Western Digital Corporation Q4 2023 Earnings Conference Call Insights

Key highlights from Western Digital Corporation (WDC) Q4 2023 Earnings Concall

Management Update:

[00:07:08]WDC said average capacity per consumer and client SSD increased over 40% and 20% YoY, respectively.

[00:07:39] The company expects overall demand to remain stable in 1Q. And for fiscal year 2024, WDC expects capital expenditures to decline significantly.

Q&A Highlights:

[00:20:55] Joseph Moore at Morgan Stanley asked if the similar level of underutilization charges in NAND in 4Q mean that utilization is unchanged, inventory is being reduced, and utilization can be brought back up at some point. David Goeckeler CEO said NAND had a good market reaction in consumer and client businesses, with growth in exabyte basis, while the fab is still underutilized, price declines are moderating, inventory is down, bit shipments are up, and WDC expects double-digit bit shipments next quarter. Underutilization charges in 4Q were similar to 3Q, with 70% of the charges coming from Flash and 30% from HDD and are expected to remain similar in 1Q and 2Q.

[00:23:04] Joseph Moore from Morgan Stanley also asked about an update on the uses of cash in the next few quarters, including the convert due early next year and potential tax payment, and if money needs to be raised to pay those. Wissam Jabre CFO replied that WDC plans to address the convert maturing in Feb. 2024 and the IRS settlement in 1Q or 2Q. The company has $4.9 billion in liquidity and will draw down the delayed-draw term loan to pay the IRS settlement.

[00:24:52] C.J. Muse of Evercore ISI enquired about supply-demand normalization. David Goeckeler CEO replied that WDC saw sequential bit growth overall, with consumer SSD content up 40% and client SSD up 20%, and expects its bits to be flat YoY for the fiscal year and down low-single digits for the calendar year. The company is taking actions to bring supply and demand into better balance, and is seeing that in its two biggest markets for flash.

[00:27:38] Michael with Wells Fargo asked how the recent uptick in AI investment in the data center impacts the mix of flash relative to HDD capacity and how it would impact WDC going forward, and an update on the company’s enterprise SSD qualifications. David Goeckeler CEO said WDC is optimistic that generative AI will lead to a profound increase in the rate of data creation, which will drive incremental growth across SSDs and hard drives. The company is still investing in enterprise SSDs and feels good about its position with the major cloud vendors.

[00:31:03] Tom O’Malley with Barclays queried about the latest timing for the recovery of the cloud portion of WDC’s HDD business and the health of that business today. David Goeckeler CEO answered that WDC expects sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but the recovery will take a few more quarters. The company expects things to look better in early next year.

[00:32:35] Tom O’Malley with Barclays asked if WDC considered being more aggressive on pricing in the HDD business, and WDC’s strategy with clients on pricing. David Goeckeler CEO replied that innovation drives pricing, especially with the 28T Ultra SMR product as the foundation for a better TCO proposition, while other products like ePMR or OptiNAND are positioned for future growth. The rest of the market follows more traditional market-driven pricing influenced by supply and demand across various channels and markets.

[00:36:09] Krish Sankar at Cowen asked if the 32TB ePMR is still early in WDC’s roadmap, and how will it impact gross margin. David Goeckeler CEO said that WDC is continuing to innovate in the HDD space and has a roadmap to increase capacity from 20TB to 30TB+ using ePMR, OptiNAND, and Ultra SMR technologies.

[00:38:17] Wamsi Mohan with Bank of America enquired what’s underpinning WDC’s confidence in the recovery of the cloud HDD market, and is the company considering a build-to-order philosophy. David Goeckeler CEO answered that WDC is confident in the recovery of the cloud HDD market based on ongoing conversations with customers. The company is also considering a build-to-order philosophy to reduce costs and improve efficiency.

[00:42:10] Sidney Ho of Deutsche Bank asked how have WDC’s conversations with large hyperscale customers changed since 1Q, and what are their expectations for inventory stabilization, supply, and purchase commitments in 2H. David Goeckeler CEO said that WDC is having productive conversations with hyperscalers about the timing of their return to buying HDDs. The company is also getting good reception for its product roadmap, which includes 22-, 24, 26, and 28-terabyte drives.

[00:44:23] Sidney Ho of Deutsche Bank enquired about the current adoption rate of SMR drives in the cloud, and how WDC expects it to change in the next few quarters. David Goeckeler CEO replied that SMR adoption is lumpy, but several major cloud providers are standardizing on Ultra SMR and WDC expects significant ramp in the next several quarters.

[00:48:59] Shannon Cross with Credit Suisse asked how WDC thinks the mix of HDDs and SSDs will trend over time, and how does AI impact this trend. David Goeckeler CEO answered that HDDs and SSDs are both growing in the data center, but HDDs are still the predominant storage mechanism. WDC expects this to continue for the foreseeable future.

[00:51:11] Shannon Cross with Credit Suisse enquired how WDC plans to manage its opex as revenues recover. Wissam Jabre CFO replied that WDC is managing its opex tightly and expects opex to increase as the business recovers, but not faster than revenue.

[00:53:01] Timothy Arcuri with UBS asked about the current NAND utilization rate and asked if there’s a milestone for when HDD under-utilization charges will go away. Wissam Jabre CFO said WDC expects underutilization charges to remain flat in 1Q and decline by 5-10% in 2Q, with all of the decline coming from HDD. It is too early to say when HDD underutilization charges will go away, but they do not need to reach $2 billion in revenue to be fully utilized.

[00:55:31] Timothy Arcuri with UBS enquired how will WDC’s debt service costs increase when it replaces its 1.5% convertible debt with new debt, and how will this affect the company’s capital structure. Wissam Jabre CFO said WDC expects the interest rate on its new debt to be higher than the 1.5% interest rate on its current convertible debt. The company is still evaluating its options and is aiming to maintain a lower cost of capital.

[00:57:26] Ananda Baruah with Loop Capital asked when does WDC expect 26-terabyte and 28-terabyte drives to reach crossover, and the factors driving this. David Goeckeler CEO replied that in the next few quarters, there will be a balanced distribution of capacity points in the HDD market, with 26-terabyte drives becoming a leading capacity point.