Western Digital Corporation (NASDAQ:WDC) Barclays 22nd Annual Global Technology Conference December 12, 2024 12:15 PM ET

Company Participants

David Goeckeler - CEO
Wissam Jabre - EVP and CFO

Conference Call Participants

Thomas O'Malley - Barclays

Thomas O'Malley

Welcome back to the Barclays Global Tech Conference. I'm Tom O'Malley, semiconductor and semi cap equipment analyst here at Barclays. Very pleased to have David Goeckeler and with Wissam Jabre here from Western Digital. Thank you guys for being here.

David Goeckeler

Thank you for having us. We're happy to be here.

Thomas O'Malley

It's a good time to be talking to you guys. You've had a long wait here. The Form-10 finally is out.

David Goeckeler

To read all of it.

Thomas O'Malley

I had some people to help me out there. I think that the most interesting thing that people paid attention to in advance and kind of now have a little more clarity to is the operating profit of the two businesses. Maybe, we start out by anything. first off, safe harbor. I think we're going to start off by reading the safe harbor statement.

David Goeckeler

I think that's a good way to start.

Wissam Jabre

So, we'll be making forward looking statements in today's discussion based on management's current assumptions and expectations, including with respect to the separation of our businesses, our product portfolio, business plans and performance, market trends and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties.

Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risk and uncertainties that could cause actual results to differ materially from expectations. We'll also be making references to non-GAAP financials and reconciliation of our GAAP and non-GAAP results can be found on our website.

David Goeckeler

Now we can get into it. Did you have any questions?

Question-and-Answer Session

Q - Thomas O'Malley

There's a couple. Revenue split relatively evenly between the two businesses as we've known, but profitability, you get a view of the flash business in general. Can you talk about efforts that can be made on the flash side over the course of the next year, where you can see that increasing profitability? Obviously, you have the supply demand dynamic, which is going to be something out of your control largely, but on that portion of the business, could you just walk us through, what are areas where you can do some, I would say, self-help or areas that you can help improve profitability there? That'll be the focus.

David Goeckeler

First of all, let me start, just give you a little overview of where we are in the process. Because it's been a big, it's been a huge effort. We announced this back on October 30 last year. We were kind of putting a pin in the end of this calendar year, and to be ready to go through this separation. And I think that we've kind of -- we're landing the plane here, I think in a very smooth way. We've got an enormous amount of work done internally. We went through this soft spin phase where we split all the systems and we're operating. They can accept orders as two separate companies. That was kind of getting our own internal house in order. And then the next goal was to get the Form 10 out, which we did before Thanksgiving. I think anybody that took a look at it can see it was a very extensive document and an enormous amount of work went into it, which we really thank all the people that have been involved in that.

Now, we're moving on to the financing of the Flash business, which is happening right now. And then we'll go into a phase here of finishing up the quarter and closing the quarter and going through that in January. And then, we'll get back to executing the rest of the separation process. So that's where we are in the process. We feel really good about where it's at. We've gotten a lot of questions on, is this going to be timed of where we are in the cycle or where the market's at? That's not what we're doing. This is like long-term strategy. We think it's the long-term right structure for the business and we're driving to it as expeditiously as we can and we think it's going quite well.

Thomas O'Malley

We can even back it up a little bit from there, because I think a great question to follow-up with that is, you talked on the earnings call about operating the business separately throughout the quarter and seeing if the processes in place were such that you felt comfortable having the businesses separate. How has that gone thus far? We're a decent chunk of the way through here. So, anything that you would note since the earnings call about that process?

David Goeckeler

It's gone well. I guess, I'll say, I'll help with, it's the arbiter of this in the end because I think we've been clear. He's been clear that the end line is defined as we can close the books on two separate companies. Like you don't want to create a company without high conviction, you can close the books on that company when the first quarter rolls around. So, we've been executing as two separate companies. It's gone quite well, very smooth. Obviously, there's a lot of work going on under the covers to make sure that happens. But I think this is, maybe you can talk a little bit about this. We'll go into this now as we close the quarter and make sure that all the systems are in the right spot and revenue is accounted in the right places and expenses.

Wissam Jabre

Yes, of course. So, as David said, we've been executing smoothly. We're basically doing a dry run for our systems, our processes, the ability to sort of operate two separate companies under one umbrella. And so as we get closer to the end of the quarter and we close the books, we're going to be closing them as if we're two separate companies, but we will be reporting as one company and that basically is meant to give us conviction that we pretty much can -- we pretty much stood up to independent companies and we can operate them as such. And then basically that will get us to the point where we can start going through the process of the separation and the actual spin.

Thomas O'Malley

Okay. All right. So looking at the split there, the Flash side, I think the debate here is what is supply demand going to look like in 2025? So any comments on the state of the market from a top line perspective, one. And two, to the original question is, clearly you've gotten a view of the operating margins for the first time. What can you do from a self-help perspective to help improve those as well, because I think that's an area of leverage that people will pay most attention to?

David Goeckeler

So, let's walk that down from kind of the bigger picture down into the smaller picture. So, what can we do? So, we put out a whole webcast on this, a new era of NAND. We think the business needs to be managed differently. I mean, this idea that there is perpetual 30% growth that we're all supplying into is not realistic. So, let's get realistic about that number. It's really kind of high teens. We were a big believer that this idea of the layers race is over, like let's build the largest stacks, most expensive CapEx intensity NAND we can and just put that in the market. Let the market absorb it. That's a kind of 2D era way of managing the business. So, we're kind of navigating out of that.

Let's look at how much we supply the market, whether it's either through nodal transitions, or wafer starts. Let's match that more to what real demand looks like on a multi quarter basis. Not just count on elasticity to soak up all that supply we're putting in the market. Let's do more work on innovating within the node as opposed to the new node is always the way to generate, to build new products, whether that's performance and when you start talk particularly about us, we now have this wafer bonding technology where we can like independently innovate the NAND stack from the CMOS.

So, if you want to build different interface speeds, different interface types, you can do that and then bond that together and build a different variant of the product. So much more flexibility in the ability to innovate and what kind of products we bring to market. So, we can do all those things of how we manage the business and we think that's the way the business needs to be managed and that's the way we're going to do it. We can talk about us in particular. We've got, we believe as a business we've got scale where it really matters. If the core NAND technology that you're building is not the best product, you can't really make that up in what you're going to build -- what we're going to -- you're going to use it to build, you can't build like an enterprise SSD. That makes up for the fact that your NAND is not as capital efficient or has the best performance possible. This is where the JV is very important.

We have scale of R&D as the largest provider in the market. That means we can invest more engineers, as many engineers as anybody in the market to build the best core product. We then attach that to a very unique go-to-market. A large percent of the business is a branded consumer business that's very different from us, that allows us -- that gives us better through cycle, profitability, less cyclicality in the business. So, there's lots of things we can do as far as levers about how we manage this business that we're very excited about.

Now you bring that down even your question. So what's happening on the ground right now in the business? It's a very -- we've said this for the last month or so. We're expecting a few choppy quarters here. We're kind of in a mid cycle point in the business. I think the thesis is quite well known. PCs and smartphones have kind of got enough inventory. They kind of ramped up coming out of the downturn. Those markets demand is maybe not as you know, we're more optimistic about demand as we move through ‘25 than we're seeing right now. We've got enterprise SSD which is strong. But as we go through this quarter, I would say it's fair to say in this quarter there's more pricing headwinds than we expected when we entered the quarter. It's an extraordinarily dynamic quarter. We're not done yet. We'll see how it all adds up in the end.

But it's a very, very dynamic quarter. We think that that's going to go into next quarter. We're very optimistic on the setup of the business as we go through ‘25. If you look at the amount of CapEx that's been invested, we have a positive bias on PC is coming back. We have a positive bias on smartphones coming back. We think the data center eSSD has legs throughout the year. But if that doesn't play out and we see these near-term dynamics, we'll adjust production appropriately.

And that's maybe different than the last time we went through the downturn, where maybe there was too long of a wait to turn the supply dial down because the demand wasn't there. I think as we're thinking about the business now, if we continue to see these-- although we're very optimistic about the business as we go through ‘25, we like the setup. If we see two, three quarter of this and we're going to see this kind of choppy, more headwinds than we expected, then we'll look at the production side of the business.

Thomas O'Malley

Of course, I asked a deep question right away and then you answered my next five questions. So why don't we touch on a couple of those.

David Goeckeler

I'll try to be more brief really quickly.

Thomas O'Malley

Very good. So I guess the first question is just on the utilization in the market today. So you obviously have a unique JV that is a little different than people who are just utilizing their own factory. There's a little bit more of a complex arrangement there. But if you were to look at the industry today, could you talk about where you think utilizations are on the core NAND product? Let's just separate eSSD from traditional NAND.Where are the utilizations today?

And you talked about, right, sizing for potentially some choppiness. If that does occur, you're not saying that is going to occur, but how easy is that for you to do? And do you have the ability to pull back aka are you already at a low utilization rate? Are you close to kind of being fully committed?

David Goeckeler

So this concept of utilization is very complex, right, because there's a nodal mix and how fast you move the nodal mix forward, I mean we can change output in the fab by how fast we change the nodal mix. People say things like full utilization. I think we're more comfortable with maybe normal utilization, right, because you're maybe also changing the fundamental structure of how many wafers you can have in the fab at any given time.

So I think everybody has to look at that for what they see in the demand of their own products. Everybody in the industry has a different mix, a different end market they play into. I think one thing about the NAND market is we tend to talk about like the NAND market, but the NAND market is like a huge market and there's a bunch of subsegments in that market. I mean, the big three are PC smartphones and data center.And then around that you've got automotive, Iot gaming, like there's one of the big strengths of NAND is there's always a new use case for NAND.

I mean, if somebody is going to come up with a new use case for storage, it's most likely going to be in NAND. So I think you have to look at what your end markets are, what your mix is, and then get your supply matched to that. And I think, again, I'll go back to this. The way we think about this now, this new era of NAND, it's not just about rolling the node forward, putting the latest product out there, because you can, because we can build it because we have really, really smart engineers and they can build something that is super productive and a fantastic product. We don't just build it because we can. We've got to match that to what we think the demand is for our business and we make that decision dynamically.

Now the JV structure doesn't change the way we can make that decision. We can independently -- although we manufacture together, we have the same technology roadmap. We can make independent decisions on how we load the fab on a week by week basis. Anything to add to that?

Wissam Jabre

I mean, that's how we've talked about how we have the capability of doing that as we were going through the prior down cycle. And you saw us manage very effectively. Not that I'm anticipating we're going to get, but we have plenty of levers that we can utilize.

Thomas O'Malley

Okay. So another part that you mentioned that I wanted to hit on was eSSDs. So two things. It's obviously becoming a more substantial portion of your business already. It sounds like you expect that there is room for growth into 2025. How big can that growth factor be is question one. And the second part of that question is if you look at like the application, there's obviously some return in enterprise demand, which has been muted for a while.But then there's also the AI side of things as well. Where is that demand profile being driven from and where is Western Digital from a competitive perspective there?

David Goeckeler

So we're excited about the portfolio. We've been working on this for a while. We have a different portfolio than most I talked about before. We're very strong in consumer, we're very strong in client. And we've had this opportunity to get stronger in enterprise, which is good.It's great to have areas to grow into that are profitable parts of the business. It's a difficult part of the business. You have -- every customer wants a slightly different enterprise SSD.It's not like you build one SKU and sell it to everybody. Everybody wants slightly different features. You got to get this, all right.

And we've been making progress on that.We entered the year thinking that we would have about 10% of our bit shipments by the end of the fiscal year being an enterprise SSD. We up that now to 15 %to 20%. We're still happy with that number. The portfolio continues to improve and we expect that to continue throughout the year. So, we're playing into a growing market with a stronger competitive position. We're still going to keep our eye on the ball of we want a diversified portfolio, we want optionality. But we've got a ways to go to grow into the enterprise SSD market and we feel good about where we're at and we think that's an improving story.

Thomas O'Malley

And you sit at this unique intersection and this will be my bridge to the hard disk drive side of seeing both of those worlds. So when you look at those two offerings today, you largely haven't seen that much adoption on the hard disk drive side going to AI. There's a variety of reasons in conversations I've had at this conference where people talk about why that is, why it is, but where do you see the long-term storage solutions moving for AI? Is it more on the NAND side? Is it more on the hard disk drive side? Maybe walk through that.

David Goeckeler

So I realized I didn't answer the second part of your question. Is the enterprise SSD demand coming from returning enterprise or AI? And it's both. I mean, that's the beauty of NAND. I mean, training large language models was not a big use case in the world three years ago. Now it's a huge use case and it's driving demand for lots of products, including enterprise SSDs. And I think this segues into your question on HDDs versus enterprise SSDs. The vast majority of what you'll call bulk storage of what gets stored, of what we all produce on a daily basis of content is going to be stored on HDDs, right? Especially if you store a lot of data. Like if you're a hyperscaler, you store an enormous amount of. So HDDs are just fundamentally cheaper way to store data on a per bit basis.

And when you store a tremendous amount of data, it is worth you going through that arbitrage to figure out what I should store on HDD and what I should store on flash, right? So that architecture has not fundamentally changed. And so as the world produces more data and more and data becomes more valuable, like I'm seeing a lot more now just in the last month about people are running out of data to train their large language models. Well, that just tells you the incremental value of storing data has gone up.

Of all the data that's produced in the world, we store like a high single-digit percentage of it. And as you continue to drive the cost of storage down, this is an important concept in the storage business. Application of R&D and innovation to drive the cost down expands the TAM. The HDD business has a long roadmap in front of it of continuing to drive better TCO. And as long as that continues and as long as the value of storing data goes up, more data is going to be stored on HDDs. Now it's harder to put your finger on because in Flash you have new use cases that emerge that you only do on Flash.

If you're going to train a large language model, you're going to have to have a lot of enterprise SSDs. You need a lot of GPUs and DRAM too. And that's all great, but you need a lot of enterprise SSDs. That is a new use case that came up in the world that drives demand for Flash. That's what's so exciting about the Flash business.

Now, how that translates into excitement on the HDD business is as you train those models, you're going to create more data in the world. You're essentially automating the creation of data, right? Why film a video when I can just create one from a large language model. And I can do that like instantaneously. All that data is going to go back onto HDDs. And so this -- it's a virtuous cycle we put out another piece of work, the AI data cycle that kind of decomposes this. It's kind of a model where it's bookended by HDDs.

If you're going to train a large language model, you're going to create a data lake by pulling all of that data off of HDDs. You're going to put it on high capacity enterprise HDDs or enterprise SSDs. You're then going to pull that into a high capacity enterprise SSD to feed a GPU cycle. You're going to create a model, that model is going to go on a device where you're going to use inference. That device is then going to spit out more data which is going to go back onto HDDs.

So you tend to see an enterprise SSD the kind of there's a great new use case in the world. It's driving demand for HDD or driving demand for Flash. And then this conversation always comes up, is that cannibalizing HDD? And I definitely -- I just do not see the market that way. It's like that new use case is going to drive Flash which is then going to drive more data back onto HDD. They're both going to be successful. They'll have different growth rates. But as long as they're both continuing to drive TCO down, you'll continue to see, I think expansion of the market.

Thomas O'Malley

I think it's a reasonable way to think about it. I think that the technology development, as you started with, is very key and I think it's a perfect kind of segue into the hard disk drive side of the business, where I think over the course of at least the better part of 12 months, you guys have seen some technology leadership on the HDD side.

Your competitor just announced last week that they had finally gotten qualified at their lead customer to you. I anticipate your answer here, but is there any change in the technology dynamic, given where you were before? I could probably give it to you. But is there any change now that, that is qualified? Now that, that is a working product in the market, does that change your view of the market? And then versus where you previously were on your intersection point of that market with your HAMR technology, has your view of that changed either? A quick update if it's unchanged.

David Goeckeler

I'll let Wissam.

Wissam Jabre

So the quick answer is it's -- our view of the world hasn't changed. We've been stating our approach, our strategy for quite some time now that we do intend to continue to build our road map on ePMR and UltraSMR out in the high 30s terabyte. In fact, we launched the largest hard drive available out there with the 26-terabyte, 32-terabyte UltraSMR product.

And we have line of sight to continue to develop that technology and their road map into the high 30s until we get to that sort of 40-terabyte point, where we think the intersection with HAMR from a technology and from, more importantly, from an economics perspective, starts making sense. So that's how we've been operating over the last many years. That's how we continue to see the progression.

And you've seen the outcome. I mean, we've managed to continue to drive better margins because we're manufacturing on technology that's very well proven, that can be manufactured at very high scale, that is very highly reliable and where we understand the cost structure really, really well. And we will continue to work on it basically until we get to that sort of HAMR intersection.

Thomas O'Malley

And I want to go into the gross margins because it's been great. But in terms of the timing, I'll push just a little more here. Clearly, there was a delay in the original product for your competitor. When you think about when you think the 40-TB HAMR comes to market, do you have a timing for that or is that market-dictated?

David Goeckeler

We're not here to do a product announcement. I mean, I don't know if I'd qualify something as a delay. I mean, building products is very, very hard and they take as long as they take. And what we've been seeing is the end game of a multi-decade innovation cycle. I mean, HDDs are fascinating technology. I mean, it's physics, it's material science. I mean, this isn't -- nothing against software. I'm a professional software developer or was at one point in my life.

It's just a very different world and the innovation cycles are very, very long. And you got to get a lot of things right. And what we've been seeing is the kind of -- we've clearly, as two big players in the market, taken different directions. We basically have been working on HAMR for a very, very long time. Our peer has been working on a very, very, very long time. Our team made a judgment literally 10 years ago that said, we think this is going to take a little bit longer to mature than maybe other people made that judgment.

So we need to develop a little bit different road map to give this technology more time to mature before it's ready for prime time. I think that strategy has played out brilliantly well. We did develop different technology. We developed ePMR, right? Remember, we've commercialized ePMR over the last three to four years. Nobody talks about that. When we first started doing it, it was like, why are we doing this? Is this going to work?

Well, now you see why are we doing SMR? When we first launched UltraSMR, why are we doing this, right? The market is not going to accept SMR in the data center. Well, now the market has accepted SMR in the data center because it's a technology that can drive higher capacity per unit, better TCO for the customer. Then those technologies gave that HAMR road map more time to mature.

And I think that was a really smart strategy. I think it's worked very well. HAMR is maturing. For us, because we have these other technologies that we've built, that technology does not make commercial sense until 40 terabytes. When we get to 40 terabytes, I'm very confident. We saw them, that technology is going to be there to support the road map continue what I said earlier, driving the TCO down. This is what's exciting about hard drives is a very big bull on the hard drive business.

You've got a long runway and you have a major technology transition that's happening here. And we've been kind of watching something that takes years. We've been launching it quarter-by-quarter. And when you watch something that takes years quarter-by-quarter, it looks very variable and things are delayed or not delayed, but it's really just a long arc that's playing out. That long arc for us is going to intersect at 40-terabytes, and we feel very confident when we get to that point in the industry, we're still a couple of years away, we will have the right drive that supports the evolution that delivers the right technology to our customers.

I heard a little bit of the last session you just had, and it resonates very strongly. At the end of the day, you're a product company. You have to deliver great products to customers. If you deliver great products to customers where they get a better value proposition, it is -- if our customers deploy that 32-terabyte drive, it is a better value proposition for them. It's better TCO. They have to spend less money that's where the economics get better for us. And the hard drive business has a long road map of being able to continue to innovate to make that equation better and better and better for the customer. And the demand drivers are there, as we talked about earlier. It's not a demand-side problem. Demand drivers are there. It's a great setup, a great setup.

Thomas O'Malley

Yes. I think from a technology road map perspective, I think most would agree you've taken the right approach. I think not to say that there are multiple things that are also helping. I think from a supply perspective, that has been the more near-term positive for you guys where you've changed the dynamic of the industry by slowing spend.

Could you talk about in that journey, which has clearly been the better part of a year now, where are you? Do you still have room to turn the dial on pricing with your customers? Is this something that as investors we should expect longer term, we would see on a year-over-year basis? Is this the new norm?

David Goeckeler

You're asking a longer-term question about HDD. I have to turn to my friend here. He is going to be long-term CFO of the company.

Wissam Jabre

So I think the -- I mean, when we think of the dynamics, it's -- at the end of the day, it's about the product portfolio, the ability for us to continue to innovate and drive or help our customers maintain or drive the TCO down. If we manage to do that, and that's obviously our goal from executing on our road map, then we should continue to be able to benefit from the value of these products.

Look, the September quarter, we were up like 15% year-on-year from a gross margin perspective, which is -- which was sort of continuous improvement quarter after quarter. So we're pretty much at a place where we think the margins are good. It doesn't mean that we're done. We're going to continue to improve on them. But it's going to end up being through continuing to innovate and develop exciting products that help our customers drive TCO down as well as continuing the focus on cost structure and innovating in the way we manufacture and manage our supply chain.

Thomas O'Malley

Well, it sounds like a lot of exciting opportunities across both businesses. I'm sure we'll be talking about them more and more over the next couple of months, but I really appreciate you both being here and spending time on each.

David Goeckeler

Thanks a lot. We appreciate it. We're very excited about where we're at, and we're going to drive to the separation expeditiously as we can. And we're just -- that we think the setup is fantastic.

Thomas O'Malley

Thank you very much.

David Goeckeler

Thank you, man.

Wissam Jabre

Thanks, Tom.

David Goeckeler

Appreciate it.

Thomas O'Malley

Thank you, guys.