The operator introduces the Western Digital First Quarter Fiscal 2024 Earnings Call and the speakers, Peter Andrew, David Goeckeler, and Wissam Jabre. The discussion will include forward-looking statements and risks and uncertainties. Materials will be posted on the investor relations website. The discussion will cover expectations for product portfolio, spending and cost reductions, market trends, and the potential separation of the HDD and flash businesses. Non-GAAP financial measures will also be referenced.

Western Digital has completed its strategic review and has announced plans to form two independent public companies focused on capitalizing on the growth in the data storage industry. This decision was made after evaluating various alternatives, and it will allow each company to focus on their respective end markets and benefit from operational flexibility. The CEO, David Goeckeler, joined the company in March 2020 with a strong belief in its potential to benefit from the digital transformation and create value as a leader in both NAND flash and hard drives.

The author discusses their efforts to rebuild and refocus the company, including forming separate business units for HDD and flash technology. They also made tough decisions to improve the company's financial standing, such as suspending the dividend and reducing debt. The company has now reached a point where it can spin off its flash business to maximize value for shareholders. Various options were considered during the strategic review process.

The board has decided that a standalone separation is the best option for Western Digital to unlock value for shareholders and provide strategic flexibility. The presentation outlines the separation transaction, with the HDD business retaining the Western Digital name and the flash business being spun-off to shareholders. The target completion date is in the second half of 2024. The HDD business is a leader in the mass storage market and has strong relationships with key players in the industry. The HDD market is expected to grow at a 12% CAGR to $25 billion in the next three years, with cloud representing the majority of the market.

Western Digital's flash business is well-positioned to address the growing demand for storage in the cloud market. The flash market is expected to continue growing at a rapid rate due to increasing content in consumer and client markets, as well as emerging applications. Western Digital's partnership with Kioxia allows them to produce high-performance, low-cost flash technology. They plan to hold an investor day to provide more information about the spin-off of their flash business and their future outlook.

Western Digital's first quarter results were better than expected, with revenue of $2.75 billion and a non-GAAP loss per share of $1.76. Their focus on business agility, innovation, and right-sizing has allowed them to take advantage of a improving market. They saw sequential margin improvement in both their flash and HDD businesses, with a 26% increase in bits shipped. Their 26 terabyte ultra-SMR drive has become a top seller in the data center market. In consumer and client markets, they exceeded expectations with strong demand for flash and PC products. However, demand for cloud products remains low.

Western Digital's gaming-optimized product, WD Black, saw significant growth in bits shipments and content per unit. The company is well-positioned in terms of flash technology and capital efficiency. They are ramping up the production of QLC-based client SSDs and plan to introduce high-performance products based on BiCS8 technology in the future. HDD revenue declined due to lower nearline exabyte shipments, but consumer and client hard drive demand remained stable. Western Digital has been a leader in driving innovation in the nearline market, with their 26 terabyte ultra-SMR drive accounting for nearly half of their nearline exabyte shipments. They are on track to qualify a 28 terabyte ultra-SMR drive and have a clear roadmap for further innovations. These achievements are a result of their product R&D and manufacturing capabilities, and the company is proud of their execution of their strategy.

In the fiscal first quarter, the company expects modest bit and ASP improvement, as well as a decline in underutilization charges, to drive continued sequential improvement in both revenue and gross margin. They anticipate higher nearline shipments and seasonal demand in the consumer end market to drive sequential revenue growth in HDD. The company also expects value-based pricing efforts and lower underutilization charges to lead to sequential revenue and gross margin improvement in the quarter and through the rest of the fiscal year. The company's HDD product roadmap is setting the stage for profitable growth in the future. In terms of financial results, total revenue for the quarter was $2.75 billion, up 3% sequentially and down 26% year-over-year. The cloud market represented 32% of total revenue, client 42%, and consumer 26%. Flash revenue was $1.6 billion, up 13% sequentially and down 10% year-over-year.

In the first quarter, there was a sequential increase in flash ASPs and a record amount of flash bits were shipped. HDD revenue decreased both sequentially and year-over-year. Gross margin for the quarter was 4.1%, which was at the higher end of the guidance range and included underutilization expenses and other one-time charges. Operating expenses were down 19% year-over-year. The operating loss for the quarter was $443 million, and net loss per share was $1.76. Operating cash flow and free cash flow were both outflows for the quarter.

In the first quarter, free cash flow included a payment for the IRS settlement and a cash receipt from the sale of a facility. Inventory decreased due to record bit shipments and proactive actions to reduce wafer starts. HDD inventory increased due to timing of purchases and lower shipments. Cash capital expenditures resulted in a net inflow. The delayed-draft term loan facility was fully drawn, and total liquidity was $4.3 billion. The second quarter is expected to see revenue growth from higher HDD shipments and improved flash pricing. Production will be adjusted to align with demand, leading to lower underutilization charges. The non-GAAP guidance for the second quarter is a revenue range of $2.85 billion to $3.05 billion, gross margin of 10-12%, and operating expenses of $560 million to $580 million.

The company expects interest and other expenses to be $105 million, income tax expenses to be between $20 million and $30 million for the second quarter and $80 million to $120 million for the fiscal year, and a preferred dividend of $15 million. They also expect a loss per share of $1.35 to $1.05 assuming 325 million shares outstanding. The CEO, David Goeckeler, is pleased with the company's performance and attributes it to the changes made in recent years. They are closely monitoring demand and managing their inventory to improve their results. They are also anticipating an improving market environment and believe that the separation of the company will create two independent public companies that can better execute their strategies and operate more efficiently. The call is now open for questions.

The speaker is responding to a question about the operational expenses (OpEx) and capital structure of the two businesses after the separation. They mention that it is too early to discuss details, but they are happy with the efficiency of the business and will have more to say as they get closer to the separation. They also clarify that the strategic change does not affect their ability to address the convertible debt maturing in February 2024.

Aaron Rakers from Wells Fargo asks two questions during the conference call. The first question is about the relationship with Kioxia and any potential impact on the JV rights due to the separation. The company reassures that the relationship with Kioxia is strong and there will be no impact on the JV rights. The second question is about the hard disk drive business and the company expects to see improving demand in the upcoming quarters.

Krish Sankar from TD Cowen asks about the separation of the company and if there will be any changes in strategy or product roadmaps for the HDD and flash businesses. David Goeckeler responds that there will be no changes and both businesses will continue to move forward with their current plans. He also mentions that the adoption of SMR is progressing well in the cloud data center and the company's 26-T drive became the highest shipping drive in the quarter. He also mentions that the HAMR Technology is expected to be adopted next year and the company's roadmap shows EPMR extending to 32 plus terabytes.

David Goeckeler discusses the company's roadmap and how they plan to stay ahead of competitors like HAMR. They have put a lot of effort into creating a flexible roadmap with options like OptiNAND, SMR, Ultra-SMR, and EPMR, which has allowed them to lead the industry in capacity points. HAMR is still in development and will be incorporated into the roadmap when it is mature. The company has taken steps to prevent any dissynergies that typically occur in business separations. They have also been working on cost competitiveness, with plans to scale up to 40 terabytes and stay ahead of the competition.

The company has been focused on optimizing their business units and operations in order to prepare for the upcoming separation. They have reduced costs and improved efficiency, and are confident in their ability to execute well as two separate companies with market-leading portfolios. They also have a strong roadmap in place for future products, such as ultra-SMR, EPMR, and OptiNAND drives, and are committed to maintaining high yields and confidence in their new product launches.

The company is confident in their ability to maintain their current financial position and operate efficiently despite the recent announcement. They have ample liquidity and operational flexibility. In the second fiscal quarter, they expect a 7 point increase in gross margin, primarily driven by a decrease in underutilization charges. The company also expects some benefits from the sale of previously written down inventory and potential price increases in both flash and hard disk drives.

The company had around $234 million to 235 million of other charges, but their guide has a lower level of underutilization. They are focused on cost reduction and are still taking costs out of the system. The company is seeing improvement in revenue from both sides of the business, and there is a better mix helping with gross margin. The HDD business is ramping new products and has an improving pricing environment, and the flash business is expected to have a positive gross margin next quarter. A question was asked about the company's expectations for market demand and supply for NAND exabytes for fiscal year '24. Some of their peers have reported slowing demand after a strong start to the recovery.

David Goeckeler, CEO of Western Digital, discusses the company's expectations for exabyte shipments for the fiscal year. He mentions an acceleration in demand at the end of 2023, with a projected high-teens demand for 2024. Tom O'Malley asks about the divergence in revenue compared to Seagate, and Wissam Jabre explains that Western Digital is focused on profitability in the HDD market. The next question is from Srini Pajjuri of Raymond James.

David Goeckeler, in response to a question about the company's growth, explains that the increase in revenue is due to more customers participating in the market and consistent participation from existing customers. However, the Chinese market has not recovered as quickly as expected. Srini Pajjuri then asks about the company's cash flow, specifically regarding an IRS payment made during the quarter. Wissam Jabre confirms the payment and provides details on the company's free cash flow for the next quarter.

In fiscal Q1, the company reported a negative free cash flow of $544 million due to a $523 million payment, partially offset by the sale and lease back of a facility. The focus is on improving profitability, managing inventory, and reducing cash CapEx. The company expects to be cash flow positive in the second half of fiscal 2024. On a question about NAND underutilization charges and bit shipments, the company expects bit shipments to recover in December, driven primarily by consumer applications. Wissam can comment on when underutilization charges are expected to abate.

David Goeckeler, CEO of the company, mentioned during the earnings call that the board is open to considering other alternatives should they become available. This could refer to the collapse of a joint venture or an outright sale of the NAND business. However, he clarified that the strategic review is completed and any ongoing conversations have ended. The company is confident that the decision to spin off the NAND business is the best next step for the company, given its current portfolio, efficiency, debt retirement, and an improving market.

In the paragraph, the speaker discusses the possibility of the business being open to other strategic options in the future. They also mention the split of underutilization charges between flash and HDD, and the expected exabyte growth for fiscal years 2024 and 2025. They also mention that there will be no change in the technology roadmap for NAND with the spin-off, and that the relationship with the JV is strong.

The speaker discusses the company's ability to produce NAND at a better capital intensity than the rest of the industry, with measures showing up to a third less capital intensity in recent years. They expect the JV to remain strong for many years and anticipate high demand and production in 2024. The team is confident in their ability to sustain a mid-teens cost down profile despite technology transitions.

David Goeckeler discusses the performance of the flash portfolio within the SSD business, highlighting the team's strong position in the client SSD market but acknowledging a lower market share in enterprise and cloud SSD. He explains that the team has qualified their NVMe-based enterprise SSD at multiple cloud providers, but the current downturn in cloud consumption has impacted their market position. Goeckeler also mentions the strength of their retail franchise and the success in building brands such as SanDisk and BLACK for gaming.

The speaker discusses the company's strong portfolio, particularly in gaming, which has seen a 50% year-over-year increase in content and doubling of bits. The client portfolio has been a strength of the business, with innovations such as the DRAM-less client SSD. They are also bullish on the enterprise SSD market, which is currently depressed but expected to recover. The CFO mentions that the current guide for the quarter implies that the NAND business will be gross margin positive, but it is too early to comment on outer quarters.

David Goeckeler and Toshiya Hari discuss the decline in underutilization charges for NAND and the reasons behind it, including dynamic management of wafer starts and matching supply and demand. Wissam Jabre also adds that underutilization is expected to be slightly lower in the third fiscal quarter, but this is subject to change based on business conditions. David also mentions value-based pricing on the hard disk drive side, which is driving better gross margins in the December quarter, but does not specify specific end markets.

David Goeckeler, the CEO of Cisco, discusses the company's ability to push through price increases in the cloud segment. He mentions that they are seeing good response to value-based pricing in the channel and that as they bring out new products, such as the 26 terabyte ultra-SMR and the upcoming 28 terabyte product, they will be able to have better conversations with customers and provide more value. Goeckeler states that they are looking at price increases across all markets. The call concludes with a thank you from the operator.

This summary was generated with AI and may contain some inaccuracies.