And then my question for Dave on the NAND side, are your fabs fully loaded at this point? I know at the trough of the cycle, you had cut pretty significantly along with your peers. But where are utilization rates today? And how should we think about fiscal '25 CapEx?

Yes. Let me take the first part of the question. So with respect to the synergies costs that I discussed for the December quarter, they range in and you noted $35 million to $45 million. It’s fair to assume that this is where steady state will be until the separation and going forward.

And then on the NAND, we're running at full utilization. We don't have underutilization costs on NAND at this point.

Yes. Regarding capital expenditures, I want to highlight our expectations for the current quarter. From a cash capital expenditure standpoint, I anticipate it will be similar to the fiscal fourth quarter, which was approximately 2% of revenue. Our perspective on capital expenditures for future investments remains consistent; we aim to maintain profitability as our primary focus.

I was wondering how, considering your experience in previous cycles on the HDD side and the mention of 52-week lead times, you protect yourself against customers placing excessive orders that could lead to disappointment later. What measures are you taking to ensure customers fulfill their commitments?

I mean, these are very big relationships with very big customers. So we're very close to them on a day-to-day basis. So that is clearly something we look for. But I think there's a lot of relationship value here as well. So we'll be on the lookout for that. But we expect our customers to be fairly rational about this whole process. I mean, look, we're in an area of HDD where almost everybody that we talk to would like to have more HDDs right now. So I think everybody is understanding that giving us more visibility will allow us to set our manufacturing infrastructure in a way where we can satisfy the market without ending up in the situation we are in, in the down cycle where we were having to really, really cut costs and quite frankly, move a lot of people off the payroll which is an unpleasant exercise. So we'll stay very close to our customers. And we have also have a lot of information on kind of ordering patterns and all that kind of stuff. So we'll keep an eye out for that.

Great If I may, just if you can talk a little bit about the industry structure that has changed and maybe how it reflects in your cost declines across both your Flash and HDD business. How we should think about that going forward, given that you see a favorable pricing environment and if you can balance that with maybe improved cost decline for both NAND and HDD.

Yes. On the HDD side, there are a few factors contributing to improved margins. First, we've reset our manufacturing base and are coming off a very low number. As we increase production and reach full utilization, our cost per unit improves. This has been beneficial for us. Additionally, we have visibility on where all the drives will be going in the next couple of quarters. Moreover, we are seeing technology-driven cost improvements, continuing innovation, and better total cost of ownership dynamics, allowing us to reduce the cost per terabyte in the HDD business, which is declining at a rate of high single digits annually. In NAND, we are also successfully driving costs down in the 15% range for this year, and we remain confident in that target. The storage industry as a whole is consistently decreasing costs through technological advancements, and we are pleased with our progress along with our R&D teams’ capabilities to keep this momentum going.

All right. Thanks, everyone. You appreciate your time today. We look forward to talking to everybody throughout the quarter. We're very happy with where the business is and where we're driving, we think the portfolio is in a great shape and things are going in the right direction. We look forward to talking to you about it more as we move throughout the quarter. Thanks for your time today.