Western Digital : Barclays Global Technology Conference Transcript

Barclays Global Technology Conference Transcript

Wednesday, December 6, 2023 (8:05 AM - 8:35 AM PT)

Tom O'Malley:	Good morning, everyone. I'm Tom O'Malley, semi and semi cap analyst here at
	Barclay's. I just want to welcome everyone to the Barclay's Tech Conference
	here. First on the day, Western Digital. We've got David Goeckeler, CEO, Wissam
	Jabre, CFO. Thank you both so much for being here.
David Goeckeler:	Great to be here. Thanks for having us.
Tom O'Malley:	I think the way that I would like to start is just you've had this period of a
	strategic review. You guys have been mum for some time about what went on
	during that process. Could you just one, talk about what was assessed? Two,
	why things ended like they did, and just any additional comments since you
	announced the split of the 2 businesses?
David Goeckeler:	Sure, I'd be happy to do that, but --
Tom O'Malley:	Before we start, disclosures, yes.
Wissam Jabre:	And my safe harbor --
Tom O'Malley:	You have some very important disclosures for us, yes.
Wissam Jabre:	As advised by my legal team. We will be making forward-looking statements
	based on current assumptions and expectations and I ask you to refer to our
	most recent annual report on Form 10K and other filings with the SEC for more
	information on risks and uncertainties that could cause actual results to differ
	materially. We will also be making reference to non-GAAP financials and a
	reconciliation of our GAAP and non-GAAP results can be found on our website.
	Thank you.
Tom O'Malley:	Perfect. All right, the strategic review.
David Goeckeler:	Yes. Very thorough process. Very detailed process. It was great to go through it.
	A lot of people participated. I will say that all the details inside of it are still
	under NDA, but I'll give you some more color around it.
	We've been driving an enormous amount of improvement in both of our
	franchises over the last several years. Just in the execution of them, the way
	we're organized internally. We focused on our balance sheet. We've cleaned up
	some longstanding problems that were kind of overhangs on the business and I
	think got ourselves in a very good position to really figure out how can we
	unlock the value of these franchises. Because we think they're very, very
	valuable franchises.

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	I think quite frankly, the downturn showed that. Both portfolios, I'm sure we'll
	get into a little bit more, both businesses are performing best in class. And in
	the NAND business significantly so. In the HDD business, we've opened up a
	profitability gap with our peer companies there as well.
	When we looked at all the different options that we had, what we were able to
	execute given the environment we're in, we decided that separating the
	businesses was the best alternative for realizing value. And there's a number of
	things behind that. One, the execution of that plan is completely within our
	control. There's no regulatory approval required or any of that. Two, it unlocks
	value in what we think are tremendous franchises. Three, like I said, we've done
	a lot of work to restructure the businesses and get them in great shape and get
	them ready to stand alone on their own. And then we've got a recovering
	market in both businesses. When you put all that together, we thought it was
	the right time to make this move on the portfolio and we're very happy to get it
	announced and onto the execution.
Tom O'Malley:	Great. Let's just start on the Flash side. Could you just start by walking us
	through end demand in your key end markets? Client, consumer, cloud. And
	then talk maybe a little bit about the inventory positions in each of those
	markets. I think that would be a good place to start there.
David Goeckeler:	Sure. First of all, I'll say the bottom is behind us in NAND and the recovery is on.
	I think the question at this point is just how fast. We'll get into that, what the
	dynamics of that are, but if you look at our markets, again, I think one of the big
	strategic advantages of our NAND business and why did we perform so well in
	the downturn and continue to perform so well is just the diversity of our
	portfolio. The number of end markets that we can access.
	I'll start with consumer. That was kind of the first-in,first-out. Consumer market
	is back to what we would say just regular normal behavior. Inventory levels look
	fine across all the different channels and all the different retailers we deal with.
	We have hundreds of thousands of points of presence for our portfolio around
	the world, so it's a very big, diverse business. We're in a seasonally strong
	quarter so we feel very good about that market. Inside that, we have a lot of
	great brands, a lot of work we've done on that over the last several years.
	They're all performing well. SanDisk, SanDisk Professional, our Black brand on
	gaming. Just very, very -- that business is performing as expected, so kind of
	past the downturn and kind of leading us out of it quite frankly.
	The PC client market, again, back to what we would think normal behavior, the
	way that customers are buying. You've seen customers in the last quarter return
	to more normal inventory positions. A lot of that has been people have talked
	about that as strategic buys, things like that. But really for us, it's just kind of
	returning back to carrying a typical amount of inventory to run my business. We
	came through a very deep downturn where a lot of our customers went into
	that with too much inventory. They corrected quickly, they waited to see the

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	return, the business come back, and we're back to that now. That business we
	feel good about, where that adds record exabyte shipments.
	And then in cloud, in the NAND business we're still in an inventory digestion
	phase. That business has not really come back yet. I think that's been one of the
	surprising things of the downturn in the NAND business. I think going into the
	downturn, everybody thought enterprise SSD is the business you have to be in,
	it's the most important business in NAND. And it certainly is a great business.
	We have great products there. But it is the business that suffered the most in
	the downturn. And still, we're waiting for that to return to normal and we think
	there's still some inventory to work through there over the next couple of
	quarters.
	HDD, you didn't ask about HDD, but we're starting to see the datacenter market
	in HDD start to normalize.
Tom O'Malley:	Great. Just diving in just a little bit there on the NAND side, in terms of the cloud
	recovery, do you have an expectation for a timeline? You said a couple of
	quarters, but is that when inventory gets to a better position? Or do you think
	that you start seeing order patterns get a bit better?
David Goeckeler:	I think we'll start to see ordering patterns. From the information we have, it's
	still a little early, but as we move through '24, we expect things to get better
	overall.
Tom O'Malley:	2 of the 3 end markets seem good, the third is a couple of quarters away. But
	that obviously plays into the ASP side. If you look historically when you look at a
	recovery, you get high single digit sequentials for only a couple of quarters in
	terms of the recovery and when pricing moves off of that recovery. If you look
	today, some peers are talking about 20%+ ASP increases. How realistic is that?
	How long do you think a pricing recovery can sustain in this example just given
	how bad this downturn was?
David Goeckeler:	Look, I don't think there's a playbook for the recovery. When we look at this
	business, when we look at it from the inside, when we talk to our sales teams
	and directions we're giving everybody, we had a downturn that was pretty
	unprecedented. I think going back and trying to map other recoveries on top of
	this is really not the right way to look at it.
	From peak to trough, we had pricing down over 50%, 50% to 60%. And that
	peak was kind of a midcycle number in the industry. If you're down 50%, you
	need to double to get back to where you are. I think we need to see pricing,
	depending on the market, because every market went down different amounts,
	but we need to see pricing come back 50% to 100% before you're going to see
	capital flow back into this industry.
	How fast is that going to happen? We don't know. I mean it could happen very
	quickly depending on how the market is. Bit supply is significantly under bit

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	demand. We've seen an acceleration of shipments over the last couples of
	quarters which is obviously what you're going to see in the beginning of a
	recovery. I don't think we have a playbook on that. How possible is it to see
	numbers that are bigger than in the past? I think it's very possible. Is it going to
	happen? I think we're going to see over the next couple of quarters.
Tom O'Malley:	I think it's a perfect time to jump in just to the supply/demand conversation.
	What do you think bit demand looks like into next year? What do you think the
	industry will need to do to match that on the supply side? Are you fully
	intending to match that? I think some have talked about potentially a time
	period where digestion needs to take place. How long do you think you need to
	be below industry demand in terms of getting the market back to supply?
David Goeckeler:	We, in our last quarter, we upped our demand for this quarter. We look at
	calendar year '23, we were in the high single digits. We're now mid double-digit
	range, like low to mid double digit on demand side given the significant
	acceleration in shipments in the last couple of quarters. Supply, fab out supply
	we see as negative single digits in calendar year '23. Calendar year '24, we see
	demand high teens. We see fab out supply still mid-single digit kind of number.
	I think -- I'll speak for us. I think when everybody looks at what's happened in
	the downturn, there's an enormous amount of capital invested in this industry.
	The industry has lost an enormous amount of money in this downturn. I think
	we're going to look at this very, very carefully about when we put capital back in
	this business to meet the bit demand. It's going to have to be more than this is
	just what we project. We're going to have to see these -- we're going to have to
	see the recovery come back. We're going to have to understand what that looks
	like.
	Obviously, what we talked about earlier, enterprise SSD in the cloud market
	coming back into NAND, it's a big market, it's an important market. We have to
	see how that develops over the next several quarters. Then I think the industry
	is going to work very, very hard to get supplied amount balance correct and not
	get ahead, not get ahead of the game like we were going into this downturn.
Tom O'Malley:	With that gap of production and demand, what does that mean from a
	utilization perspective? At what point do you start to increase utilization? What
	are the metrics that you're looking at that would make you get more
	aggressive? And then could you make any comments on what you think about
	CapEx in the Flash business for next year?
Wissam Jabre:	Yes. On utilization, as you know, in January we announced a 30% reduction in
	supply in wafer inputs. And since then, we've been managing our utilization in a
	very dynamic way. We look at the demand of our products, we look at what
	inventory is doing, and of course, we are focused on preserving cash. These are
	really the key things we look at as we look to continuously, dynamically manage
	our utilization.

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	Where we are today, it looks like we'll continue basically the same process. As
	we see demand for our products improve, that will influence the decision on
	what we do from the wafer input.
Tom O'Malley:	How do you see the introduction of BiCS8 impacting the CapEx side over the
	next couple of years? And then what's the timeline that that represents a more
	substantial portion of your bits?
Wissam Jabre:	On the CapEx, which was also part of your previous question, on the CapEx in
	fiscal '23 we did reduce our CapEx by more than 30% relative to the previous
	year. In this fiscal year, we are reducing our cash CapEx spend significantly by
	probably 50% or more. And as we see the recovery let's say taking hold, then we
	will be adjusting.
	But with respect to BiCS8, BiCS8 will probably be -- it's basically our next big
	node after BiCS6 and from a cash CapEx or a CapEx perspective, I would expect
	it to start, again, if the recovery takes hold and we see the profitability, then we
	should see CapEx for BiCS8 at some point in the second half of fiscal '25.
Tom O'Malley:	Got it. We've walked through all the moving pieces. But spinning out on the
	other side you have this positive gross margin guide in the December quarter. If
	you look at other memory players, they seem actually a little bit behind of the
	curve that you guys are on. Could you maybe dive in and explain why you're
	seeing the acceleration in gross margin that you are? Is that just related to the
	JV? Or how have you been able to come up the curve a little bit faster during
	this recovery?
David Goeckeler:	Yes. It's the result of a lot of hard work over the last 3 or 4 years. Some changes
	we made and then a lot of hard over decades with the JV. Let me decompose it
	a little bit. In the NAND market, just big picture, there's 2 things you've got to
	get right. You've got to get your fundamental technology correct and you've got
	to get it in the right position and you've got to get the right count of CapEx to
	build that technology. That's the BiCS roadmap.
	That's a place where we invest jointly with Kioxia. It's one R&D team. Basically,
	we punch above our weight. We're the largest. We have the largest investment,
	from a bit share point of view, we're able to invest like the largest player in the
	market. That's gives us a very, very good base technology position if you look at
	the BiCS roadmap. If you look at CapEx per output of bit, we're consistently over
	the last 5 years 1/3 lower than the industry average.	We've got a very good
	technology base to build on top of that's very capital efficient and very high-
	quality product.

The other side of that, work we've been doing over the last 3 years, is you've got to figure out what portfolio -- I'm going to take these wafers out of the fab, I'm going to sell them to somebody. You can -- there's lots of choices you can make. You can just sell the wafers. You can sell components. You can build controllers and sell SSDs. We put an enormous amount of work into what is the right

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	portfolio to get the best outcome? And we're able to -- the consumer portfolio
	that you said earlier is the real gem of the whole portfolio. Better through cycle
	margin than any other part of the portfolio. Again, we have tremendous brands
	there, a lot of work on those brands over the last 3 years, so that's a great place
	for us to mix into.
	Client SSD, we have the second largest client SSD portfolio in the industry. Very,
	very good position there. We sell into mobile. We have a very good position in
	gaming. The Black brand, again, both into the consoles and retail directly to the
	consumer. That -- when I came to the company, the amount of bits we sold into
	mobile was an easy number to remember. It was 0. And now it's double digits,
	so that's a big part of the portfolio.
	And then we're qualified in Enterprise SSD. That market is very depressed, but
	we still have the products there. We've done an enormous amount of work that
	on top of that base technology that's very capital efficient, very high quality, we
	put a very robust, diverse portfolio. And then we put the agility in the
	organization to change mix dynamically to get the best outcome. Because every
	market in NAND is a different size, different growth rate, different profitability,
	and those change throughout the cycle. You have to constantly be mixing across
	this and we're able to do that. We put the agility in the organization to be able
	to do that very, very quickly. And you're seeing the results.
	We're leading. We bottomed out in gross margin significant double digits ahead
	of anybody else in the industry. 10, 20, 30 points ahead. And now we're the first
	one coming out into positive gross margin territory. Again, this goes back to the
	strategic review and why we think this business is ready to stand on its own. It's
	the best NAND business in the industry and we're demonstrating it every
	quarter with the results we're delivering.
Tom O'Malley:	Helpful. Why don't we switch over to the HDD side of the house. You mentioned
	earlier that you do expect cloud recovery on the HDD side this coming quarter.
	One, could you just talk about how that trajectory has changed since you talked
	about the recovery in earnings? And then maybe any color in nearline between
	the cloud players and others? Is there a different pace of recovery or inventory
	position is different at either one of those? Just help shape what is happening in
	nearline right now.
David Goeckeler:	Going into this, when cloud went into the downturn, there was just clearly way
	too much inventory that had been built up. Clearly, there was some buy ahead
	that was going on when everybody was worried about the supply chain, the
	pandemic, and all those issues. And then we went into a multi-quarter period
	where some of the biggest customers in the market just stopped buying. We'd
	have customers that would buy enormous amount, hundreds of millions of
	dollars' worth of product, just go to zero. It was all through working off that
	inventory correction.

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	We talked about this over the last couple of earnings calls we expected
	sequential growth as we move throughout '24 as those customers came back
	into the market and the inventory positions it drives really started to normalize.
	That process is on. We're not all the way there yet. Again, the bottom of the
	HDD business is behind us. We expect sequential growth in nearline as we go
	throughout the fiscal year and the conversation with the customers are very
	good on what that looks like.
	The industry is going more toward the build to order process. We've taken a
	significant amount of infrastructure out of this business. We were overinvested,
	again, in this infrastructure especially. We're kind of at the end of this client to
	cloud transition and now we've got the footprint sized for what we need. Our
	customers understand that. We're getting more visibility into what their
	demand looks like. And we have a lot of confidence that the HDD business is
	going to grow from here and we'll continue to see the margins improve as well.
Tom O'Malley:	How about the client and consumer side? I think we haven't touched on those
	yet for HDD. You mentioned on the last earnings call I think at least consumer
	was stabilizing. How are those trajectories as we go through the quarter here?
David Goeckeler:	They're fine. It's a decreasing part of the business. Consumer, we're in, again, a
	seasonally strong quarter, so we'll expect consumer to do well. The client
	business, again, during the pandemic, I think we had a false signal that
	everything that was a client, everybody wanted a PC at the start of the
	pandemic. We had this kind of false signal where client SSDs went up. If you
	draw a trend line from pre-pandemic to now, actually the client HDD
	penetration in the PC is now below where it was coming, that trend line, coming
	into the pandemic.
	This business is transitioning to cloud. They're still important markets. There's
	still millions of drives sold into those markets every quarter. But again, we've
	taken 40% of our capacity out of client and we're getting that sized right to
	meet that market. But again, like the client SSD market, more predictable past
	the inventory corrections.
Tom O'Malley:	Okay. Just zooming out a little more broadly again, I just want to talk about the
	broad strategy in your UltraSMR drives. How are you seeing customer
	interaction at those higher capacity drives when your competitor is moving to
	HAMR? And are you seeing better traction at the high end? Is that working? Can
	you see the result of that strategy yet? Or is that still kind of on the come?
David Goeckeler:	No, it's working. It's fantastic, quite frankly. I mean if you look at the 26-terabyte
	drive that we launched 2 quarters ago, last quarter it was nearly half of our
	exabytes shipped. That tells you that the market at the very high end is moving
	to SMR. Now, SMR is a technology that's been around for quite some time. It's
	just never been adopted at the very high end of the market because there's
	work to do on the host side to adopt it.

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	And the really key in driving the adoption of that was our introduction of
	UltraSMR. A traditional SMR technology gives you an extra 10% of capacity on a
	drive. And it doesn't matter what kind of drive. It can be a CMR drive, a PMR,
	EPMR, HAMR, it doesn't matter. SMR is a different layer on top of that.
	When we introduced UltraSMR a couple of generations ago, now it's plus 20%.
	When you're deploying a 22-terabyte drive, going to 24-terabyte drive, an extra
	20% is quite a bit. The hyperscale vendors started adopting this technology and
	we've been saying for quite some time that this was going to be the next leg of
	growth in the datacenter, and that's turning out to be correct. I mean we'll get
	to HAMR. HAMR will come. But once we get to HAMR, SMR is going to work on
	top of HAMR just the way it works now. We're very, very happy with the
	technology and the strategy. And we've got line of sight with our current
	technology portfolio of EPMR, UltraSMR for many, many more generations of
	drives that are cost controlled, high yields, and meet our customers'
	requirements, quick qualifications. We feel like the portfolio is in great shape.
	And again, this is another thing, showing up every quarter in the numbers. Last
	5 quarters we've had outsized profitability versus our peers and that gap is
	increasing.
Tom O'Malley:	You mentioned HAMR and your competitor talks about a million units in the
	first half of calendar year '24 for HAMR drives. How are you progressing on your
	roadmap? And how do you see the technological landscape changing? Where
	are you in your progression in HAMR as well?
David Goeckeler:	HAMR is a technology -- I think HAMR, when I was in Japan couple of months
	ago, I talked to the gentleman that actually wrote the seminal paper on HAMR I
	think it was 2002. HAMR has been in development literally -- and this is the
	story of the HDD industry. I mean these drives, the technology in this is
	incredibly sophisticated and can take decades to bring to market. I think where
	we're at right now is we're like in that endgame of when does HAMR, the
	commercialized technology for the datacenter? And it's going to happen
	sometime over the next several years. Our technology is at -- we've been
	working on it for several decades. When we need to bring it into the portfolio,
	we'll fold it in as a technology.
	But as I said earlier, we have EPMR. This is I think something that maybe we
	haven't talked enough about. We went to EPMR, energy assist on PMR several
	generations ago. We've now shipped over 600 exabytes of EPMR technology
	into the market. It's really this EPMR plus UltraSMR is giving us this roadmap
	that it gives us the flexibility to bring HAMR into the portfolio when we can get
	the yields, when we can produce it at scale.
	Look, let's look at the nearline market. The nearline market, the depressed
	number in calendar year '23 is somewhere about 40 million drives. The year
	before that it was 60 million drives. When you talk about a million drives, you're
	talking about a very, very small percent of this market. And we have a strategy
	where we can satisfy the entire market at these very high-capacity points with

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	technology that has already been commercialized, can be produced at scale in a
	very const controlled way. And that's why we're getting the increased
	profitability across our portfolio. When HAMR can be produced as a part of that
	portfolio, we'll fold it in if we get the right economics.
Tom O'Malley:	Helpful. I think we have time for one more here, but just you've already talked
	about most of those end markets on the HDD side actually getting a bit better.
	Some of the smaller legacy businesses obviously working through periods of
	downturn still. But can we talk about what it means for utilization in the second
	half of the fiscal year? Can you give us an update on how that's trending? And
	then on the HDD side, just given those utilization changes, when do you think
	you can get back to what you've stated is kind of a normal margin profile of that
	above 30% range?
Wissam Jabre:	Maybe I'll start with the second part of the question. When we normalize, for
	instance when you look at the September quarter and we normalize for the -- or
	adjust out the utilization charges, our margin was pretty close to around 30%.
	Similar to the Flash side, we manage also our utilization on the hard drive side
	to basically match the supply of our products with where we see the demand.
	Over the next couple of quarters, we'll continue to see underutilization, but I
	would expect it to be slightly lower than what we're seeing now as the demand
	continues to sort of improve. I expect eventually utilization will be phased out.
	But for the rest of the fiscal year '24, I still expect to see some underutilization
	charges.
Tom O'Malley:	Very helpful. I think that's all we have in terms of time. Thank you both so much
	for being here. Have a lovely rest of the week.
David Goeckeler:	Thank you. Thank you very much. Appreciate it.