WDC - Western Digital Corporation (WDC) Barclays Global Technology Conference (Transcript)
2023-12-06 17:18:02 ET
Western Digital Corporation (WDC)
Barclays Global Technology Conference
December 06, 2023 11:05 AM ET
Company Participants
Wissam Jabre - CFO
David Goeckeler - CEO
Conference Call Participants
Thomas O'Malley - Barclays Bank
Presentation
Thomas O'Malley
Perfect. Good morning, everyone. I'm Tom O'Malley, Semi and Semi-Cap Analyst here at Barclays. I just want to welcome everyone to the Barclays 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.
Question-and-Answer Session
Q - Thomas O'Malley
So I think that the way that I would like to start is just you've had this period of a strategic review. You guys have been mum (ph) 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 two businesses.
David Goeckeler
Sure. I'd be happy to do that. [Multiple Speakers] Yeah.
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 10-K 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.
Thomas O'Malley
Perfect.
David Goeckeler
All right. The strategic review.
Thomas O'Malley
Yes.
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 execution of them, the way we’re organized internally, we focused on our balance sheet. We've cleaned up some long-standing 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.
I think, quite frankly, the downturn showed that both portfolios, I'm sure we will 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. So when you look at all the different options that we had, what was available (ph), -- 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 is a number of the things behind that.
One, the execution of that plan is completely within our control. There's no regulatory approval required any of that. Two, it unlocks value, 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 standalone on their own. And then we've got recovering markets in both businesses. So when you put all that together, we thought it was the right time to make this move in the portfolio and we're very happy together announce and on to the execution.
Thomas O'Malley
Great. Let's just start on the flash side (ph). So could you just start by walking us through in demand and your key end markets or client, consumer or 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. So first of all, say, the bottom is behind us and NAND, and the recovery is on. I think the question at this point is just how fast? And so 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 and the number of end markets that we can access.
So 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 are in a seasonally strong quarter.
So we feel very good about that market. Inside that, we have a lot of good brands and a lot of work we've done on that over the last several years. They are all performing SanDisk, SanDisk Professional, our Black brand on gaming. Just a very, very -- that business is performing as expected. So kind of pass 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 returned 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 is just kind of returning back to carrying a typical money inventory to run my business. We came through a very deep downturn where a lot of our customers with into that, with too much inventory, they corrected quickly, they waited to see the business come back and we're back to that now. So that business, we feel good about where that has record exabyte shipments.
And then in cloud, in the NAND business, we're still in an inventory digested 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 has suffered both in the downturn and it’s 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. But HDD, you did asked about HDD, but we're starting to see the data center market in HDD start to normalize.
Thomas O'Malley
Great. Yeah. Just diving, just a little bit there on the NAND side in terms of the cloud recovery. Do you have an expectation for a time on, you said a couple of quarters, but is that when inventory gets to a better position or do you think that you start seeing ordering patterns get a little 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.
Thomas O'Malley
So two of the three 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 get a recovery, you'd get high-single digit sequentials for only a couple of quarters in terms of the recovery and what pricing moves off of that recovery? If you look today, some peers are talking about 20% plus ASP increases. How realistic is that? How long do you think the pricing recovery can sustain in this example, just given how bad this downturn was?
David Goeckeler
Look, I mean, I don't think there's a playbook for the recovery. I mean when we look at that – this business when we look at it from the end side, we talk to our sales team, the directions we're giving everybody. We had a downturn that was pretty unprecedented. So 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, it's kind of a mid-cycle number in the industry. So if you're down 50%, you need to double to get back to where you are.
So I think we need to see pricing, depending on the market because every market went down different amounts. We need to see pricing come back 50% to 100% before you’re going to see capital flow back into this industry. So 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 demand. We've seen an acceleration of shipments over the last couple of quarters, which is obviously what you are going to see in the beginning of the recovery.
So I don’t think we have a playbook on that. So how possible is to see numbers that are bigger than in the past, I think it’s very possible. Is it going to happen? I think we are going to see over the next couple of quarters.
Thomas O'Malley
Yeah. I think it’s a perfect time to jump in just the supply demand conversation. So what do you think the 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, 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 a healthy spot?
David Goeckeler
Well, we -- last quarter, we’ve upped our demand for this quarter. We look at calendar year ‘23, we were in 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 is negative single digit for calendar year ’23. Calendar year ’24, we see demand high-teens. We see fab-out supply is still mid-single digit kind of number. So I’ll speak for us, I think when everybody looks at what happens in the downturn is enormous amount of capital invested in this industry. The industry has lost an enormous amount of money in this downturn. So 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 and we have to understand what that looks like. Obviously, as what we talked about earlier, enterprise SSD and the cloud market coming back in the NAND, it's a big market. It's an important market. We have to see how that develops over the next several quarters. And then I think the industry is going to work very, very hard to get supplied to mount balance correct and not get ahead of the game like we were going into this downturn.
Thomas O'Malley
So 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. So 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 end of our products. We look at what inventory is doing. And of course, we're focused on preserving cash. So these are really the key things we look at as we look to continuously dynamically manage our utilization.
Where we are today, it looks like, we'll continue basically the same process as we see demand for our products improve that would influence the decision on what we do from a wafer input.
Thomas O'Malley
How do you see the introduction of Big 8 (ph) 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
So on the CapEx, which was also part of your previous question, on the CapEx in fiscal '23, would it reduce our CapEx by more than 30% relative to the previous year? And this fiscal year, we're reducing our cash CapEx spend significantly by the -- probably 50% or more. And as we the recovery that’s taking hold then we will be adjusting. But with respect to Big 8, Big 8 will probably be -- it is not -- it's basically our next big node after Big 6 and the – from a cash CapEx or 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 Big-8 and at some point in the second half of fiscal '25.
Thomas O'Malley
Got it. So we've walked through all the moving pieces, but spitting 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 margins that you are? Is that related to the JV or how have you been able to come up the curve a little bit faster during this recovery?
David Goeckeler
Yeah. It's a result of a lot of hard work over the last three or four years and changes we've made and then a lot of hard work over decades with the JV. So let me decompose it a little bit. In the NAND market just big picture, there is two things you got to get right. You got to get your fundamental technology correct, and you got to get it in the right position and you got to get the right amount of CapEx to build that technology. So that's the BIX road map. And that's a place where we invest jointly with KIOXIA. It's one R&D team.
So basically, we punch above our wade, we're the largest -- we have the largest investment – it’s from a bit share point of view, we're able to invest like the largest player in the market. That gives us a very, very good base technology position. If you look at the BIX road map, if you look at CapEx per output a bit, we're consistently over the last five years, a third lower than the industry average. So we've got a very good technology base to build on top of it that's very capital efficient and very high quality product.
Now the other side of that, what we've been doing over the last three years is, you've got to figure out what portfolio. I'm going to take these wafers out of the fab, and I'm going to sell them to somebody. And you can -- there's lots of choices you can make. If you can just sell the wafers, you can sell components, you can build controllers and sell SSDs. So we put an enormous amount of work into what is the right portfolio to get the best outcome. And we're able to -- the consumer portfolio that you said earlier is a real gem of the whole portfolio. So better through cycle margin than any other of the portfolio.
Again, we have tremendous brands there, a lot of work on those brands over the last three years. So it'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 in the mobile was an easy number to remember, was zero and now it's double-digit. So that's a big part of the portfolio and then we're qualified in enterprise SSD. Now that market is very depressed, but we still have products there.
So we 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. So you have to constantly be mixing across this. And we're able to do that, we put the agility in the organization be able to do that very, very quickly. And you're seeing the results, right. 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.
So again, this goes back to the strategic review and why we think this business is right to stand on it’s own. It's the best NAND business in the industry and we are demonstrating it every quarter with the results we are delivering.
Thomas O'Malley
Helpful. So 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. So 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 your line between the cloud players and others? Is there a different a pace of recovery or inventory position is different or either one of those. Just help shape what is happening in nearline right now?
David Goeckeler
So going into it, when cloud went into the downturn, there was just clearly way too much inventory that had been built up. So 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 stop buying. We have customers that would buy enormous amount, hundreds of millions of dollars’ worth of product, just go to zero. So it was all through working off that inventory correction.
So we talked about this over the last couple of earnings call, we expected sequential growth as we move throughout '24, as those customers came back into the market and the inventory positions and 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 at near line as we go throughout the fiscal year and the conversation with customers are very good on what that looks like.
And we're – the industry is going more toward build the order process -- we’ve taken, and then we've taken a significant amount of infrastructure out of this business. We were overinvested again in this infrastructure, especially kind of at the end of this client to cloud transition. I know 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.
Thomas O'Malley
How about decline in the consumer side? I think we haven't touched on that yet for HDD. You mentioned on the last earnings call, I think at least consumer was stabilizing. How are those trajectories as we go to the quarter here?
David Goeckeler
They're fine. I mean, it's decreasing part of the business. I mean, 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 the PC at start of the pandemic. So we got this kind of false signal where client SSDs went up. And if you look at -- 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. So this business is transitioning to cloud. There's still important markets. There's still millions of drive sold into those markets every quarter. But again, we've taken 40% of our capacity out of client and we're getting that size right to meet that market, but again, like the client's SSD market more predictable past inventory corrections?
Thomas O'Malley
Great. So just assuming a little more broadly again. I just want to talk about the broad strategy in your ultra SMR drives. How are you seeing customer interaction at those higher capacity drives when your competitors moving to HAMR? And are you seeing better traction at the high end? Is that working? Can you see the results of that strategy yet or is that still kind of on the come (ph)?
David Goeckeler
No. It's working. That's fantastic, quite frankly, I mean, if you look at the 26 terabyte drive that we launched two quarters ago, last quarter, it was nearly half of our exabyte shipped, right? So 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 whole side to adapt it. And the really key in getting and driving the adoption of that was our introduction of Ultra SMR.
So a traditional SMR technology gives you an extra 10% of capacity on a drive. It doesn't matter what kind of drive. It can be a CMR drive, PMR, ePMR, HAMR, it doesn't matter SMR is a different layer on top of that. And so when we introduced Ultra-SMR, a couple of generations ago, now it's plus 20%. You're deploying a 22 terabyte drive, going to 24 terabyte drive and extra 20% is quite a bit. So 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 will get to HAMR, HAMR will come, but once we get the HAMR, SMR is going to work on top of HAMR just the way it works now. So 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, Ultra-SMR for many, many more generations of drives that are cost control, high yields and meet our customers' requirements, quick qualifications, so we feel like the portfolio is in a great shape. And again, this is another thing, showing up every quarter in the numbers. The last right quarters, we've had outsized profitability versus our peers and that gap is increasing.
Thomas O'Malley
So you mentioned HAMR and your competitor talks about 1 million units in the first half of calendar year '24 for HAMR drives. How are you progressing on your road map 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, a couple months ago, I talked to the gentleman that actually wrote the seminal paper on HAMR. I think it was 2002. So HAMR has been in development, a little bit -- and this is the story of the HDD industry. I mean, these drives, the technology and this is incredibly sophisticated and can take decades to bring to market. And I think where we're at right now is, we're looking at end game of when does HAMR to the commercialized technology for the data center, and it's going to happen sometime over the next several years. Our technology is, 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.
As I said earlier, we have ePMR. I think something that maybe we haven't talked enough about, we went to ePMR, our energy assist on PMR several generations ago. We've now shipped over 600 exabytes of ePMR technology into the market. So it’s really, ePMR plus Ultra-SMR is giving us this road map 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 at the nearline market. The nearline market, the depressed number in calendar year '23 is somewhere around 40 million drives. The year before that, it was 60 million drives.
So when you talk about 1 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 technology that is already been commercialized can be produced at scale and a very cost 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 will fold that in that we get the right economics.
Thomas 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 being a bit better. Some of the smaller legacy obviously working through periods of downturn still. But can you talk about what it means for utilization in the second half of the fiscal year. Could 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 state it is, kind of a normal margin profile of that about 30% range?
Wissam Jabre
So maybe I'll start with the second part of the question. When we normalize references when you look at the September quarter, and we normalize for the year, 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 our -- the supply of our products with where see the demand. Over the next couple of quarters, you will continue to see underutilization, but I would expect it to be slightly lower than what we're seeing now. So 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.
Thomas 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.
For further details see:
Western Digital Corporation (WDC) Barclays Global Technology Conference (Transcript)