All right. Good morning, and thank you for attending J.P. Morgan's 51st Annual Technology Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor capital equipment analyst for the firm. Very pleased to have Dave Goeckeler, Chief Executive Officer, and Wissam Jabre, Chief Financial Officer of Western Digital, here with us today. Let me turn it over to Wissam, who will read the safe harbor statement, then we'll go ahead and kick off the Q&A. Gentlemen, thank you for joining us today. Wissam, let me turn it over to you. Thanks, Harlan. Good morning, everyone. Happy to be here. We'll be making forward-looking statements. I ask you to refer to our SEC filings for the risks associated with these statements. We will also be making references to non-GAAP financials and the reconciliation of our GAAP and non-GAAP results can be found on our website. Great. Thanks for that, Wissam. Before I jump over to discuss the business with Dave and you, I wanted to ask a couple of high-level questions about some of the recent headlines that investors have been interested in. The first question is, you know, while I understand you can't comment on a few recent headlines and the strategic review that is ongoing, you know, how about just reminding investors about the benefits of the JV with KIOXIA as well as, you know, how the two companies differ from a go-to-market strategy and also from a supply chain perspective? Sure, Harlan. First of all, it's great to be here. Thank you for the invitation. The JV is a wonderful relationship. Let me just start with that. It's coming into the company now for 3-plus years, it's been just fantastic to really get to know this JV. This JV has been in existence for 23-24 years now. Yep. Very, very successful. Anything that lasts 23, 24 years is because it works very well and it provides a lot of benefit. I think the easiest way to think about the JV, if you think about the NAND business, you think about a wafer that goes through the process. Yep. Everything up until the wafer comes out of the fab is the purview of the JV. It starts with all of the R&D, our BiCS roadmap. We collaborate very, very closely. It's like there's one big engineering organization that's defining our roadmap, our technology roadmap. Our technology has been very strong, very capital efficient for decades now. That's a reflection of the fact that we're both investing our combined might in the market together. Mm-hmm. on one roadmap, so we get very large economies of scale out of that. Of course, the manufacturing is done together at our fabs in Yokkaichi and Kitakami. All of that is the purview of the JV. Yeah. The production, the R&D, you know, this, just how all that works, all of the, supply chain side of procuring everything is done as through the joint venture. The wafer comes out of the fab and we each take our share, and we go our own ways. Mm-hmm. Separate backends. We're peers in the market, and we compete against each other as, and then selling that NAND. We make independent decisions on what markets we're gonna enter. Are we gonna build client SSDs, enterprise SSDs? Which part of the market are we gonna be in? Those are completely separately separate, and that's not part of the JV. The JV gives us this great scale position on our technology roadmap, and ability to drive that forward. Gives us this great scale position on manufacturing. All that is very important. We take our wafers and we're peers in the market at that point. My understanding is that you talked about the synergies from an R&D perspective, process technology development, manufacturing development. My understanding is that there's also some synergies even at the basic design level, right? There's certain fundamental building blocks that are common to every NAND chip that you produce. Even there, the teams collaborate on the foundational IP, right? That is also critical in determining ultimately the performance of the product as well. Yeah, absolutely. I mean, I think there's always different technology building blocks- Mm-hmm. There's research going on, for many years before it then gets commercialized into a product. I mean, take what we just did with the BiCS8 product. Yes. We just announced, wafer bonding. That's a technology primitive that the teams have been working on. You decide when to bring it into the roadmap. We've brought it into the roadmap and now commercialized it. It's a perfect example of where we get these economies of scale, and we get this joy. If you would look at the R&D team working on NAND research, you would think it was one company. It works hand in glove with each other and have work, has worked that way, for decades now. Another point that we wanted to just bring forward was, you know, in discussions with clients. You know, post our earnings call, there are concerns around the potential violation of the terms of the credit agreement and debt covenants that cover your Term Loan A, revolver, and DDTL. You amended the covenants in December of last year, right? That took into account a period of industry weakness and similar to an amendment that your credit, you know, your credit agreement, similar to the amendment that you made, you know, during the 2019 downturn as well. Given the severity of this down cycle, by our estimates, you know, the team could potentially exceed the 5x gross leverage ratio threshold in the September quarter. I would argue that the design win pipeline, future competitive position of WD is stronger than what it was when you renegotiated the amendment back in December. In any case, what actions can the team take to renegotiate or further amend the terms of the agreement, and how do we think about the potential economic cost of such a move? Harlan, we, let me first start talking about our liquidity. We ended the quarter with $5.3 billion of liquidity between the cash on the balance sheet and the credit lines that are available to us. And, as you mentioned, in December, we did renegotiate, we amended our credit agreement, and if we see the need for it, to be amended again, we'll be proactive about doing that going forward. We're very comfortable with, actually we feel good about where the portfolio is, from a technology perspective, as well as a lot of the costs that actions that we've taken to take costs out of the system. That positions us really well for future improving the future profitability of the business. Perfect. Okay. Now, moving on to some of the business related discussions, sort of on the near to midterm demand environment. Your earnings call was a couple of weeks ago. Industry is in the midst of a downturn. You know, team has been disciplined under shipping and market consumption for three, four consecutive quarters. Typically, after under shipping for this duration, you start to see some signs of excess inventory normalization and a move, you know, higher in shipments towards consumption. maybe Dave, help us understand how you're seeing the current supply-demand environment in your flash and HDD businesses, in the first half of this calendar year? I think let me walk through it by business. The consumer business is stabilized. I would say that's probably a good word for it. You know, it's pretty consistent from quarter to quarter. When we go into a quarter, we kinda understand how it's gonna play out, and it's been that way now for certainly the last quarter or two. That market feels like it's stabilized. It was kinda the first one into the downturn. Yeah. -that we saw early last year. The next one in was, the PC OEM market. That started inventory correction mid last year. Mm-hmm. I think if you look at our last quarter, we saw actually good dynamics. That market was a little better than we thought, especially in distribution, than we thought going into the quarter. It feels like that is through its inventory digestion at this point now, shipping closer to end demand, to your point, for several quarters there, we were significantly under shipping. Mm-hmm. Demand as customers had a very sharp inventory correction. Other markets around that, gaming has been strong. That still feels, that's still a great market. We have some great brands there, especially with WD_BLACK. You get to the data center market, which is still... It was kind of like the last into the inventory correction towards the end of last year. It's still going on. It's a bit idiosyncratic against the, with the big players, the big, especially US hyperscalers- Mm-hmm. are so big that they can move markets all by themselves. They're at different points in their inventory digestion, but I still think we're, you know, a couple quarters away from getting through all of that. Given all the dynamics, you did mention on the earnings call that you anticipate accelerating sequential flash bit growth from this quarter into the second half of the year. Better second half shipments in flash. From an HDD perspective, as you just mentioned, despite some of the improvements, I think that you guys saw in China Cloud, US Cloud and hyperscale, still uncertain. Some are spending, some are still working down inventories. Is that sort of the way to think about the second half demand profile for the team? That- Flash better, still a little bit of uncertainty in HDD. I think that's right. I think that, in flash, I mean, for in the consumer markets, seasonally better. Yeah. better half of the year, clearly. As we said, the PC OEMs feel like shipping more to true demand. Data center, enterprise SSD is still going through a correction in the second half of the year. When you add it all up, we see sequential growth going into the next quarter. Capacity enterprise drives, again, it's gonna be. I think it gets better towards the end of the year. I think we still have a couple quarters to go through here of demand normalizing in that market. Then China, on top of all of that, feels like there's better activity there. you know, it feels like the second half is gonna be better given the activity we're seeing from customers. that's a bit of a wild card about how that plays out as well. Any questions from the audience? If you do, just feel free to raise your hand. On the cloud HDD weakness and uncertainty, there seems to be a couple of concerns by investors, right? First concern is cloud HDD cannibalization by SSDs as flash pricing has dropped significantly, right, through this downturn. Then the second concern is the shift of more cloud CapEx dollars to support generative AI, compute infrastructure build-outs, right? Love to get your thoughts on both of those investor concerns. Yeah. The first one, the idea of enterprise SSD cannibalizing HDD, I mean, if there was any time that was gonna happen, it would happen right now. I mean, there's. Right. Underutilization of NAND supply in the world. NAND is in a very serious downturn. I can tell you from our portfolio, we see more deterioration in enterprise SSD exabytes than we do capacity enterprise HDD exabytes. You know, I think that customers are very smart about this. They're not gonna design an entire hyperscale data center architecture based on what pricing is in a couple of quarters. They look out over the long term. You know, the products are used in different use cases in the data center. That hasn't really changed that much, right? Again, if it was going to change, it'd be changing right now. Kinda the exact opposite is happening, which is all the NAND providers are taking CapEx out of the system. Mm-hmm. because the demand is not there, yet we're still shipping hundreds and hundreds of exabytes every quarter of capacity enterprise HDDs. I don't see that long term. You know, I think there's pretty stable demand in the data center. Yeah. -with how data centers are architected. You know, the old saying, and maybe it's not so old, that two things can be true. They're complementary technologies in the data center. Yeah. Both markets are growing. Think the NAND exabytes are definitely growing a little bit faster. Right. than capacity enterprise. They're both growing markets in the data center. That's a good place to be. Certainly generative AI is gonna generate more demand for enterprise SSDs. If you look at servers, you know, going from four terabytes to 32 terabytes the way they're configured- Mm-hmm. You're gonna see more demand for enterprise SSDs. That's a part of the data center architecture where you didn't have HDDs, to my point earlier. That's right. Right? That's right. I think from a HDD point of view, you know, the AI algorithms have just shown that once again, the world has figured out new ways to monetize stored data. You have new ways to monetize stored data to train engines, a generative AI engine that says marginally going forward, storing more data is important 'cause I can monetize it in the future, and that's gonna drive HDD demand. I think it's just another you know, it's easier to track to say, "Hey, a server's got more terabytes of enterprise SSD on it." That's clearly gonna drive enterprise SSD demand. Maybe one of the reasons why that TAM's growing faster. It's also gonna pull along the demand. That's right. for capacity enterprise hard drives in the data center as well, because we're all just generating more data, we're storing more data. Again, they're both good markets in the data center. Yeah, and to your- Highly complementary. To your point, and you guys can verify this 'cause you guys have both technologies under one roof, but we're just looking at some of the industry data, as it relates to this whole concern around SSD cannibalization of HDD because of the pricing declines. By my calculations, even with the sharp pricing declines in flash price per bit is still seven times higher, right, than cloud-optimized HDD price per bit. Is that sort of the range that you guys are seeing as well? That's the range we're seeing as well. You know, in both businesses, there's one thing I feel really good about our portfolio. Yeah. We're driving new technology in both businesses. Here we are in the NAND business, we're right on the cusp of BiCS8 wafer bonding, much more productivity in that market on bits per wafer. At the same time, we're driving new innovation in HDDs, EPMR, OptiNAND. Now we have SMR coming, where you can get 20% more bits per drive than you could before by making a software change. I think in both markets, we're still driving productivity, and that's a good thing. If you drive the cost per of storage down, it increases the market. That's. Both businesses are still doing that, and while they're both doing that, they'll both be good businesses in the data center. Yeah. I think the market tends to be more focused on the memory, sort of flash side of the business, and sort of understands the economics of cost per bit declines, you know, moving from, you know, one generation BiCS to the next generation BiCS, and 100 layers, 200 layers and so on. My sense is that areal density improvements in HDD are certainly keeping pace with that, right? As you could tell by the continued big delta between, you know, the pricing in SSD versus pricing in HDD. We'll get a little bit more into that. You're anticipating a stronger bit shipment profile in flash, as we discussed, in the second half of the year. Pricing is the other dynamic that will drive revenues and margins. From a supply side perspective, you guys are doing all the right things, right? Cutting flash capacity utilizations by 30% back in, you know, January. Consolidation, lowering HDD capacity since second half of last year, as well as cutting cash CapEx plans for fiscal 2023 by 50% versus your targets at the beginning of the year. Your competitors are executing to similar supply cutbacks, but are competitors acting in a similar disciplined fashion from a pricing perspective? Look, I mean, we'll mainly keep our comments to our business. Mm-hmm. I think it's no secret that, you know, the market is in a major cyclical downturn, and I think the industry is doing the things it takes to bring the market back in balance. Yeah. All of us have to look at our own portfolios and make the best decision for our own business. We're doing that, certainly. We wanna make sure we can match our supply and demand as best we can and not let inventory get out of control, and I think we've done a pretty good job of that. We've got a, you know, a relatively good inventory position, and we plan to keep it that way by looking at where we have homes for the bits. Again, one of the things I think that the downturn has shown is the diversity of our portfolio. Yes. -is working. The fact that we have a consumer franchise, we have a strong position in client SSD, we have a strong position in mobile. We have a very strong position in gaming, which is an emerging market. We've built out now, of course, the leg of the stool on enterprise SSD. Yes. Now that's a, you know, very depressed market right now given the downturn, but the product strategy is still there. Our ability to basically mix across that entire portfolio to get the best return we can, that has worked, and I think that the numbers that are showing up in the downturn are showing our ability to generate the best margin possible given what the environment is. Before we dive into the product portfolio, performance leadership, any questions from the audience? Let's start off with HDD. The recent March quarter market share rankings just came out, and the WD team took some pretty significant share in capacity HDD, right? Your 22 terabyte CMR HDD, now the majority volume among your 20 terabyte plus offerings. Like I said, you gained some significant market share traction in the March quarter, and I think the expectation is that you're gonna continue to gain share for the remainder of this year. Now you're on target for full qualification of your 26 terabyte UltraSMR drive this quarter. What kind of reception have you been getting at your cloud customers with 26 terabyte UltraSMR? How much of an advantage is UltraSMR technology giving you? When should we expect the volume ramp of that platform? Okay. Let's talk about 2 things in HDD. Yeah. I'm gonna talk about the portfolio a little bit. Sure. We've also been doing a lot of work on the cost side of the business. Mm. which is just as important. I'll let Wissam talk a little bit about that. First of all, what you're seeing playing out is a strategy that was put in place five, six, seven years ago, which is, we looked at the areal density roadmap and realized, "Hey, we're gonna get to 20 terabytes, and now we're gonna need some other things to get us up to 30, and to the point where HAMR will take over and be kind of the major technology." We believe that technology is gonna take a little bit longer, we put some things in the roadmap. We started layering in these technologies. We layered in EPMR. That got us more areal density per platter. We layered in OptiNAND, same thing. We layered in UltraSMR. These technologies, you're now seeing them play out in the market. The first driver that really shows up altogether is in the 22 terabyte CMR drive. We talked about this past quarter, that above 20, that became our leading capacity point. Mm-hmm. That's something we've been planning for years. It's actually playing out in the market. The portfolio's being well-received from a share and margin perspective. That technology strategy is working. Another layer on top of that, to your point, is UltraSMR. Now, SMR is not a new technology. SMR has been around for actually a very long time. It's proven technology. We did 2 things. With OptiNAND instead of SMR is traditionally you get 10% more capacity per drive. With UltraSMR, you get 20% more capacity per drive. That's why the 22 CMR drive becomes a 26 UltraSMR drive. That's a unique position in the market. It was a very explicit strategy to, like, fill this gap and be able to continue to stepwise this areal density roadmap. The issue with SMR adoption has always been there has to be work on the host side. The customer has to do some software work to adopt the technology. What's happened in the last year and a half is the big hyperscale players are now all doing the work to adopt SMR. Our SMR drive is in qualification at the largest data center operators in the world. Some of those qualifications will start to be done this quarter, and we'll start to ship in volume in the second half. This strategy that's been put in place for years to kind of get us from 20 to 22 to 26 is now playing out, and I think it's being very well-received by our customers. You know, it's leading to good performance of the business and why... You know, we're in a big cyclical downturn. Mm-hmm. It's harder to see, but we believe when volumes return to normal, we are in a very strong position to offer our customers a very strong value proposition. On the other side of that, we've been looking at our cost- Yes. -side of the business. Maybe, Wissam, you can talk a little bit about that. Yeah. Yeah. On the cost side, for the hard drive business, we started taking action towards the end of fiscal 2022. Mm-hmm. the beginning of fiscal 2023. We restructured our manufacturing footprint, taking out around 40% of the capacity of the client manufacturing capacity. In parallel, we continued to drive the fixed costs down across the board. We're now, when you look at where we are today relative to where we ended fiscal 2022, our fixed costs in the hard drive business is around 10%-15% lower. In fact, I don't think it's been that low for at least a decade. When you look at what we delivered last quarter in terms of gross margin, and you factor into that the underutilization charges and some other charges, we're pretty much north of 28% on a reasonably low or relatively lower revenue. As volumes come back, we expect that gross margin to trend back to higher levels at a faster pace. Perfect. Dave, you mentioned HAMR, Heat-Assisted Magnetic Recording, HDD technology. It's been around for many, many years now, under development by you and your competitor. Your competitor claims they'll be ramping HAMR-based drives next year. WD team always has had a really good track record of being able to extend current generation drive technology and bringing new technologies to the market at a time when the market needs it and the economics to WD are optimized, right? Obviously you just talked about your CMR architecture, your OptiNAND, your UltraSMR. These are all great technologies to continue to extend areal density, but what's the team's strategy and adoption curve for HAMR-based HDDs? Yeah. You know, I was in, I was in Japan about three weeks ago, and I actually met with a gentleman that actually wrote the seminal paper on HAMR, right? It turns out he published that paper in 2001. The... That's like it's very, it's great work. Right. I mean, it just tells you the industry has been working on this for over 2 decades, and that's not surprising when you're I mean, HAMR is not a software product. I mean, it's material science. Right. It's physics. It's like stuff that takes a long time to really make sure, you can produce it. The issue is not just producing it and making it work. The issue is producing it at scale, being able to produce millions of drives for a quarter, being able to produce a drive that has the reliability, where somebody's gonna put it in their data center and bet their business on it, and it's gonna be there for 5 years. I think the industry feels good that this technology is going to be there and is gonna get to that point. It's still... You know, we're in the final stages of something that took decades. Yeah. We're still a year, a year plus away from that. The reality is the market right now is adopting SMR. Mm-hmm. Of the technology in the data center, that's where our portfolio is focused. We had a very explicit goal. Yeah. To, like, bring this technology to market and make it better exactly in this timeframe because we didn't believe that HAMR, not that our HAMR wasn't gonna be ready, but just HAMR in general, the technology, the physics, the material science of it wasn't quite gonna be ready yet. I think that's turning out to be true. Right. That turned out to be the correct bet. Will it be there? Yes, it will be there, but we're still a year and a half or more away from that in volume where it becomes the major part of the technology. I have every confidence in our engineering team. They've been working on this technology for several decades. When that technology is ready to be commercialized, we will be there with the right products. Perfect. Any questions from the audience? Let's pivot over to your flash technology. You and KIOXIA, and you mentioned this in some of your remarks, you know, announced that you're starting to productize your next generation BiCS8 NAND flash technology. I assume it's 200+ layer 3D NAND architecture. There's some pretty innovative features and major architectural changes on BiCS8, right? Versus your prior generation technologies. Namely, the move to a periphery circuit bonded to memory array architecture, right? You're actually bonding two wafers together. Seems like a very complex architecture, but help us understand some of the advantages of the BiCS8 platform. Yeah. It is... We feel very good about it, and it was an ambitious technology direction, and one that I think the industry knew it was going to have to tackle. Yeah. At some point. I mean, it was circuit next to the array- Mm-hmm. Circuit under the array. Both of those architectures have been, you know, some of them are. That's what's in the market now. We had to figure out, like, how do we build the memory stack and the CMOS- Mm-hmm. Separately and then bond them together as opposed to building the CMOS and then stacking the memory on top of it. That project is something that's been in development for many, many years to the. Mm. The question you started out with. We've had R&D. Right. Right. Working on this for years and years and years. We got to the point where, okay, we feel like we can now commercialize this. We've got enough confidence in the technology. That's what BiCS8 was all about. We feel really good about where it's turned out. We were ahead of schedule on it. We're producing it. It's starting to go into commercialization in some early products. Clearly we're in a downturn. When we need, when we ramp back up the fab, we'll be ramping back up into BiCS8. We feel like we're in a very, very strong competitive position. It is a 200 plus layer product. Yeah. Again, in true KIOXIA Western Digital fashion, we feel like we can, we know we can produce the same quality and the same density of product with fewer layers. That's a good thing. It's a 218-layer product. The key thing is we've got two wafers. You build the CMOS separately from the memory- That's right. Then you bond them together. What happens, you end up with much, much higher quality on each side of it, then when you bond them together, I think people are gonna see when we put all the specs out on it. It's a very, very impressive product on the performance, on the density, on the productivity, and on the capital efficiency. Perfect. On the financials, your 3-5-year financial targets that you put up at your investor day last year, 7%-9% revenue CAGR, 30%-36% gross margin, 17%-22% operating margins, cash CapEx intensity 8%-10%, right? Obviously, you know, before we enter the current downturn, question is, did the team actually factor in a downturn over the 3-year horizon back last May when you set your targets? Do you still see the targets as attainable by 2027? Harlan, naturally, we're in a cyclical industry, so we do. Mm-hmm. Downturns into our modeling. When you look at the 3-5-year targets we have, we're still comfortable with those. We talked about during this cyclical downturn, taking action on the portfolio. On the hard drive side, we have a very strong technology portfolio that would help drive the business forward. On the flash side, we talked about the node of technology transition, and that would help us also to continue to drive the business forward. In parallel, we've taken a lot of cost out of the system from an OpEx perspective, as well as from a manufacturing cost perspective that would help position the business for much more improved future profitability. There's a lot of actions that the team have been taking during the severe cyclical downturn to position the business for longer term success. Is there anything that you've done from a development perspective, R&D perspective to try to accelerate the innovation, the product roadmap, such that when you emerge from this downturn, not only do you have the most efficient cost structure, but maybe even, you know, increase that technology advantage by half a step coming out of this downturn? I mean, it's what we just talked about. I mean, the technology roadmap is a long thing, right? You don't. Yeah. -a technology roadmap just in the two or three quarters that you're in a downturn. It's just continue to execute the plan we had put in place and make sure that when You know, we're obviously adjusting the cost side of the business to. Mm-hmm. you know, to deal with the current market realities. When you do that, make sure you preserve the long-term competitiveness of the business. I mean, in the NAND business, your foundational NAND, how good is the BiCS roadmap? I mean, that's the foundational technology. Right. The foundation has to be strong, and we feel like, again, we're gonna emerge out of this downturn onto technology that is really differentiated, right? This idea that we have BiCS8, we've gotten past wafer bonding, we've got that figured out. We've got it commercialized. Everybody else is gonna have to go through that whole transition eventually to get to the same level of the ability to continue to drive the roadmap forward. Make sure we preserve that, make sure. Obviously there's other BiCS versions that are in the works. Mm-hmm. Make sure we keep the investment on that roadmap. The same thing on the drive business. Make sure that, no matter what we do around the business, we keep the core technology moving forward. Yeah. on businesses where you have long-term investments to make sure that you always stay on the leading edge of competition, and you can bring the best value proposition to our customers. We always wanna protect that, whether we're in a down cycle, mid cycle, up cycle, continue to invest in that foundational technology. We've got just a couple minutes here, but I wanted some closing thoughts from you, Dave. You know, what are some of the key messages that you want investors to take away from today? What are the areas you think investors may underappreciate with regards to the to the WD story? I think it's a lot about what we just talked about. When I think about it, one is the foundational technology is very, very strong in both businesses. you know, we've always had a very capital efficient roadmap in NAND. That's been something. Sometimes people say to me, "Well, you must be falling behind 'cause you're spending so much less CapEx," which is kind of an interesting thing. Right. Which is not the case. We just have an engineering team, and we have the scale of R&D investment because of the JV to make sure we can invest as much or more as anybody in the industry. That has worked for 20-plus years now, and we feel like we're in a very strong position there. Same thing on the HDD business. The roadmap that we put in place over the last several years is working. EPMR, OptiNAND, UltraSMR, that is what all customers are adopting. You're seeing it now show up in the numbers. When the next transition happens, we'll be there with that as well. At the same time, we've spent a lot of time to adjust the cost structure of the business. The fundamental structure of the business take cost out, especially on the HDD business, so that when the volumes normalize, profitability, we're in a much stronger position to deliver profitability. The go-to-market synergies that we have, this idea that we can sell into the consumer market and reach every individual in the world with our products and the SanDisk brand and the WD brands. You know, and we go all the way from that to selling, you know, $1 billion worth of product to the largest customers in the world, is a breadth of go-to-market and portfolio strategy that allows us to mix across that and get the best financial return no matter the market conditions we're in. Perfect. Dave, Wissam, thank you very much for joining. Thanks for your insights today. Thanks for your time. Thanks, Harlan. Yeah. Thank you for having us. Thanks, buddy.