Western Digital Corporation (NASDAQ:WDC) Citigroup 2024 Global TMT Conference Call September 4, 2024 7:30 AM ET

Company Participants

Wissam Jabre - Executive Vice President & Chief Financial Officer
David Goeckeler - Chief Executive Officer

Conference Call Participants

Asiya Merchant - Citigroup

Asiya Merchant

Welcome to Citi’s 2024 Global TMT Conference. My name is Asiya Merchant. I cover the tech hardware, tech supply chain here at Citi Research. We’re very pleased to have David Goeckeler and Wissam Jabre from Western Digital. This session is for Citi's clients only [ph].

I'm going to first turn it over to the management here to have some quick Safe Harbor statements and then we're going to jump into Q&A. Welcome, everyone. Thank you.

Wissam Jabre

Thank you, Asiya. Good morning, everyone. We're going to be making forward-looking statements into those discussions based on management's current assumptions and expectations in coming with respect to our product portfolio, business plans and performance, market trends and dynamics on future financial results. These forward-looking statements are subject to risks and uncertainties. Please refer to our low teen financial report on Form 10-K and our other filings with the SEC for more information and risk and uncertainties that could cause actual results to differ materially from expectations. We'll also be making references to non-GAAP financials and the conciliations of our GAAP and non-GAAP results can be found on our website.

Question-and-Answer Session

Q - Asiya Merchant

Great. Thank you, David. Thank you, Wissam. So I'm going to jump right into it. I think top of mind is this thing which you guys have been talking to investors about. Maybe for those in the room, just a quick recap on the strategic graphs now for spinning out the 2 businesses. And what should investors focus on as you look at these businesses individually.

David Goeckeler

So first of all, thank you for having us. Great to be here. We spent a lot of time thinking this through and it's a company who trying to be real and focused on getting the Zones business executing extremely well and we're looking in the company. I think I have first step, we've spent a long time in the portfolio is getting the businesses in good shape. I think they're executing extremely well. Our AC business is the largest, fastest-growing, most profitable HD business in the industry. Our portfolio is in good shape. We can talk about that maybe a bit lower and on cost business, we point executed on a profitability basis better than it. We have a very 1 portfolio as to be consumer franchise, client as a team, we have an aging energized SSD portfolio which I think we'll talk about -- what we're seeing for these businesses are just timing on this page. We think there are different businesses from an investment perspective. We will steer pot intensity business, are no predictable cash flows I think investors want something different out of that business. They run capital return policies in the glass business is in total in terms of business cyclical business we'll look at what we and storage assets.

We think these are better separate assets, especially around that they're executing extremely long. And so I think we started down our process. We announced it October 30 of last year. It's on a very big base inside the company with Super companies got 50,000-plus it’s -- it's 2 big franchises, we mean gibbon our path and we expect to getting to the plants month early October and we've got all of our IT systems separated. We've got our self-organized and where we can start operating 2 separate companies and make sure we can process orders, make sure we collect on in a road on an attributable to 2 separate businesses. It's called the soft spin in the parlance of people that do spins all the time. And we'll execute in that mode for the next quarter through the December quarter. And then when we get through that, we get conviction, we can close the books on 2 independent public companies. We'll do that most likely through the December quarter and then we'll go through the separation process. So a very long process.

We're very excited about it. We think we have 2 fantastic businesses going to spinning the flash business, give investors the opportunity to decide how they want to invest in those as separate assets. As I said, they're both executing extremely well. So making progress on continuing to build up the teams for each business. I think we've talked about last quarter, I'll be going to leave the flash business. We saw we'll be going to be the CFO of the HDD business. We'll do teaming up with Irving Tengler, who joined the company about 3 years ago in head's operations out of Singapore. He'll become the CEO of that business. Extremely excited about the turnaround I'm going to lose my partner here at Visa and we've had a great run together in this business but to have an enormous amount of confidence in Irving and Wissam are going to be great running that business.

And within the last couple of weeks, we've hired a new CFO for the flash business. He's now joined the company, a gentleman by the name of Lisa and he's got a very, very deep background in both the consumer business and the technology businesses. And I think 1 of the very interesting things about our flash businesses. We do have a very large consumer franchise, about 1/3 of the revenue is consumer and very important brands like SanDisk and SanDisk professional. And I think Louis joining us to team with me to run that business is another step in us getting to the point we actually go execute this separation. So, we're really excited about where we're headed and we think we're on a great path to unlock the value of these franchises.

Asiya Merchant

The question about been asked about Kioxia that's your partner for the flash. They're going through some kind of an IPO on their own. Does that have any changes or any impact to the JV?

David Goeckeler

The JV has been a great structure for many, many years, over 2 decades. I expect it to continue to be a great structure. In fact, in the last quarter, we've signed an agreement for all of the Kitakami fab 2 which is our next production site which will extend the JV through 2034. So a big part of the JV is our combined road map. We work together on the BIC road map or because of our -- we're able to invest an enormous amount of engineering resources in that. We think that puts us in the best position in the industry to have the best fundamental technology road map. We look back over the last decade, we believe we've invested about 1/3 less CapEx in the business to get the output we need as industry average.

And I think that's a reflection of our ability to drive an R&D road map that is very, very sound and very sophisticated and quite frankly, we're able to invest as a very -- as the market leader in having the best technology, we have manufacturing behind that are now in datacom through 2034, the Kioxia fab through 2029-2030 time frame. So the JV has been through a lot of different corporate structures on each side of this. And I don't expect that to change at all as part of them going public and are going through our spin. It's just another iteration of the structure of each of our companies but the JV is very sound and it's a very, very big structure. Something that I've invested quite a bit in since I've been here about making sure that relationship is very strong and continues to be strong. So we expect that to continue to go forward.

We are looking at -- as Western Digital and we go to the spin structure, we do have this opportunity in this 2930 time frame where we have some of the capacity becoming available that we could potentially move to a different fab or even a captive Western Digital fab. I think that's optionality we have. And any time you have an optionality, you're always going to evaluate what you're going to do at that time. So we're looking at that question, but having just signed an agreement through 2034, we're really, really happy with where the JV is at.

Asiya Merchant

Great. Question about end demand. As you sit here in calendar third quarter, maybe if you can think about how you think the end demand across the various client, cloud, consumer business has changed. Let's say, relative to where you guys were 6 to 12 months ago. And when you think about your end demand going forward, what are some puts and takes to your end demand outlook?

David Goeckeler

So 12 months ago, it was a very interesting pin to put in the calendar as far as where we were because that's where we were kind of in the depths of the downturn, we were just starting to see the business turn the NAND business I'm talking about. And so we did see a very, very strong recovery in the business. Everybody has seen that for the last several quarters. That was really 1 way to think about read by the PC business, a lot of recovery in and building back inventories and getting back a level of product into the -- to support the normal flow of the business that really led the recovery over the last several quarters. I would say that business is taking a bit of a breather now or maybe a little bit of a plateau before it makes its next move. And the market that didn't participate in the beginning was the data center market.

We didn't see the data center market really moving at the beginning of the recovery. Now we're really seeing leadership transition to the data center market and that market is very strong. So we've seen that transition in the business. Of course, around that, we had good consumer recovery in the first half of the year and now we're seeing, I think, some general consumer headwinds and just consumer spending. So that business is taking a little bit of a breather as well. But over the last 2, 3 quarters, we're seeing that location and leadership of where -- what's driving the market forward. When you look at the NAND business, the big picture driver for us is always we look at CapEx spending across the whole business, like when is -- how are people investing in the business.

And we've been pretty clear that we're going to look at the business differently. We want to see sustained better than through-cycle margin target performance before we think about investing CapEx and we're seeing the business get back into that through cycle and above level. So we're still in that we're still in that phase. When you look back the last couple of years, we haven't seen a tremendous amount of investment in NAND. So we expect continued supply demand -- good supply-demand dynamics in that business for increased profitability -- but of course, it's a very dynamic business. You're going to see different changes in different pockets of the business. As I said, leadership is transitioning from 1 part of the business to another. So that's kind of how we see the NAND business.

HDD business again, as you start to see that data center recovery very strong in HDDs; we've talked about that the last couple of quarters. We just had record profitability in that business last quarter. We continue to see very strong demand for HDDs. We -- as part of the downturn, we did kind of a major reset on the amount of capacity we have in that business. And I think for the first time in quite some time, we're seeing supply-demand balance in that business which is leading to better dynamics around visibility in future demand on the business, pricing and so we expect that to continue -- we have good visibility over the next 2 to 4 quarters in that business.

Do you want to add anything to that, Wissam?

Wissam Jabre

I think you've covered it very well, David. The 1 thing I would add is you mentioned the -- throughout the downturn, we took some cost action out. And so it's been we started seeing that margin expansion at lower volumes a few quarters ago. And as sort of the recovery continued, obviously, as David mentioned, we got the sort of record profitability with volume coming back, pricing being a good -- also a tailwind for us and we expect sort of -- we will continue to focus on margins and profitability going forward.

Asiya Merchant

Fair enough. Digging into the flash business, maybe first, David, people are really nervous here about flash pricing, what's going on there? If you've just started sort of is just starting to get recovered, recovery here? Why is flash pricing maybe across certain end markets not doing as well. So if you could just dial down on that one.

David Goeckeler

So yes, the flash market is a very big market, first -- so almost any interesting technology and device in the world is going to use flash, right? So there's 3 may change markets and smartphones, PCs and data centers. And then all kinds of things around that, around IoT devices. And we all know how ubiquitous flash is in the world. And I think it's what I kind of outlined it a little bit earlier, intermarket is going to behave a little bit differently and they're going to recover at different times. They're going to -- we saw, for example, the PC manufacturers, I think, kind of OEMs lead us out a very, very strong recovery in the flash market. I mean a very strong recovery over the last couple of quarters.

Naturally, as they build back up inventory positions, they're going to get back to a level where they don't have to have quite as much demand after they build that inventory position and maybe take a little bit of a breather as the business sits a plateau before it takes the next move up, I think that's a natural thing that we're seeing. We didn't see the data center business move right at the beginning. We're seeing very strong data center demand now. And then you mix in with that macro headwinds or macro consumer spending around parts of our business where you have consumer and channel more transactional business. And we're just going to see a lot of different dynamics around how each business moves and the pace it moves -- and it's not -- every part of the business is going to be a little bit different each quarter.

Now when you add it all up, we're still seeing like-for-like pricing increasing going forward. We're seeing volume increasing we're seeing our blended pricing go down a little bit this quarter because of mix. We're mixing more into mobile than we would in a previous quarter; so you're always going to see that kind of dynamic. But again, I back up and look at the big picture and look at capital spending and where supply demand is at. And I think that's still in a very healthy place. There as each of these markets continues to go through its own individual cycle, if you will, that the overall dynamics of the bucket, we think, are still in a very good spot.

Asiya Merchant

Talking about the end demand, the question, obviously, especially as it relates to PCs and smartphones that you talked about, is AR really an incremental driver for maybe additional NAND bits in each of those end markets?

David Goeckeler

We believe it will. I mean, we put out a webcast this past quarter on the AI data cycle where we try and kind of demystify how AI really impacts the storage business. There's many different phases of that, where it impacts both the HDD and the flash business and the flash business is going to impact it in both kind of the training cycle of the AI data cycle and we're seeing a lot of that with AI data centers being built and the strong demand for enterprise -- it's also going to implement the edge on devices where you get to the inference phase and this starts to get deployed. So we're certainly believe first that AI models are going to come to smartphones.

The AIPC is going to be real. We think smartphones are going to be impacted first as we come out of this as the manufacturers prepare for that and put more capacity per device. We think the AIPC follows that. So we think that these are part of the third macro tailwinds of AI getting past just all of the training phase, getting into the infant phase, getting these models deployed on devices -- and our -- the NAND business is predominantly a device business, right? I mean there's obviously a big data center component in it but there's a huge device business out there for NAND and we think as AI becomes a nice tailwind to that business.

Asiya Merchant

Yes. All right. And then the data center, switching to SSDs -- can you -- I know it's a growing part of your business and you've talked about it being at least double digits for the fiscal '25. So maybe you can just remind investors what are your current offerings there, how you're thinking about growing share in that business? And where are you seeing traction specifically as you're growing that business?

David Goeckeler

So I would say pre-downturn, we had just gotten to the point where we had qualified enterprise SSDs at a number of major hyperscalers just in time for the market to kind of really go into a major downturn and not a lot of buying happening in that market. So we're seeing a couple of things now as data center recovers. One, we're seeing that traditional kind of hyperscale data center demand return. And then -- so that's good. We already have products qualified. Those -- we're shipping those and more volume now. And we also kept our shoulder to the wheel during the downturn and continue to build new products.

And so we've just launched a new enterprise SSD focused around the compute part or when you're going through model training or really feeding that GPU complex and so that requires a very, very fast PCI Gen 5, enterprise SSD. We're just launching that product. It's in many, many, many, many qualifications. It's been very well received. We believe it's the highest-performing enterprise SSD in the market for PCIe Gen 5. So that's really hitting this different customers building large language model training infrastructures that product really hits right in that sweet spot of the high-performance enterprise SSD that's important for that.

So we're seeing emerging traction there. Of course, we're seeing demand for larger 30 and 60 terabyte enterprise SSDs as customers build out their training infrastructures, they need those large enterprise SSDs as they prepare the data lake, they pull all that information off of HDDs, they prepare it in a data lake. They do all of the things they need to do to get that data in a form where it can then be pulled into the training complex by these faster enterprise SSDs. And so that's -- we're building those higher capacity enterprise SSDs. We expect to have those in the market in the second half as we go through '25. So we're seeing demand from the products we had qualified before the downturn, that demand is returning.

We're putting new products in that really hit the sweet spot of these AI training infrastructure. So we feel like the portfolio is well positioned -- as we said on our last call which you referenced, we expect when we add it all up for fiscal year '25, that enterprise SSDs will be about 10% -- double-digit percent of our bit shipments for the year. So that's good progress in 1 year about where our enterprise SSD business is. Again, our portfolio, what we're trying to do in our portfolio is to have a balanced strategy. We want to be able to sell our products and our supply to as many places as we can and then mix across all those different outlets to get the best return every quarter. So as we talked about, one, we have a great consumer franchise we can sell around the world.

We have hundreds of thousands of brick-and-mortar places where people can walk in and buy our products and buy a SanDisk product. That's a great franchise for us. We're very well positioned in the client business. We have a great position in mobile, IoT, auto, gaming. We have a great brand in gaming on WD Black, also play -- we're able to say that market with a gaming console providers and the retail side of it. And now we're bringing in the final major pillar to that portfolio strategy which is enterprise SSD. And what we try to do every quarter is where do we see the demand across those markets? Because as we talked about earlier, all those markets are not all going to move in unison.

Like every market is not going to be the same every quarter. They're just -- they're too big. They're 2 complex every market is going to have a different demand, different profitability and we want to be able to mix across that to get the best through-cycle performance. That's what we're driving for best through-cycle performance. And I think as we saw throughout the downturn in the recovery, that's what we're delivering, the best profitability on a through-cycle basis for the NAND portfolio.

Asiya Merchant

A little bit on the node transitions. When you talk about the flash business, where are you in the node transitions? Maybe if you can double-click on that? And how does that affect your market share positioning? Or does it introduce any kind of risk to meeting demand?

David Goeckeler

Think from a nodal strategy, we have a lot of opportunity. As I said before, this is 1 of the -- I think that a lot of times in the JV, there's a lot of focus on the manufacturing side and appropriately so, I mean, NAND manufacturing is important. But when I look at it, it's really that team that's just defining the BIC road map, right? And when you run a technology business; you think about how many engineers you can put on solving a particular problem. And the number of engineers you can put on solving a particular problem is almost perfectly correlated to your market share, right? And so -- the fact that when you put us in KOC [ph] together, we're able to put that amount of resources on driving the BIC road map forward is why we have such a great technology base.

And I think if you look at this over a long period of time, we stay very focused on delivering the best technology at least amount of CapEx required to bring that technology to market. So right now, we're in a position where we have a number of nodes kind of in production. We still have BIC 5 which has been the most capital efficient, most productive node in the history of the BiCS5 road map is kind of the workforce of the portfolio right now. We have big 6 which we're producing which is really, for us, is where we're going to move parts of the portfolio to Big 6. Usually, we would move the whole portfolio from 1 node to the next node to the next node.

And I think as you heard Rob Soderbery talked about the new era of NAND. We're thinking about this very differently now. We want to move the portfolio where we get the best innovation out of each particular node. And so Big 6 is going to be where we're moving part of the portfolio around -- so we also have a new client SSD we've just launched in the last couple of quarters on -- which is a QLC-based client SSD we believe that product has the best performance in the market on the client SSD side. So really strong QLC performance out of that big 6 node -- and then, of course, we still have big in front of us where we've talked about a lot, where we have this very significant architectural breakthrough on wafer bonding, our circuit bonded the array, where we can produce the CMOS separately from the NAND the NAND stack and then we bond these 2 wafers together.

So that gives us an enormous amount of benefit of, one, you can scale yields independently on the NAND stack and the CMOS wafer. The CMOS wafer because you're not building the NAND stack on top of it is maybe a little pure. And so the interface speeds you get out of that are just really, really superior. We can now start to think about bonding different CMOS technology to different NAND technology to create different sets of products. So we can now have different innovation levers. Now you can move those 2 levers at different rates at different paces. So that product, we're extremely excited about. It's starting to produce now. It's completely in front of us. So we think from a -- from a nodal strategy, we have a very strong line-up. We've got a lot of really great innovation that's in front of us.

And as we want to drive those nodes forward as the demand is there in the market and we see the profitability where we want it to be. We have all of that in front of us. And of course, if you go to the R&D teams, they're off working on stuff that's well beyond BIC. So we're not talking about that just yet. But again, that's the part where we have this very large R&D team between us and Kelcy [ph]. We're looking at nodes well down the road from those. So we think that -- this is a particular strength of the company. It's particularly in the NAND business, you have to start with good fundamental technology.

You can't make it up by you can't make it up by designing a controller on top of the -- if you don't have the fundamental technology in the right spot. This idea to be able to innovate within the node, around performance, around density; this is really where the business is at and we think we have a tremendous foundation under us and the teams have really, really delivered as far as giving us a very strong NAND technology road map.

Asiya Merchant

Okay. I can switch a little bit maybe to the HDD side of the business now. You've talked about demand drivers here for nearline cloud customers. Just a little bit on visibility, how do you find -- how do you feel about visibility in that end market? And then people often ask this question, is AI really an incremental driver for HDD side of the business? I know we talked about flash a little bit but maybe help us understand why you think AI is incremental for HDDs as well.

David Goeckeler

I'll let Wissam take this one.

Wissam Jabre

Yes, sure. So on the visibility of the business in the near line specifically, we do have visibility much better than sort of prior quarters, we can see within at least another maybe 2 to 4 quarters ahead of us. The -- coming out of the downturn, as we've resized our capacity, we've also implemented a build-to-order approach which basically we work very closely with our customers to get earlier visibility of our demand -- of their demand. And so what we see is they're providing us longer-term forecasts which allow us to get better visibility to plan also our supply chain. So yes, as I said, we have visibility for 2 to 4 quarters.

With respect to AI, our current demand, what we see in our current demand is more of normal ordering patterns and inventory replenishment. We don't think at least today, we don't see necessarily demand driven by the AI side of things. Now longer term, yes, we do see AI as an additional sort of growth drivers that that would enhance the CAGR or the longer-term growth of the bit demand in the hard on the drug side but it's not yet visible in our numbers today.

Asiya Merchant

Okay. All right. And then I guess there's always concerns about customers, how close you are to their audit patterns? Is there potential any kind of double ordering going on there? I know we touched a little bit on that last night but if you could just expand it over here for the broader audience?

Wissam Jabre

Yes. I mean, look, these are in any type of situations where we see demand sort of extending over a few quarters. There's always that kind of question that comes up. But we continue to triangulate with respect to trying to figure out where the demand stands. As from where we stand today, we don't think there's a double ordering happening. And obviously, we will continue to monitor very closely because that's also very important for us to be able to manage our supply chain. The -- the way to think of building a hard drive, it takes almost that today is taking almost 50 to 52 weeks to build a hard drive. And so there's -- this is a very long lead time supply chain and we need to be able to manage accordingly.

And so this is why having that earlier visibility and demand, as I mentioned earlier, on the build-to-order is extremely important because it's not only about our manufacturing process, it's also about the components that go into the hard drive and we need to be able to supply those and in tandem with our own manufacturing.

Asiya Merchant

Fair enough.

David Goeckeler

Sorry just 1 comment on that. I think that I'm really excited about where the HDD business is at. I think this business is just structurally a different business than it was several years ago. And I think, quite frankly, everybody involved in the HDD ecosystem is adjusting to that. ACDs were a technology -- it's always been a very, very important technology in the data center. I mean, the foundation of storage in the data center is -- and we don't see that changing anytime soon. They're both NAND and HDD are great technologies are both going to grow. But ACDs have always been plentiful, right? HCD has always been available. So customers have been able to basically, at any time, be able to acquire HDDs because the industry is coming off of this literally 15-year transition from client to cloud. And in client, you just need many, many more units.

We don't need all those units anymore. And -- we've structurally changed our business, to take that capacity out of the system. So customers -- our partners can't just show up at any time and like I need HDDs and we have them available. Now we all have to plan a little more, right? So we started with looking for some visibility I mean just -- I've only been in this business for 4.5 years. And when I came into the business, like the entire business transacted in the beginning of the quarter, price was completely renegotiated every quarter. Demand was given out every quarter. And so we've been slowly driving a change in that business.

But coming out of the downturn, there was a structural change in capacity was removed from the system, we think, to get supply/demand in balance. I think we're at that point now in the industry where supply and demand are more balanced. And our customers were asking them to give us more visibility to what their demand is a year out because we have to plan. We have to -- we have to put wafers through a fab which is a very, very sophisticated process to build the heads. That takes quite a bit of time. We obviously have our own supply chain to manage for lots of different parts then we've got to assemble the whole thing and test it for quite a bit of time before it actually goes into a data center.

I think 1 thing that should be fairly obvious to everyone over the last -- watching the HDD industry over the last, let's say, 18 months, is the quality that's required with an HDD in a world-class data center is a very, very high bar, right? It's not something that can be done very easily; there's a lot of work that goes on. The R&D is extraordinarily sophisticated the amount of testing that's required. If somebody is going to put that that component in their data center and basically run it for 5 years and never expect to have any kind of problem with it, that's a very high bar. And so it takes quite a bit of sophistication to build a product like that. And I think we now have the industry is more balanced.

So our business is more balanced around supply demand. So we're asking our customers to give us more visibility -- and quite frankly, they've reacted quite well to that. Like they understand. They understand it takes a long time to build this product. They understand that the product is very important to their infrastructure and we're working with them to get that more visibility. And at the same time, we've been able to we think get a better a better share of the amount of innovation we're delivering.

Remember, every generation of drive that we deliver to the market, we've just announced a 32 terabyte drive now with our Ultra SMR and PMR technology. That drive delivers better total cost of ownership to our customer that allows us that total cost bornership, there's a lot of value in that. And so we're able to drive pricing in a way that makes that product more profitable for us and still be a great value proposition for our customers. So I think that dynamic in the industry, it's been really -- it's been really great to watch that play out and drive that over the last 2, 3 quarters coming out of this downturn.

Asiya Merchant

Okay. Last 5 minutes, I'm going to ask the audience if they have any questions, please raise your hand so we can bring the mic over to you. Any questions from the audience? We have a question here, please.

Unidentified Analyst

Yes. You're good. Can you talk a little bit about the capital structure planning process for the 2 spin companies, or the split up of the company.

Wissam Jabre

Yes. Maybe I'll touch on that. So on the capital structures for the 2 companies, the way we're thinking about we're planning on -- sorry, architecting the capital structures for each company, we look at the specificities of that company, meaning the markets, it's in the capital investment that's required the growth profile, the volatility of the cash flow all the values in the privity [ph] of profitability. Basically, all the various things that you'd expect to look at by company but also the competitive landscape, how sort of that asset would compare to the companies that are already out there trading that space. So all of these are inputs that we take into consideration. And our goal is to set up 2 companies that have competitive capital structures that can compete effectively and basically be successful in their own markets but also, in many ways, be really good, attractive assets for investors.

So as much as I'm not giving out numbers. I'm giving you sort of the framework of how to think about it. Now as we get closer to the spin, obviously, there will be -- our SEC filing becomes public -- that will have a pro forma of the cap structures in it. And also that would be made available ahead of an Investors Day as well as road shows. So there'll be opportunities for investors to look at the material be ready for Investor Day to ask sort of the good questions around the -- how this whole thing was made up. So hopefully, that helps.

Asiya Merchant

Any other questions from the audience? One more.

Unidentified Analyst

Can you talk about the HAMR Technology and then the time line in your road map?

David Goeckeler

Yes. We've -- I think maybe for the first time in a very long time, different players in the industry have different technology road maps. And we very clearly made a decision quite some time ago, quite frankly, I think I've said this before, our chief architect showed me some material where it was all the way back in 2013, I believe, that the team looked at this and decided we needed -- we wanted to develop the EPM and the Ultra SMR technology before we got to HAMR. And that's what we've been doing. And we've been working on Hamburg for a very, very long time. HAMR is a big part of our road map because of the technologies we've developed around ePMR and Ultra SMR, was HAMR is not accretive to the portfolio until we get to 40 terabytes per drive. To build a hammer drive, it's a different bill of materials, different components. It's just more expensive.

So you have to have -- you have to have a big enough capacity point to amortize that cost for us to get accretive. And so we've got -- we built a set of technologies around ePMR, OptiNAND, UltraSMR that allow us to drive our road map up to 40 terabytes on that technology and that's exactly what we're doing. And that technology is proven -- we can -- it's easily qualified by our customers. I think I said earlier about how difficult it is to build the hard drive that goes into a production data center in the world is a very, very difficult task. It's a very high bar. It's not like building a hard drive 10 years ago that goes into a desktop system. It's a very different set of requirements in the operational requirements, the environmental requirements, the reliability requirements. It's a very different device than it was 10 years ago.

So we built a set of technologies that our customers understand extremely well. It's been qualified. Products are -- we ship millions of these products a quarter. And we have -- we've just announced the 32 terabyte or drive UltraSMR drive. The industry has adopted SMR, quite frankly. I think if you go back 2 years ago, there was a big question around that. People saw SMR is something that was mainly a consumer technology and it wouldn't be adopted by the hyperscalers. That's -- I think we've driven the market to adopt SMR. We have 3 hyperscalers now or 2 hyperscalers now on U.S. hyperscalers on some variant of SMR and we have the third 1 adopting it aggressively as we go into the second half of the year. So it's very clear that SMR is the current and next generation of technology in the world-class data center. And we're extremely well positioned for that.

Our UltraSMR technology gives us 20% additional capacity over CMR drive, everybody else in the market is a 10% amount of capacity increase, that 20% comes from -- the fact that we have OptiNAND in there, we'll be able to do some interesting design work and software that gives us another -- that incremental 10% that's really important, right? It's really important for the customer because they get a drive that's denser, it's a better TCO equation -- it's really important for us, quite frankly, because we're able to get that extra 10% of capacity without adding any additional cost into the system. So it's a more profitable drive. And I think you're seeing that in the industry where our profitability is now separated and is increasing and is putting us in a very good position.

So look, we're big believers in HAMRs. HAMRs Day will come -- but it's a very high bar to get into those data centers and we have technology that's going to drive us to 40 terabytes. And at that point, we'll make the transition to HAMR and we expect that to be a seamless transition.

Asiya Merchant

Thank you.

David Goeckeler

Thank you. Appreciate your time, everyone.

Wissam Jabre

Thank you for having us. Thanks, everyone.