WDC - Western Digital Corporation (WDC) Bank of America Securities 2023 Global Technology Conference
2023-06-07 01:01:06 ET
Western Digital Corporation (WDC)
Bank of America 2023 Global Technology Conference
June 06, 2023, 02:20 PM ET
Company Participants
Wamsi Mohan - Senior Equity Research Analyst
Conference Call Participants
Peter Andrew - VP, FP&A Investor Relations
Wissam Jabre - Chief Financial Officer
Presentation
Wamsi Mohan
Welcome to BofA's Global Technology Conference. I'm Wamsi Mohan, I cover IT hardware here. Thank you all for joining us here today. We're delighted to welcome Western Digital today for this fireside chat. We have the CFO, Wissam Jabre. We also have from Investor Relations, Peter Andrew.
Peter is going ahead and kick it off with a quick safe harbor.
Peter Andrew
Okay. Thanks, Wamsi, and it's a pleasure to be here. Before we start, I do have to make a quick disclosure -- safe harbor disclosure. We will be making forward-looking statements based on current assumptions and expectations. And I ask that you refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also be making references to non-GAAP financial measures and a reconciliation of our non-GAAP to the GAAP measures can be found on our website.
So with that, let me get back to you.
Question-and-Answer Session
Q - Wamsi Mohan
Thanks Peter. Well, to kick it off, Wamsi, thank you so much for being here. Just about a year ago, right before our tech conference, you announced the strategic review right? Can you give us an update on where we are in that process of the review.
Wissam Jabre
Thanks, Wamsi. It's great to be here. So yes, almost a year ago, we off the strategic review. Look, the strategic review, the process is still ongoing. It's progressing. Obviously, we can't talk much about it given that there's a lot of the discussions are covered by NDAs. But it is progressing and still ongoing active.
Wamsi Mohan
So market conditions have changed significantly. How is that impacting the way that either you're looking at the review or the actions that are possible to take? Is that eliminating certain things, maybe accelerating other options?
Wissam Jabre
From a flash market perspective or from a total market perspective, we don't think of strategic review sort of the short term -- from a short-term view. The way we think of value creation as we think of it the through-cycle value creation. And so our strategic review is designed to -- and the process is designed to really optimize shareholder value creation. And so it's not fully dependent on necessarily where we are in the market and the market cycle.
Now of course, one has to be realistic from a capital markets perspective, there are certain things that are more restrictive today, for instance, than they were year ago. But these are things that we think through and we navigate as we go through our process.
Wamsi Mohan
Okay. Okay. That's -- thanks for that update. So as we think about the demand environment, it's been exceptionally challenging demand environment across various companies. Clearly, you guys are not been immune to that. How much longer do you -- sort of two elements to that, like from an inventory digestion standpoint, that's been a huge headwind this cycle. Can you talk about where we are in terms of the -- or any line of sight to end of the inventory digestion that you've been absorbing now for several quarters?
Wissam Jabre
Yes. So I think one way to sort of talk about this is to talk about it from an end market perspective. And so as you know, we do address really from the consumer to client to cloud end markets. On the consumer side, we've seen the market fairly stabilized. It started sort of -- it was really the first market to start experiencing the slowdown, let's say, mid of last year, we've seen quite a bit of decline. But then a couple of quarters ago, we started seeing signs of stabilization. And today, I would say that, that market is more or less stable.
On the client side, this was the second market -- this was sort of the second market to see the effect of downturn. We've seen really sharp inventory corrections late last year. And so we are probably at a stage, let's say, if you look at -- within client, if you look at the PC OEM part of it, we're probably at a place where the inventory digestion is of course, depending on the player, but it's largely done, and now we're seeing shipments are closer to where the end market demand is.
On the mobile side, it's also fairly stable or is at least stabilized. The -- with staying within client when we think of gaming, for instance, which is really the emerging market segment for us has been doing well. Gaming has fairly done well over the last couple of quarters. But we do have really a great brand with WD_BLACK there. And in cloud, we still are within sort of -- and this was the last market really to be impacted by the cyclical downturn. I would say we still are in the inventory digestion phase there. We probably still have a couple of quarters through that.
Wamsi Mohan
Okay. Okay. That's helpful. So talking about HDDs, right? So how are the shipments of 22 and 26 TB drives progressing? And when you think about your largest competitor, talking about introducing HAMR-based drives, when do you get -- or where is your road map on launching HAMR drives as well?
Wissam Jabre
So the -- there's a lot of excitement around the 22 and 26 terabytes. Those were launched last year at our Investor Day. And in the past quarter, we've shipped quite a bit of 22 terabyte drives. Actually, it is the largest capacity point in terms of volumes over the 20 terabyte for us.
We're also going through some qualification on the 26 terabytes as well. So basically, the cloud customers are adopting 22 terabyte CMR as well as we're starting to see adoption on the 26 terabyte UltraSMR which, as you know, is a 20% increased capacity versus the CMR.
And then sort of when we think of the road map, potentially the HAMR could be one of the next on the road map. Obviously, it's been in development for quite some time, actually several years. We've done a lot of -- our engineering teams have done a lot of R&D around that and a lot of development work and as you know, it requires a lot of work on the material science as well as the physics.
But also a lot of work that's required in terms of commercialization, meaning being able to manufacture that scale, improving, making sure that it's -- that the yields are where they need to be as well as the ability to sort of have a reliable product that can last for several years. And so it takes time to get there, but I think we're probably on the HAMR side, we're probably 1 year to 1.5 years plus before we get sort of volume production anyway.
Wamsi Mohan
Okay. I should ask you, I have a sort of fireside chat earlier today with Pure Storage whose CEO says that hard drives won't ship anymore in 5 years. Well, what's your reaction to that?
Wissam Jabre
So I think hard drives will still be shipping at least [indiscernible] will still be shipping in 5 years plus. Look, there's this whole discussion around where the flash prices are today, there's cannibalization of hard drive or not. We don't see it. And we do sell both. We do have hard drives, and we do have enterprise SSDs. And so we're not seeing it in our business. In fact, over the last quarter or 2, probably the enterprise SSD business was a little bit more impacted than the hard drive business.
The way we think of it is that our customers or the cloud customers aren't going to make decisions on very important data center architecture or products for their data centers based on a few quarters of flash pricing. Having said that, the two products have their own use cases in the data centers.
So they can -- anyway, they are complementary. And as the cloud or demand for storage grows, there is basically the need for both of them to grow in the hard drive and enterprise SSD granted probably the growth on the flash side is a little bit higher than on the hard drive side, but there's -- but both of these things could be true. Hard drive and enterprise SSDs could -- are complementary and could grow both of them.
Wamsi Mohan
Okay. Can you talk about how you think about both supply and demand growth across both of those in terms of maybe exabyte growth or however you want to frame this?
Wissam Jabre
The growth will end up being correlated to the -- how the cloud market will evolve. The -- in terms of the long-term trends, we don't see a really change in the long-term trends for the hard drive business growth. We're going -- yes, we're going through a period of inventory digestion on the cloud side. But this is sort of -- this will be over in, let's say, in a few quarters and then the growth should resume and over time will revert to the long-term growth trends.
Wamsi Mohan
So you think still that maybe between 30% to 40% kind of growth range is reasonable or do you see something that has changed? You said it was predicated on cloud growth. Is there something that's changing that trajectory that would now reset maybe to a 20% to 30% growth rate?
Wissam Jabre
I would say the 20% to 40% is a reasonable growth rate. It's a wide range. Also remember, the key thing right now is the HDD industry is operating at such a low level today that you're likely going to have a nice steep ramp. The question is over the next three to five years versus a single year going up or down. The key thing we need to get is just a little bit more stability in our overall business as we go forward.
And then I think then from there, we can make some better and more accurate predictions about the future. But whether it's 20%, 30%, 40%, but there's still some great opportunities in HDDs going forward.
Wamsi Mohan
And depending on whether it is 20%, 30%, 40%, when you think about your cost declines relative to the growth over there, what is ongoing that is going to maybe change the trajectory of caustic lines? Or does it change? Or does it not change?
Wissam Jabre
I think the cost declines on the HDD side would still be there. They won't be as high as the cost declines we would experience necessarily on the flash side as an industry, but they'll still be there. And they will still be there in a meaningful way to allow for that TCO to continue decline and make it economic for our customers to adopt them.
Wamsi Mohan
We've heard a lot from many large purchases of NAND, including large smartphone companies and PC companies talk about doing some strategic buys. On the one hand, that kind of suggests that, that there's probably a bottom approaching in the NAND market. On the other hand, does it change now the near-term nature in which the bit growth is getting skewed because of strategic buys and then we sort of struggle through maybe different kind of inventory adjustment over the next few quarters. How do you think about that?
Wissam Jabre
From where we stand from our business, we don't see much of that. And sort of to my earlier comments, for instance, in the PC OEM supply chain, we're seeing more sort of the demand is -- or yes, the shipments are more correlated to where the end demand is.
Wamsi Mohan
Okay. So you're not seeing necessarily from your lens prebuys of any magnitude that would change your thinking about the trajectory of bit growth over the next few quarters?
Wissam Jabre
Yes, we're not seeing that.
Wamsi Mohan
Okay. Can you talk about -- I know the industry as such has looked at profitability and said, wow, like we really need to take some capacity offline. You guys have taken action around that. How much of your capacity is offline? When do you think some of that's going to come back? And maybe you can give us an update on your underutilization charges and how we should think about that over the next few quarters?
Wissam Jabre
Yes. So early in January, we've made the decision to underutilize our fan, meaning basically run the lower number of wafers in the factory. We've taken down the capacity utilization. And we continue to sort of do that also within this quarter. So last quarter, I think on the flash side, we had approximately $160 million of underutilization charges. So if you put it in context, this was around 12 percentage points of gross margin, which is quite significant.
This quarter, we're looking at a range of $220 million to $240 million for total. So two thirds of that is probably more or less roughly in line with what we saw last quarter on the flash business. We've made the decision because we look at where the demand of our product is, the level of inventories and what we're projecting to produce. And where we want to sort of keep a good control of where our inventory is, we don't want to sort of get out of control.
Even though when you look at it relatively speaking, we are in a good -- our inventory is -- and talking relative to some of our peers, we have been in a good shape. But it is also about managing our inventory, managing our cash and also looking at the supply of our product versus where the demand for our product is.
Wamsi Mohan
Okay. Can you talk a little bit about pricing. So one of the things that changed -- that felt like changed structurally over the last few years was HDD pricing or price declines moderated quite a bit. And this happened really as high capacity drives took over what was maybe unused capacity over the years that had built up from PC declines.
And so as we think about the next few years, right, as there is some normalization back in demand, do you expect that kind of pricing discipline remains in the industry? And how should we be thinking about pricing declines in the near term where there is all this excess inventory, and we hear of companies taking some pricing actions in different areas opportunistically.
Wissam Jabre
Yes. So for instance, when you look at the pricing in the HDD for us, it was fairly benign over the last several quarters. We're probably seeing a little bit more pricing pressures, but it's not anything outside of the historical ranges. When we look at our own manufacturing capacity earlier this year, at the beginning of -- actually late June, early July, we've restructured our manufacturing footprint to resize it and sort of we've reduced around 40% of the capacity typically reserved for client hard drive manufacturing. So that's sort of permanently taken out.
We continue to assess where the -- our manufacturing capacity is relative to where the demand is the long-term demand for our products. And so the idea is for us to sort of continue to maintain that sort of balance between supply and demand and so that's one side of it. The other side of it is, of course, we want to make sure we continue to manage our working capital as well as reduce our CapEx investment as we continue to preserve cash in the short term.
Wamsi Mohan
And how about on the NAND side, can you talk about the pricing dynamics over there?
Wissam Jabre
On the NAND side, the pricing is always a factor of supply and demand. And over the last few quarters, I would say, let's say, at the beginning of this cyclical downturn that we're going through, we've seen steeper price declines, but it seems to have sort of -- we're still seeing price declines, but sort of the rate of decline has slowed down.
There too, for instance, in our case, we decided to take action to limit the impact to our inventory or sort of to limit the growth of inventory. And so we've reduced as well as we talked earlier, our manufacturing utilization to sort of work on aligning our supply with where we see the demand of our products. So I would say probably, The rate of decline on the pricing side has slowed down.
Peter Andrew
Yes, but also to help limit the bit growth, we've also taken CapEx down sharply. Remember coming into this year -- coming into this fiscal year, we said we expected overall CapEx. Now this is CapEx for both HDD and Flash to come in around $3.2 billion. I think last quarter, we updated that and we said it in somewhere closer to $2.2 billion. So we've taken both HDD and flash CapEx down very sharply in order to help better align our supply with what we see as demand out there.
And I'd say what's another, I guess, a positive sign is remember, elasticity, especially on the flash side of the house. We have seen some elasticity pick up in a number of our consumer client and other end markets like that. So I'd say it's a good first sign of hopefully an improvement in the flash space from a pricing perspective.
Wamsi Mohan
Okay. That's helpful. There's also been one of the things that I think investors have been worried about was China and YMTC going back some time. Obviously, as a risk now with the YMTC being on the entity list, that's kind of gone away. Why do you think that Western Digital is maybe not getting any credit for sort of this kind of a threat going away?
Wissam Jabre
Look, this is probably not a question for me. It's a question for our investors more than for me. But we continue to operate our business as we've always done. And so it could be that over time, this will become a bit more visible.
Wamsi Mohan
Maybe switching gears a little bit. If you think about the covenants, right, we -- I know you guys have, in the past, renegotiated some of these covenants. We just saw one of your competitors make some significant changes as well. How are you thinking about it? What kind of flexibility are you shooting for if incrementally you do need that. And, maybe you can give us an update on that.
Wissam Jabre
Yes. So well, let me first start talking about our liquidity. At the end of the last quarter, we ended with around $5.3 billion of liquidity. And so that's between the cash on hand of around $2.2 billion plus the credit facilities that are available to us. So within the quarter, if you recall, we did raise around $900 million in convertible preferred. We also got around $875 million of the delayed draw term loan. So from a liquidity perspective, we're comfortable as we navigate through the cycle.
Also in December, we did negotiate our credit agreement and we sort of got an amendment to allow us to operate a little bit more -- to give us a bit more flexibility from an operating perspective. And so the other actions we've taken as we navigate through the cycle is we've taken a lot of cost out of the system. So Peter talked about the CapEx reductions. We've reduced our CapEx quite a bit, not only relative to where the plans were at the beginning of the year, but also year-on-year our CapEx spend came down quite a bit.
On the operating expenses, we've taken our operating expenses as well, more than 20% sort of down year-on-year. I think last year, for instance, we were running, let's say, on average around $750 million a quarter, this quarter with -- our number is below $600 million and so we've also taken action on the underutilization of both the hard drive manufacturing as well as our -- the flash manufacturing side. And that's -- these are all the efforts for us to reserve cash, manage working capital and basically continue to navigate effectively through the cycle.
If we need to do more, if there's a need for us to do more, we still have a great relationship with our lenders. They've supported us for so many years. We can -- we're prepared to do more if that's needed.
Wamsi Mohan
And when you think about liquidity sources, like what do you think is sort of maybe prioritize options, a few options of how you think about it?
Wissam Jabre
So we talked about keeping CapEx as -- sort of as low as possible. We are taking action to also manage inventory. So the way I see it probably, our inventory will probably be more or less flattish this quarter, but then we would expect it to start going down, so that should help with as a source of cash. But also, we continue to use all the levers that are at our disposal whether on the receivable side or on the payable side. We work very closely with both our customers as well as our suppliers to make sure we continue to manage and improve on that cash conversion cycle as we navigate through the cyclical downturn.
Wamsi Mohan
Would you say you'd be free cash flow positive in the near term? And would you call for a sequential improvement in free cash flow?
Wissam Jabre
So free cash flow is big focus for me and for the rest of the team. And so that's something that we continue to work on and will continue to improve. It's -- as you'd imagine, this is extremely important to us. We typically don't guide or project, We do project but we don't talk about free cash flow in terms of the outlook, but that's something extremely important to us to continue to focus on. It's a major focus.
Wamsi Mohan
I think you and [indiscernible] announced that you're starting to produce your next BiCS8 3D NAND node and my understanding is BiCS8 is 218 active layers based on wafer bond manufacturing technology is sort of different from circuit underway architecture. Does this lead to any change in sort of market share or like cost advantages that you can talk about?
Wissam Jabre
So look, this is a very exciting development. It's pretty much the next memory technology node, the BiCS8. The fact that the team managed to get it out ahead of time with the great sort of improvements in performance as well as productivity and yield and also maintaining that sort of capital efficiency in mind is very important.
The technology actually started to be -- we're starting to commercialize a very -- sort of very low volumes this quarter, but we expected to ramp a little bit later. It's very -- it's -- from my perspective, it's really very competitive. It will allow us to continue to sort of maintain that cost curve that we've always aimed for. But also, it's fascinating in terms of the technological innovation, the ability to sort of build the -- on two different wafers, the memory stack versus the logic -- the control logic and then sort of pound them together, it's sort of really innovative.
Wamsi Mohan
Yes, absolutely. I did want to go back on sort of the cash and liquidity point. When you think about your debt ratings, how do you think about it? And what sort of -- how committed are you to sort of where you currently are versus if things were to get worse? Like how are you thinking about that?
Wissam Jabre
And so look, the focus, first and foremost, is on free cash flow generation. But we still have the ability, as I said, from a liquidity perspective, we have -- we're comfortable to operate. And so when I look at where we are, and we do have, for instance, the convert this currently -- current, we plan to address it over the next couple of quarters.
Look, the focus on the balance sheet is big. And so -- but we still have also a lot of options and flexibility. But the idea is to really to continue to focus on the cash preservation, the ability to do whatever we can from a cost perspective as well to navigate through the cycle.
Wamsi Mohan
Okay. That's great. I just want to give you the opportunity maybe to just talk about what's most misunderstood about the WD story since we only got a couple of minutes left. Maybe you can wrap with that.
Wissam Jabre
So look, we have a great technology in both hard drive and the flash side. On the hard drive side, with 22 terabyte, 26 terabyte SMR, we're pretty much leading technology there. On the flash side, we just talked about the BiCS8 and sort of the introduction of BiCS8, and the amazing technological innovation this sort of brings in terms of the ability to improve the productivity as well as the performance and output as well as sort of capital efficiency from a memory perspective is also phenomenal.
We continue to take a lot of action. And we've taken a lot of action and will we continue take a lot of action to make the business much more resilient and much more sort of strengthen the business as we navigate the cycle. But also more importantly, position it for really great position of success as the upturn comes up to really improve on the ability to, I think sort of the future profitability of the business.
And I would say from breadth of markets, we touch consumer, client, cloud. So we do have basically all the ingredients and the elements required for long-term success and value creation.
Wamsi Mohan
Excellent. Well, unfortunately, we're out of time. Really appreciate your time. Wissam, thank you so much. Peter, thank you so much. Really appreciate it. Thank you.
Wissam Jabre
Thanks, Wamsi.
For further details see:
Western Digital Corporation (WDC) Bank of America Securities 2023 Global Technology Conference