The operator introduces the Western Digital Second Quarter Fiscal 2024 Analyst Call and turns it over to Peter Andrew, VP of FP&A and IR. He reminds everyone that the discussion will contain forward-looking statements and references to non-GAAP financial measures. David Goeckeler, CEO, then gives introductory remarks and states that the company's second quarter results reflect the success of their strategic changes in both the Flash and HDD businesses.

The company is confident in its ability to improve profitability and manage business cycles by building leading products, controlling product costs, and increasing business agility. They have successfully navigated business cycles in the Flash market through proactive inventory management and partnerships, resulting in best-in-class gross margins. They will continue to take a disciplined approach to supply and capital investments and align their supply and inventory with customer demand. The company also believes that storage is entering a multi-year growth period and that generative AI is a transformative technology driving growth. Industry analysts estimate that the edge now represents a larger portion of total NAND bit shipments, indicating increased demand for cloud services during the pandemic.

The company believes that the second wave of generative AI-driven storage deployments will lead to a refresh cycle for client and consumer devices, driving content growth in PC, smartphone, gaming, and consumer markets. They are well positioned to benefit from this trend with their Flash portfolio and leading HDD technology. The company also expects their financial outperformance to become more evident as nearline demand accelerates in the second half of fiscal year 2024 and beyond. In the cloud end market, revenue returned to sequential growth, led by an increase in nearline shipments. In the client and consumer end markets, revenue was impacted by a decline in bit shipments and an increase in Flash ASPs. The company attributes this to their proactive optimization of product mix.

The company's WD Black gaming SSD product achieved record revenue with a 50% year-over-year growth. They are also on track to release QLC-based client SSDs and BiCS8 technology. HDD revenue increased due to improving nearline demand and pricing, particularly in China. The company expects continued growth in HDD shipments and anticipates a significant increase in UltraSMR hard drive shipments in the third quarter. They also expect SMR drives to comprise the majority of nearline demand by 2025.

Western Digital's portfolio strategy involves first commercializing their UltraSMR technology, followed by a transition from EPMR to Hammer, which they believe will offer the best TCO and profitability in the industry. They plan to introduce multiple generations of nearline drives with various technologies to support the growing demand for AI training data and content. In terms of flash, they expect bit growth to remain in the mid-teens percentage range, while fab-out bit production growth will be in the mid-single digit range. They will continue to manage their inventory and capital expenditures to align with customer demand, and anticipate Flash pricing to increase as their primary revenue growth driver for the year.

HDD has been successful in gaining profitable market share in the last two years through their competitive portfolio strategy. They expect this trend to continue as demand for nearline storage improves and they ramp up their UltraSMR products. In the fiscal second quarter, they exceeded or met their financial guidance, with total revenue of $3 billion and a non-GAAP loss per share of $0.69. Cloud revenue increased for the first time in six quarters, while client and consumer revenue also saw growth.

In the fiscal second quarter, the company saw a 7% increase in Flash revenue, driven by a 10% increase in Flash ASPs and a 21% increase in bit shipments. However, there was a 2% decline in bit shipments and a 6% decline in HDD revenue on a year-over-year basis. Gross margin improved by 11.4 percentage points sequentially, but declined by 1.9 percentage points year-over-year. This was due to higher Flash ASPs and underutilization charges of $156 million. Flash gross margin was 7.9%, while HDD gross margin was 24.8%, both of which were impacted by underutilization charges.

In the second quarter, operating expenses were tightly managed and decreased by 15% compared to the previous year. The operating loss for the quarter was $91 million, including underutilization charges of $156 million. The loss per share was $0.69, and operating cash flow and free cash flow were outflows of $92 million and $176 million, respectively. The ending inventory decreased by $281 million, with Flash inventory remaining at a four-year low. The company issued $1.6 billion in convertible notes, repurchased $508 million of outstanding notes, and paid down $300 million of a term loan. The remaining balance of the 2024 convertible notes is expected to be retired in February 2024. The company had $2.5 billion in cash and cash equivalents and total liquidity of $4.7 billion at the end of the quarter.

The non GAAP guidance for the fiscal third quarter includes expected revenue between $3.2 billion to $3.4 billion, mainly driven by an increase in HDD. Gross margin is expected to be between 22% and 24%, and operating expenses are projected to be between $600 million and $620 million. Interest and other expenses are estimated at $95 million, and income tax expenses are expected to be between $20 million and $30 million. Earnings per share are projected to be $0.05, plus or minus $0.15, and the company remains focused on improving profitability. The Western Digital team's efforts to establish a strong product portfolio and adapt to market changes have positioned them well for future success.

During a recent earnings call, an operator allowed for questions from analysts. The first question came from Joe Moore of Morgan Stanley, who asked about the gross margin improvement in the first quarter. David Goeckeler, the representative from the company, responded by stating that they were happy with the gross margin in the Flash business in December, but they expect a decrease in volume for the March quarter. In the HDD business, they expect an increase in both volume and price. Another analyst, Aaron Rakers from Wells Fargo, asked about the underutilization assumption for both the HDD and Flash businesses and the trajectory of Flash gross margin. Goeckeler responded by saying that they expect underutilization in the HDD business and a decrease in volume for Flash, but they are still seeing strong price increases. He also mentioned that they hope to return to a 30% plus gross margin in Flash in the future.

David Goeckeler discusses the guidance for Flash and HDD, stating that Flash inventory has decreased and they will continue to manage supply and inventory to meet demand. He clarifies that they are close to achieving a 30% margin on the HDD side, with continuous improvement expected. On the Flash side, they will focus on optimizing product mix and cost reduction to increase ASP and reach their goal of 30% margin.

The company expects to reduce costs by mid-teens percentage for the fiscal year and anticipates further reductions in the next few quarters as pricing improves. The focus is on optimizing product mix in order to match supply and demand and keep inventory under control. The NAND bit side of the business saw a record quarter two quarters ago, but will be down in the current quarter due to underutilization. The company will continue to adjust fab utilization to align with demand and expects most of the growth in Flash to come from pricing throughout the year.

The mix of products in the business is constantly changing, with different pricing and demand profiles in different segments of the market. The company is focused on putting supply where it will generate the best return, and they have recently shifted some supply from client to consumer products. The enterprise SSD market is still depressed, but as it recovers, the company expects to mix into that segment as well. On the OpEx side, the company expects to be in line with previous quarters and gradually increase as profitability improves, but they are focused on not increasing it faster than revenue growth. They are currently significantly lower than their OpEx at the beginning of the downturn.

Karl Ackerman asks two questions during a conference call with Cisco executives. The first question is about the doubling of China's demand for [indiscernible] applications and its sustainability. David Goeckeler attributes it to the China hyper scalers coming back and better demand there. The second question is about the trajectory of NAND ASP and how it compares to peers. Goeckeler explains that the starting point and product mix play a role in price deltas, but overall, the profitability of the franchise is still leading the industry. The next question is from Tom O'Malley at Barclays, who asks about the competitive environment and if there have been any changes in interactions with customers since the competitor announced a million unit shipments of Hammer in the first half of the calendar year.

Customers are looking for the best capacity, TCO, and reliability in hard drives and are not specifically asking for EPMR or PMR drives. Western Digital's portfolio includes EPMR and UltraSMR drives, which have been well-received by customers. The transition to Hammer technology will not make sense until the 4TB per platter threshold is reached. Customers have confidence in Western Digital's roadmap and are happy with their current products, leading to accelerating growth, better profitability, and share gains.

The implementation of Hammer technology has added significant costs to the product and subsequently to the bill of materials. The company expects to see a strong total cost of ownership proposition for the EPMR plus UltraSMR platforms in the coming years, with the majority of demand for Hammer technology expected in 2025. The company is also confident that customers understand and are satisfied with their roadmap. When it comes to HDD gross margins, the company expects to reach their target of 30% once underutilization charges are removed, and they have already taken steps to reduce costs in order to reach this goal faster.

The speaker discusses the sustainability of NAND pricing in the back half of the year and mentions factors such as utilization rates and CapEx investment. They believe that the market is currently under supplied and profitability levels need to improve before investments can be made. The speaker also mentions the potential for a Hammer solution from WD and the need for clear visibility into profitability numbers.

The company is expecting good pricing increases in the next quarter and will stay disciplined in managing supply and demand. They are working on a new product, Hammer, that will have a capacity of 40 terabytes and will be released in the next couple of years. Customers are more concerned with the overall specifications and reliability of the product rather than the specific technology used. The company's current technology, EPMR and UltraSMR, meets these requirements.

David Goeckeler discusses the ability to deliver increasing TCO and drive pricing higher in the future. He mentions the high scale, quick qualification, and reliability of their product, which is being adopted by more customers. When asked about the pricing runway in relation to past cycles, Goeckeler states that it is difficult to predict future pricing and that they are focused on matching supply and demand and optimizing their portfolio for profitability. He also notes that the CapEx investment is not expected to return anytime soon, indicating a need for continued supply.

During a Q&A session, Krish Sankar asked about the company's plans for reinvesting in their business and when the demand for NAND bits at the edge will increase. David Goeckeler responded that they are waiting to see through-cycle profitability before reinvesting and that they are optimistic about the future demand for NAND bits, but cannot specify a specific quarter. He also clarified that demand is tracking at mid-teens while fab production is at mid-single digits, and that their NAND inventory is at a multi-year low.

During the earnings call, Mehdi Hosseini asks about the impact of low inventory and high demand on Western Digital's shipping and market share. David Goeckeler and Wissam Jabre clarify that the market trends mentioned are not specific to Western Digital and they are still comfortable with a 15% cost down for NAND. They also mention that enterprise SSDs are still depressed but they will continue to mix into that market and it is an emerging part of their portfolio.

The company has been qualified at several cloud titans in their NVMe based enterprise SSD, but the enterprise SSD market has been the most depressed part of the NAND market during the downturn. As the market starts to recover, the company will consider demand and mix into the market depending on price. The enterprise SSD market is trailing enterprise HDDs and there is more inventory digestion to get through. The company sees good demand trends for capacity enterprise HDDs and expects sequential growth throughout the calendar year. Mark Miller from The Benchmark Company asked about the product cycle for enterprise SSDs as enterprise spending recovers. David Goeckeler, the speaker, stated that enterprise SSDs typically trail enterprise HDDs and that there is more inventory digestion in the hyperscale market for enterprise SSDs. However, the company sees good demand trends for capacity enterprise HDDs and expects sequential growth throughout the calendar year. The company will consider demand and mix into the market depending on price, but there is no fixed percentage they are aiming for.

During the quarter, the company's cash flow improved but there was still an outflow. The company's goal is to become free cash flow positive, which they expect to achieve in the second half of fiscal 2023. They do not typically guide for cash flow. The company does not anticipate having to draw on their revolver. The last question was about the potential impact of NAND bit rate increases on various markets, to which the CEO responded that they are big believers in the NAND market and there will likely be significant bit growth in the future. They also have the ability to produce new nodes to increase efficiency.

The speaker discusses the growth potential of NAND technology and how it can continue to deliver cost downs. They mention the potential impact of generative AI on the market, particularly in the edge market. The speaker also notes that the NAND market has shifted to an edge-centric focus and their company is well positioned with their consumer, client SSD, gaming, and PC OEM businesses. They express confidence in being able to meet the demand as it returns. The call ends with the speaker thanking the attendees and signifying the end of the conference.

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