Western Digital Q2 Fiscal 2026 Earnings Call - Agentic AI and UltraSMR Drive Margin Expansion

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Now, I’ll turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you. Good afternoon, everyone. Joining me today are Irving Tan, WD’s Chief Executive Officer, and Kris Sennesael, WD’s Chief Financial Officer. Before we begin, please note that today’s discussion will contain forward-looking statements based on management’s current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please 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 from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis, unless stated otherwise.

Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that have been posted in the investor relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to WD as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving?

Irving Tan, Chief Executive Officer, Western Digital: Thanks, Ambrish, and good afternoon, everyone, and thank you for joining us today. WD started calendar year 2026 with great execution, driving strong sequential and year-over-year revenue growth in our cloud, consumer, and client businesses while expanding gross and operating margins. Gross margin exceeded 50%, driven by our continued innovation and focus on improving total cost of ownership for our customers through higher capacity drives and increased adoption of our UltraSMR products. With strong operating leverage, lower interest expense, and an efficient tax structure, these efforts resulted in nearly doubling of our EPS compared to last year. These results underscore our commitment to leading-edge innovation and strong execution. It is an exciting time to be part of WD, a focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy.

We are well-positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand. Looking at the bigger picture, it is clear that data and data storage are becoming more critical and valuable. As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly two-thirds of all AI compute. This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage. The scale of what is happening is also considerable. One leading hyperscaler’s LLM processes over 16 billion tokens per minute via direct API used by their customers, while another AI company processes over 2.5 billion prompts every single day from 900 million active users.

While the resources that are used to create tokens are recycled, the data that is being created must be stored. Every token, every prompt, and every query answered and checkpoint saved creates data that requires persistent, scalable, and cost-efficient storage, and the majority of this data is stored on hard disk drives. As we look ahead, we see the rise of agentic AI, the next wave and arguably the biggest yet. What we are seeing with agentic AI frameworks represents a structural shift from AI that answers questions to AI that continuously executes workflows. That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored. As a result, we expect agentic AI to drive a step function increase in capacity-orientated storage demand, particularly in cloud and enterprise environments.

Beyond agentic AI, two more waves are building simultaneously. Synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world inputs that seed it. Across industries, physical AI data factory frameworks are being designed to transform limited training data into larger synthetic datasets at scale for robotics, autonomous vehicles, and vision AI. Physical AI itself, robots, industrial systems, autonomous fleets, generates continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops. These forces are not additive. They are a compounding loop. Inference creates data, agents consume and generate more data. Physical AI creates data and trains synthetic models that create more data, and ultimately the loop accelerates. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high capacity, reliable, and high-performance storage on HDDs.

This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. WD’s technology and product roadmap is purpose-built to meet this growing demand. As we shared on our Innovation Day in February, we continue to innovate to meet our customers’ needs through a combination of capacity leadership and performance innovation. Our high-capacity drive roadmap now extends from our 44 terabyte HAMR and 40 terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes. On HAMR, we are accelerating our development, and we are now in qualification with 4 customers. We are qualifying our 40 terabyte EPMR drives with 3 customers and are on track to start volume production in the second half of calendar year 2026. With UltraSMR technology, which works across both EPMR and HAMR drives, we are expanding our customer base significantly.

Three of our largest customers now have adopted the technology. Two are already meeting nearly all of their exabyte demand with UltraSMR, while the third is rapidly ramping in that direction. We plan to have all of our major customers qualified on UltraSMR by the end of calendar year 2027. We are delivering on major areal density improvements, along with a focus on performance innovation with our high-bandwidth drives. Customer response to our innovation has been very positive. Our high-bandwidth drives are currently sampling with two hyperscale customers, with an additional customer scheduled to start this quarter. Our Dual Pivot Technology is being built specifically for new AI workloads, with an OpenAPI approach aimed at simplifying deployment at scale. Based on our industry-leading technology and product roadmap, we are well-positioned to support growing customer capacity, demand, and address their AI workload needs.

Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029. We continue to see strong demand from across our client consumer and OEM enterprise customers as well. In summary, the tailwinds shaping our industry today are both exciting and dynamic. At WD, we remain focused on meeting our customers’ needs while enhancing the value proposition and delivering long-term shareholder value to our investors. With that, let me now hand it over to Chris to share our Q2 results and outlook for Q4.

Kris Sennesael, Chief Financial Officer, Western Digital: Thank you, Irving, and good afternoon, everyone. The WD team delivered strong results, making solid progress against our strategic priorities with continued focus on innovation and disciplined execution, while advancing key initiatives and remaining tightly aligned with our customers’ growing exabyte demand. As we move forward, we are encouraged by our momentum and remain confident in our ability to deliver sustainable revenue growth, expand gross and operating margins, and create long-term value for our shareholders. During the third quarter of fiscal 2026, revenue was $3.3 billion, up 45% year-over-year, driven by strong demand across all our end markets and an improved pricing environment. Earnings per share was $2.72, almost double compared to a year ago. Revenue, gross margin, and earnings per share were all above the high end of the guidance range.

We delivered 222 exabytes to our customers, up 34% year-over-year. This includes over 4.1 million drives, or 118 exabytes, of our latest generation EPMR with capacity points up to 32 terabytes, demonstrating our ability to quickly ramp new technologies and products in support of strong customer demand growth. Cloud represented 89% of total revenue at $3 billion, up 48% year-over-year, driven by strong demand for our higher capacity nearline product portfolio and a stronger pricing environment. Consumer represented 6% of revenue at $186 million, up 24% year-over-year. Client represented 5% of total revenue at $179 million, up 31% year-over-year. Both client and consumer segments saw strong year-over-year exabyte growth and improved pricing.

Gross margin for the fiscal third quarter expanded to 50.5%. Gross margin improved 1,040 basis points year-over-year and 440 basis points sequentially. The drivers of strong gross margin performance include continued mix shift towards higher capacity drives, along with ongoing execution of our pricing strategy and tight cost control. Operating expenses were $397 million or 11.9% to revenue, a 40 basis point sequential improvement demonstrating further operating leverage in the model. The sequential increase of operating expenses was driven by the acceleration of R&D project expenses as we continue to expand our HAMR qualifications with more customers.

Strong top-line growth, expanding gross margin and leverage in the model drove operating income to $1.3 billion, up 116% year-over-year, translating into a strong operating margin of 38.6%, up 1,260 basis points year-over-year. Interest and other expenses were $24 million, and our effective tax rate in the fiscal third quarter was 16%. Taking into account the diluted share count of 385 million shares, earnings per share was $2.72, an increase of 97% year-over-year. During the third fiscal quarter, we significantly strengthened our balance sheet by monetizing 5.8 million shares of SanDisk, which led to a $3.1 billion reduction in our debt.

As a result, only $1.6 billion of convertible debt remains outstanding, and with $2 billion in cash and cash equivalents, we ended the quarter in a net positive cash position of $450 million. At quarter end, we still owned 1.7 million shares of SanDisk. Additionally, during the quarter, we received an upgrade from Standard & Poor’s and Fitch to investment grade level. Operating cash flow for the third fiscal quarter was $1.1 billion, and in combination with a disciplined approach to capital expenditures with CapEx of $145 million, this resulted in strong free cash flow generation of $978 million for the quarter and a free cash flow margin of 29%.

During the quarter, we made $43 million of dividend payments and increased our share repurchases to $752 million, repurchasing 2.9 million shares of common stock. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned $2.2 billion to our shareholders by way of share repurchases and dividend payments. Given the board and management confidence in the business, the board has approved a 20% increase of the cash dividend from $0.125 per share of the company’s common stock to $0.15 per share, payable on June 17, 2026 to shareholders of record as of June 5, 2026. I will now turn to the outlook for the fourth quarter of fiscal 2026.

As we continue to operate in a strong demand and pricing environment with longer-term visibility across our cloud, consumer, and client businesses, we anticipate revenue to be $3.65 billion ±$100 million. At midpoint, this reflects a growth of 40% year-over-year. Gross margin is expected to be in the range of 51%-52%. We expect operating expenses in the range of $385 million-$395 million. Interest and other expenses are anticipated to be $10 million. The tax rate is expected to be 16%. As a result, we expect diluted earnings per share to be $3.25 ±$0.15 based on a non-GAAP diluted share count of 385 million shares.

In summary, this quarter’s results and outlook highlight our commitment to disciplined execution, focus on innovation, and deep customer engagements. Our strengthened balance sheet and robust free cash flow empower us to invest with confidence in the business. With strong momentum and a clear capital allocation framework, we are well positioned to drive durable earnings and free cash flow growth and create long-term shareholder value. With that, let’s now begin the Q&A. Ambrish?

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Kris. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator?

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. Ladies and gentlemen, we will now begin the question and answer portion of today’s call. Today’s first question comes from Erik Woodring at Morgan Stanley. Please go ahead.

Erik Woodring, Analyst, Morgan Stanley: Great, guys. Thank you so much for taking my question. Irving, congrats on the really nice results. I would love if you could maybe go into a bit more detail on the specific tailwinds that HDDs and Western Digital are seeing from agentic AI, meaning exactly what parts of the workflow in agentic are ripe for HDDs, and again, just tying that back to your comment on greater than 25% long-term exabyte growth. You know, where does that go as a result of agentic AI? Thank you so much.

Kris Sennesael, Chief Financial Officer, Western Digital: Thanks, Erik, for the question. We really see 3 core drivers of HDD growth going forward. 1 that we’ve seen for quite a while right now, which is the ongoing storage requirements that’s associated to training. That’s not gonna end. Training will continue. Relearning, reinforcement, retraining is gonna happen, and what we are seeing from our customers as they retrain

Irving Tan, Chief Executive Officer, Western Digital: Reinforce learning with these models, the quality of the model results that they get are improving. They continue to store all the data they’re generating to enable improved quality of the model. That’s 1 continued driver that we see. The 2nd driver that we’re seeing is obviously the rise of agentic AI and inferencing. With every inference that happens, new data is getting generated. What’s happening is that all that new gen-data that’s getting generated is getting stored as well to both feed back into training models and be stored to support future inference references as well. That’s the 2nd key driver of what we’re seeing, both in terms of agentic AI and inferencing. The 3rd driver that we see for data storage for HDDs is obviously physical AI.

As we’ve highlighted before, physical AI, with the limited data sets that it has, whether it’s autonomous vehicles or robotics, is using AI to generate a lot of synthetic data to further train and enable physical AI as well. Obviously, any data that’s generated out of it gets stored and feeds that whole training and synthetic data development loop as well. Those are the three big drivers of growth that we see going forward, Erik. That’s why we have the confidence to see exabyte growth growing beyond 25% CAGR going forward. Thank you, Erik. Did you have a follow-up?

Erik Woodring, Analyst, Morgan Stanley: Yeah, just a quick follow-up, Kris, for you. You know, over the last four quarters, you guys have really shown a lot of gross margin expansion. I think it’s 260 basis points on average over the last four quarters, and you just did 4.5 points of gross margin expansion. For the June quarter, you know, guidance applies about 100 basis points of gross margin expansion. Just curious if there’s conservatism baked into that forecast or if there are any emerging headwinds we need to consider, just given you should, you know, be accelerating cost downs and you’re seeing really nice pricing growth. Just wanna get some context around the June quarter gross margin, please. Thanks so much, guys.

Kris Sennesael, Chief Financial Officer, Western Digital: Yes, Erik. First of all, I’m really pleased that we delivered strong gross margin in the third quarter and breaking into the 50% gross margin range that we’re 50.5%. For Q4, we are guiding to 51%-52%, some further good improvement in the gross margins. If you look at the incremental gross margins on a year-over-year or quarter-over-quarter basis, for three quarters in a row now, and including a fourth quarter, the quarter that we guided to, you see very strong incremental gross margins in the +70%, +75% range on a year-over-year and quarter-over-quarter basis. We believe that we will be able to continue to further improve gross margins.

Obviously, we’re only guiding one quarter at a time. We definitely based on the strong pricing environment that we operate in, which is based on more and more value that we provide to our customers, right? As well as a better mix as we move to higher capacity drives with EPMR and later on, of course, moving to HAMR drives, as well as more and more moving and driving adoption of Ultra SMR, will give us further gross margin uplift. Then, of course, we continue to execute well from an operations point of view. So when you put it all together, fairly pleased with the gross margin and the gross margin trends going forward.

Irving Tan, Chief Executive Officer, Western Digital: Operator, next question, please.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. Our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani, Analyst, Evercore: Yep, thanks for taking my question, and congrats on a nice set of numbers here. I guess my first question is just on the pricing side, and I think, you know, on a per terabyte basis, pricing was up, like, 8%, 9%, high single digits in March. It’s a big step up from the flattish trends I think I’ve seen in the last few quarters. Could you just help us understand what is sort of enabling this step up, and is it reflective of some of these LTA contracts that you have engaged in? Just trying to get a sense on, you know, really, Irving, if this is the new normal on pricing as we go forward. Yeah. Amit, thanks for that. Yeah, pricing was up 9%, year-over-year. It reflects a couple of things.

Irving Tan, Chief Executive Officer, Western Digital: Obviously, the ongoing value that we’re creating for our customers, better TCO value. As we said, our whole pricing philosophy is to be able to enable better TCO value for our customers and to be able to share in that value creation through pricing. As we highlighted at Innovation Day, as Kris Sennesael highlighted also, we said that as we move forward towards the latter part of calendar year 2026, we would see pricing increase more towards the high single-digit range. That’s what you’re seeing from us. That’s really reflective of the timing of new LTAs coming on board as well as we move forward to new periods of LTAs. Obviously, we’re about to deliver our next generation of EPMR in the second half of this calendar year.

That will be a step up in capacity point that will deliver more TCO value. Therefore, we are able to share in better pricing as a result of that as well.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: You have a follow-up, Amit?

Amit Daryanani, Analyst, Evercore: I do. Thank you, Ambrish. Maybe just on the other side of this, you know, cost per exabyte, I think, was down again 10%, give or take, in the quarter. Can you just talk about what is the right framework for us to think about cost per exabyte declines? Should we expect a bigger step down as you transition towards the higher density next gen EPMR end of this year? Thank you. I think if you look at the cost down, we delivered 10% year-over-year, that’s probably the right way to look at it. Going forward, you know, we continue to be focused on delivering higher aerial density. That’s a big cost driver.

Irving Tan, Chief Executive Officer, Western Digital: As I mentioned, we will be introducing and wrapping up our next gen EPMR in the second half of the year. We also have a increasing uptake of customers on UltraSMR, which is a good cost driver for us as well. Obviously, we get a 20% uplift on capacity without the associated cost. By the end of fiscal year 2027, close to about 60% of all the exabytes that we ship will be on UltraSMR. Our teams continue to work on platforming the products to drive further cost downs and also ongoing value engineering to see how we can further reduce, you know, elements, high cost elements of our bill of materials. Obviously the ongoing just supply chain efficiency that we have both from our procurement and manufacturing operations.

If you put that all together, we feel confident that we can continue to sort of deliver that trend that we’ve just mentioned.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Amit. We can go to the next question, please.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Absolutely. Our next question today comes from Aaron Rakers at Wells Fargo. Please go ahead.

Speaker 0: Yeah, thanks for taking the question and congrats on the results. I wanna go back to the 25% growth rate and think about, you know, as you see agentic AI drive incremental, you know, structural demand, maybe you can help us appreciate how you’re thinking about the capacity to fulfill that demand. Is it a continued ability to just mix higher, or is there a point in time where, you know, some capacity investment might have to play itself out?

Irving Tan, Chief Executive Officer, Western Digital: Thanks for the question, Aaron. Maybe, just to hit this straight on, you know, at this juncture, we still do not see any need to increase unit capacity, so we have no plans for that. Our focus is really to continue to improve aerial density. As we introduce our next gen EPMR, which is a 40 terabyte drive, that’ll be a 25% step up already from our current drives which are at the 32 terabyte capacity range. And then there’s this opportunity to further mix up our customers as we’ve highlighted in the past as well. We’ve seen an acceleration of mixing up, and as we introduce the high capacity drives in the next two quarters, we’ll see an acceleration of that going forward as well.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Follow-up, Aaron?

Speaker 0: Yeah, I do. Thanks, Ambrish. You know, maybe on the capital structure now with the debt for equity transfer behind you’ve still got 1.7 million shares of SanDisk. I know that you increased your dividend, I think it was 20% with this relief. Kris, I’m kinda curious, you know, any updated thoughts how you’re thinking about capital return, you know, building cash in a balance sheet versus maybe just returning what appears to be, you know, very strong free cash flow generation going forward. Thank you.

Kris Sennesael, Chief Financial Officer, Western Digital: Yes, Aaron, I agree with you. We do have a very strong free cash flow and free cash flow margin. The free cash flow margin last quarter was 29%, we’re approaching our +30% or above 30% free cash flow margin. In terms of capital allocation and capital return to our shareholders, we’re not changing our policy or our framework here. We are returning all the excess free cash flow back to the shareholders through a combination of our dividend program and share buyback program. As you have seen what we’ve done last quarter, we will continue to do so going forward. We are making an increase to the dividend with a 20% increase to $0.15 per quarter, we will continue to execute on our share buyback program.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Aaron.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Our next question today comes from Tom O’Malley at Barclays. Please go ahead.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital3: Hey, guys. Thanks for taking my question. Congrats on the good results. I’m looking at SanDisk results, which are out tonight too, and I’m seeing, you know, over 100% sequential pricing increases. I know you guys got asked on pricing already in the Q, but just from a 30,000-foot view, maybe you could talk about, you know, with the gap kind of exploding between NAND and some of the hard disk drive players, you know, how much appetite do customers have to keep on taking pricing increases, and what’s your strategy there about how much you could push given the gap is moving higher? Secondarily, you’re hearing about some of the industry potentially doing long-term agreements where you have prepaid upfront.

Could you maybe talk about your appetite to do that and what that would mean for the industry if we saw some of that? Thank you.

Irving Tan, Chief Executive Officer, Western Digital: Thanks, Tom, for the question. In terms of pricing, you know, our pricing philosophy is really to provide predictable pricing to our customers. The one thing that they appreciate and want to avoid is volatility in terms of pricing. Our whole focus is really to provide predictable pricing. As we said, as we deliver higher, more value to a better TCO, to higher capacity drives, as we deliver more innovation in terms of performance, whether it’s throughput or bandwidth enhancements as we laid out in Innovation Day, that gives us the opportunity to create more value for our customers to be able to share in that through better pricing. Our whole philosophy is to ensure that we do that in a very predictable way. Why do we wanna do that?

Because predictable pricing enables our customers to make long-term architectural decisions. That’s really our focus, and that gives us the confidence of why we are putting forward the roadmap that we have, why we’re making the investments that we’re making. We’re not looking at, for it to be, you know, optimistic from a pricing standpoint, but really provide that predictability of pricing, enable our customers to make those long-term architectural decisions that supports the structural change in the hard drive industry that we’ve been talking about going forward. To your question around LTAs, we continue to make progress, in LTAs, we now have LTAs that extend into calendar year 2029 as well. Obviously, as we’ve shared in the past, those LTAs are exabyte based with a degree of pricing associated with it.

Obviously, the LTA volume that we are putting together for our customers does not meet the full requirement that they want, and anything that we can deliver above and beyond what we call the base volume requirement that we’ve agreed for our customers, that’s subject to a different pricing regime that gives us an opportunity to drive some incremental upside from pricing as well.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: All right. No follow-up from Mr. O’Malley. We’ll go to the next caller, please, operator. Thank you.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Absolutely. Our next question today comes from Asiya Merchant with Citi. Please go ahead.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital0: Hi, good afternoon. This is Mike Cadiz for Asiya Merchant at Citi. Congratulations on the quarter. My first question is, would you be able to provide any color or additional color on yields and reliability? As a result, are there any implications to the cost for de-declines that we can think of?

Irving Tan, Chief Executive Officer, Western Digital: Sure. I mean, if you look at our EPMR products that we’re shipping today and what we are anticipating as we go into volume RAM in the second half of the year for our next generation EPMR, they continue to be in the 90% range, right? Quality also, which has been one of our key considerations, remains very high. This is the hallmark of who we are as a company, high yields, known quality products, and that’s something we’ll continue to focus on, both in our EPMR products and in our HAMR products, which is the focus of our HAMR qualification right now to ensure we have the right reliability, we have the right quality, we have the right manufacturing yields as well. That remains constant.

immediately in terms of, current yields and quality, we don’t see any changes.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: You have a follow-up, Mike?

Ambrish Srivastava, Vice President, Investor Relations, Western Digital0: Yeah, I do. Thanks. Given the price differential currently between hard disk drive and flash, would you be able to attribute the strength in HDD demand because of that? Are you seeing any architectures changing, which I think you said at this point is not?

Irving Tan, Chief Executive Officer, Western Digital: Yeah, look, I think, you know, flash is a great technology. It has a specific role in the storage stack. We both play in slightly different spaces, right? If you look at large scale object storage, which requires long-term retention, that’s where HDD really comes to the fore. That’s 80% of all data that’s stored within a hyperscale data center. If you look at workloads that require high IOPs, high throughput, that’s where flash really comes to the fore. Even in inferencing, right, we saw a symbiotic relationship. The new data that’s created from inferencing typically will get stored on HDDs. The vectoring data that’s required for inferencing, that’s actually stored on flash. It’s a very symbiotic relationship. Obviously, some of the new innovations that we are delivering are high bandwidth drives.

As an example, now Dual Pivot Technology that will improve throughput and bandwidth will continue to improve the performance of our HDDs and continue to deliver more value to our customers going forward. We don’t see any, at this point, any major structural changes to architecture. That’s why, again, we want to make sure there’s predictability in the pricing we provide so customers can make decisions not 1 year out, but they’re making architectural decisions 2, 3 years, 5 years out as well.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Mike Cadiz.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital0: Thank you.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. Our next question today comes from Samik Chatterjee with JP Morgan. Please go ahead.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital2: Hi, thanks for taking my question. Maybe for the 1, if I can just ask you about the quarter. You obviously had a strong set of numbers here, including both on revenue and gross margins coming in above the high end of your guide. When I look at it, the outperformance and gross margin was a lot more relative to the outperformance on the high end of the revenue. Is there something more specifically going on with gross margins, maybe in terms of like cost reduction? What really outperformed rate of your expectations is probably where, what I’m trying to get to in terms of the magnitude of the outperformance is on those 2 metrics. Thank you.

Kris Sennesael, Chief Financial Officer, Western Digital: Yeah. Again, on gross margins, there’s three major drivers. The first one is pricing and the pricing environment, that obviously continues to be very strong, and was a little bit better during the quarter than we expected when we provided the guidance. As we’ve indicated, not all the pricing going into the quarter is locked, we do have some opportunities, by the way, not only in our cloud business, but also in our client and consumer business, where we see further continued opportunities in terms of pricing. Secondly, mix, and there again, we’re making good progress driving to higher capacity drives and more adoption of UltraSMR, that’s playing out really well.

The teams continue to execute really well on driving down costs across the board throughout the supply chain. Great execution during the quarter, and I expect going forward similar levels of execution.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: You have a follow-up, Samik?

Yes, please. Maybe just sort of then looking at the cost per exabyte and sort of a follow-up to Amit’s question earlier, you’re doing this sort of 10% decline in cost per exabyte right now. As you start shipping the 40 terabyte EPMR and then eventually the HAMR drive, why shouldn’t we expect that cost per exabyte to maybe declines to X rate? I’m just trying to think about the trajectory and as you ship those sort of lower cost over profiles, why shouldn’t that trend sort of accelerate from where it is today? Thank you.

Kris Sennesael, Chief Financial Officer, Western Digital: First of all, we’re only guiding one quarter at a time. I have confidence that the teams will again continue to execute on those three levers that we have that I discussed just a moment ago. We are ramping the next generation ePMR in the second half of calendar year 26. That’s not that far out. As Irving already talked about that, we’re feeling good about that ramp, the manufacturability and the yields there. The HAMR ramp, we’re making really good progress on the qualifications. Now with 4 customers, getting really good feedback from the customers. We expect to ramp that in 2027.

Still a little bit of work to be done in terms of yield and reliability and quality, but good progress being made by the operations teams. There is going to be an adoption curve, right? We’re not switching overnight to those new products that are being launched. The improvements will be phased in over us, over the ramp period.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital2: Thank you, Stefanie.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Ashlyn Greninger, Analyst, Bank of America: Hi, this is Ashlyn Greninger on for Wamsi. Congrats on the results. Just 1 question from me. You mentioned the UltraSMR JBOD platform as a way to broaden adoption beyond your current target base. Can you just talk about whether that primarily expands your reach into tier 2 CSP customers or enterprise customers? Just how material could this opportunity become over the next 1 to 2 years? Thanks.

Irving Tan, Chief Executive Officer, Western Digital: Yeah. We definitely see it as an opportunity to expand our reach into, you know, tier 2 hyper CSPs, even some of the hyperscalers in the Asia region as well. That’s one of the enablers where we are forecasting by the time we get to end of calendar 2027, the vast majority of our key customers will all be on UltraSMR, either fully adopted or materially underway in terms of qualification. That gives us also the confidence, as I mentioned. As we get to the end of fiscal 2027, close to 60% of the exabytes that we ship will be on UltraSMR.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Ashlyn Greninger.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. Our next question today comes from C.J. Muse at Cantor Fitzgerald. Please go ahead.

C.J. Muse, Analyst, Cantor Fitzgerald: Yeah, good afternoon. Thank you for taking the question. Curious, on the agreements, particularly, you know, as they extend out into 2027, 2028 and beyond, how should we think about pricing and what is embedded inside there? Is there a fixed kind of variable, kind of different percentages or what?

Irving Tan, Chief Executive Officer, Western Digital: Yeah. CJ, thanks for the question. The construct of the LTAs broadly are obviously there’s an exabyte volume tied to it. There’s pricing tied to it, depending on the duration. There may be periods of pricing adjustment as we introduce new capacity points, as we introduce new capabilities, that gives us the opportunity to adjust pricing going forward.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: A follow-up, CJ?

C.J. Muse, Analyst, Cantor Fitzgerald: All right. Curious on the remaining SanDisk position now that it’s beyond 12 months, is that something that is now taxable? Any sort of implications of beyond that window? How are you thinking about, you know, timeframe in terms of monetization?

Kris Sennesael, Chief Financial Officer, Western Digital: Yeah. We still have 1.7 million SanDisk shares after we did the debt for equity monetization in Q3 of fiscal 2026. It’s our intention to monetize the remaining 1.7 million shares in an equity for equity transaction. We’ve indicated it’s our intention to do that before the end of calendar year 2026, and this will be in a tax-free manner.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, CJ.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. Our next question today comes from Karl Ackerman at BNP Paribas. Please go ahead.

Karl Ackerman, Analyst, BNP Paribas: Yes, thank you. I have one for Irving and one for Kris, if I may, but I’ll ask Irving first. Irving, when would Western Digital consider adding internal head and media capacity to support these multi-year commitments from customers? For example, have you had discussions regarding prepayments for future capacity adds?

Irving Tan, Chief Executive Officer, Western Digital: Yeah. We definitely are looking at head and media investments. As we said in the past, we’re not making any investments in terms of adding unit capacity. When we talk about areal density improvements or increasing the capacity per drive, that does involve technology investments to support new media recipes, new media substrate, new head designs as well, and the potential to increase disks over time, as we’ve highlighted in our Innovation Day, where we are able to get to 14 disks over time. Our number one focus is to increase the terabytes per disk to make sure that it’s very competitive within the industry. Beyond that, we were able to add more platters to the drive as well.

That’s the most cost-effective way to deliver incremental capacity to our customers. We’re definitely looking, and if it makes economic sense, we’ll look to add head and media capacity in terms of investments, but not unit capacity investments.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Karl, you had a follow-up for Chris?

Karl Ackerman, Analyst, BNP Paribas: Yes, I may. Kris, when you note that you have agreements extending into 2028 and 2029 with your major customers, could you delineate that with respect to build to order and LTAs? For example, do you have build order contracts addressing much of your nearline capacity this year or does it extend into 2027 as well? Thank you.

Kris Sennesael, Chief Financial Officer, Western Digital: Yeah. The manufacturing lead times is around about a year, most of the purchase orders are being placed a year in advance. If you look beyond the first year, we are going into those LTA frameworks that has been explained by Irving before. There is still a little bit more variability beyond the first year.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you. We’ll go to the next question, please.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Absolutely. Our next question today comes from Krish Sankar with TD Cowen. Please go ahead.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital4: Hey, guys. This is Eddie for Krish Sankar. Irving, when you look across your four largest hyperscale customers, are you seeing demand patterns that are broadly similar, or is there a meaningful divergence in how aggressively different customers are scaling based on their AI roadmaps? I’m just wondering if there’s anything specific outside overall CapEx growing that is driving demand for HDDs.

Irving Tan, Chief Executive Officer, Western Digital: No, I would say, in general, the profile is quite similar. Obviously, as I’ve highlighted, you know, the demand for storage is increasing because storage is persistent, right? If you look at it, if you talk about inferencing, the resources that are used in inferencing, whether it’s compute or whether it’s memory, they can get recycled. But the data that’s getting generated for inferencing is not being recycled. All that data that is getting generated is getting stored, and that storage, the data that’s being stored, is persistent. That is consistent with what we see with all our top 4 customers. Whether their business model is in search or whether their business model is in advertising or in the enterprise software space, it’s pretty consistent.

It’s really this ongoing data storage requirements to support training, improvements in training, to support the demands of inference, and to support synthetic data being driven by physical AI.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Eddie. Operator, will you go to our last caller, please?

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Absolutely. Our last question for today comes from James Schneider at Goldman Sachs. Please go ahead.

James Schneider, Analyst, Goldman Sachs: Good afternoon. Thanks for taking my question. I was wondering if you’d maybe talk about, you know, at some point in time in the future, let’s say at the end of calendar 2027, when you know, what level of coverage you would expect to be shipping in terms of HAMR on, in terms of exabyte shipments.

Irving Tan, Chief Executive Officer, Western Digital: Yeah, we don’t have a number that we are putting out there right now, Jim. Obviously, our focus has been to, as we stated repeatedly, is to ensure we de-risk the transition for customers to HAMR. We have taken a slightly different path, where we have a dual-track process. We continue to deliver areal density improvement and high-capacity EPMR drives even as we introduce HAMR. That gives the customers both the confidence in the transition, but at the same time to be able to enjoy better TCO through the higher areal density. When we get to the right reliability, we get to the right yields, we’ll make that transition accordingly to HAMR to make it the mainstream of exabytes that we ship.

Kris Sennesael, Chief Financial Officer, Western Digital: Just to add there, we indicated we have now four customers in qualification with HAMR. We are somewhat ahead of schedule compared to our initial plan. The feedback that we are getting from all our customers is very positive. Our HAMR development is going really well.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital: Thank you, Jim.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. That concludes our question and answer session. I’d like to turn the conference back over to Mr. Tan for any closing remarks.

Irving Tan, Chief Executive Officer, Western Digital: Thank you. As we shared today, we, you know, we are really excited about the opportunity ahead of us, and the roadmap that we’ve put forward in WD really positions us well to address our customer needs and the demands that they have going forward. I wanna take this moment to really thank all our WD drivers, our business partners, for their commitment to our customers and all that they do for WD. Thank you again for joining us here today and hope all of you have a great rest of the day.

Ambrish Srivastava, Vice President, Investor Relations, Western Digital1: Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.