Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Great. Welcome back to the Barclays Global Virtual TMT Conference. I'm Tom O'Malley, mid-cap semi and semiconductor capital equipment analyst here at Barclays. It's our pleasure to host Western Digital this afternoon. We have David Goeckeler, Chief Executive Officer; Robert Eulau, who's Executive Vice President and Chief Financial Officer; as well as Peter Andrew in IR. First off, thank you very much for being here with us, gentlemen. We appreciate it. And I think I'm going to turn it over to Robert or Bob to give the intro here on safe harbor.

All right. Thanks, Tom, and thanks to everybody, for having us today. We will be making some forward-looking statements, and I ask you to refer to our SEC filings for the risks associated with these statements. We'll also be making references to non-GAAP financials and a reconciliation of our GAAP and non-GAAP results can be found on our website. So I think we're ready to go, Tom.

Awesome. Appreciate it. Well, I guess, David, why don't we start from a high level. Can you just share your thoughts on your performance over the past year? Kind of give us a mark-to-market on demand trends as we exit the year just across the storage markets?

So Tom, first of all, it's great to be here. Thanks for having us. I'm really happy with where we are in our performance throughout the year. I mean, obviously, I started at the company 9 months ago, right at the start of the global pandemic. So that's colored my whole time here. But when I -- my starting point of thinking about our performance was right at that time, which is; one, keeping all of our employees safe, which we did a great job of, and also keeping our whole portfolio up and running, all the factories around the world, getting everybody into work, making sure we could supply the market. That was a nontrivial exercise back at that point in time. And I think the team did a tremendous job with it and continues to do a tremendous job with it. I mean, we've learned a lot. The issues are primarily behind us. But if we look at our performance a year, that's been fantastic. Obviously, the pandemic has come into the company, right? When you have a supply-side shock and a demand-side shock. So big changes in the market right at once. We had some geopolitical issues as we went throughout the year, but I think we've navigated that very well. Within Western Digital, it's been a year of transition. A leadership point of view, obviously, I've joined the company this past year. We've made some organizational changes now and brought in some other very senior leaders into the company and probably, most importantly, our portfolio is in transition, and we're -- in both sides of the house, both on the Flash business, about transitions of the, first, the primary technology to the new nodes like BiCS5, which has been a big success for us, and we're really happy with where that's at. And then the portfolio keeps getting better. We've been talking about our move, continued progress in the enterprise SSD market, which is very important to us there. And then on the drive side of the business, it's about the move to 18T, and that's been playing out throughout the last several quarters, and we feel good about where that's going and kind of reasserting ourselves in the leadership position with those capacity points and delivering a great value proposition to our customers. So I mean, all in all, I think, we're very happy with where the performance is and optimistic heading into '21. Now we look at the demand side of the business and kind of where things are at. It starts with, at least on the pandemic, we're talking about the end game. I mean the pandemic is raging. We're still very focused on keeping everybody safe inside the company and all the stuff that's going on in society around that, but at least now we're talking about a vaccine. And as we look to '21, we hope things will get better throughout the year. On the cloud side of the business, which is, obviously, a super important market for us. We've talked about we're in a digestion cycle, and we see that getting better and coming out of that as we move into early '21. That -- so on the drive side of the business, that looks very strong. We've talked about our retail business has been a strength for us for the last couple of quarters, and we continue to execute very well there. And then in the Flash business, again, we've got the portfolio getting better around enterprise SSD, which I'm sure we'll dive into in a little bit more detail. But then we've got gaming ramping up. We've talked about that last quarter. It was 10% of our bits in our last quarter. We certainly see 5G ramping up. We see the Cloud coming out of digestion. So I think as we go forward, there's a lot to be optimistic about.

Great. Thanks, a really good overview. I think I want to kind of take you back to where you started, where 1 of the early things you've done here in the company is shift the operating structure of the business to both the HDD and SSD business units, and you made some hires and promotions to kind of lead those positions. Can you walk through just briefly why you think it's important to structure the business that way. And maybe with those leaders that are now on board, what priorities and mandates have you given them such that this new operating structure is going to be more successful than the prior one?

Yes. So when I came into the -- so when I joined Western Digital, I joined for a bunch of really good reasons, but part of it is we're in great markets. I mean, we have a great portfolio. We're a diversified storage provider. You can't build the cloud without our portfolio. That's a pretty good place to be in the world -- in the technology world. Great portfolio, great franchises, great customer base, but I thought we could do a little bit better on the execution side of the business. We were organized in a way where it was kind of a flat organization structure with everybody reporting up to a Chief Operating Officer. And I spent a lot of time thinking through the business, where are the primary synergies in the business. Although there are some synergies on the product side, the primary synergy of the portfolio is on go-to-market and operations. And both portfolios are really very different from a technology perspective. And I think in any time you're in a technology business, sophisticated business, very large portfolio, it takes focus. Focus is what leads to outstanding execution. It leads to agility. It leads to the optimal allocation of resources and the best returns for our shareholders. So I thought it was best for us to get a focused team around the Drive business, a focused team around the Flash business. Obviously, we have a focused team around retail as well. That's more of a go-to-market kind of side of it. But those 2 portfolios, I thought, we could benefit from really getting the technology teams, the product management teams, the engineering teams focused on. Look, you're in the Flash business, bring in a very senior leader on that, that can lead that business, lead the team of how do we allocate our resources, what markets are we going to play in, drive the execution of the portfolio, and then the same thing on the Drive business. And then given that we sell them to the same customer, that's a great strength of the business. We talked about this on our last call. All of our top 20 customers buy from both sides of the house. So a lot of synergies from that point of view. We don't want to disrupt that. We want one single voice to the customer. So the go-to-market team, leave intact, get focused on the product side, and I think, that will lead to better execution. It also gives us the opportunity, as you said, to bring in 2 very senior technology leaders into the business. And that's always good when you've got 2 very senior technology leaders that know how to operate at scale. They've run very large franchises. They know how to work with customers. They know how to drive engineering programs. They know how to think about how do you allocate resources over multiple time dimensions, not just what am I going to do next quarter, what am I going to do next year, and what am I going to do 3 years from now? Because, in a development portfolio, you have projects that go on for that long. So you got to think about resource allocation across all of those time dimensions. And so I was excited that we were -- we could shift into this model very quickly. Rob Soderbery joined us in September to lead the Flash business, very seasoned general manager, has been in the storage industry. Quite frankly, he's run a portfolio as large as our company at other places. And then Ashley Gorakhpurwalla joined us in November in the Flash business. And again, another very, very seasoned technology leader. He has also run a portfolio that is, again, the size of our entire business. So now, very quickly, we've created very focused groups on their markets. And we brought in 2 very senior leaders to make sure that we keep our eye on the ball on execution and also make sure we have the right road map going forward. Now those 2 folks are pretty much plug and play. You don't have to give them a tremendous amount of direction. They've been general managers for a very long time. But the whole company is focused on some very key principles, which is, we want to drive gross margin. Bob and I have talked about that. That's one of the key measures we're going to look at. We want to drive profitable market share gains. It's not just about gaining share, it's about gaining profitable share. And again, that's what general managers think about, like how do I -- where is the best allocation of our resources to get the best return. And then we want to be as capital-efficient as we possibly can. We want to be the most capital-efficient company out there in our space. So focus on capital efficiency at the same time. And we've got all the teams focused on that going forward.

Great. So you've come into the business, you set up this structure, let's dive into kind of 1 of the pillars here on HDDs. So going into that segment, there are clearly tailwinds from this market as you're shifting to higher density drives. And can you remind me what percentage of your HDD business has moved to capacity enterprise drives? And more importantly, to energy-assisted drives that are greater than 16T?

So this is a really important point because this is a business that is in major transition, a year's long transition coming from predominantly a client business to going to predominantly a capacity business or basically fueling the growth of the cloud. And that transition has been going on for several years, and we are at that transition point now, I think, where -- well it is not more than, I think, I know that more than half of the portfolio is on the capacity enterprise side now of the exabytes we sell, and that is a growth business, and it's going to be for many years to come. Again, you can't build the public cloud without that portfolio, without hard drives. It is the fundamental storage technology in that space. And so we feel very good about that. Energy-assisted drives. We're building a platform around 16 and 18, and we've been talking about that now for several quarters. The mix is ramping on 18. Right now, in the -- the market is still at 14 and 16 is the predominant point, but it will shift to 18 as we move through '21 midyear, around that time. So we've -- we're right at the start of ramping the 18 -- 16, 18, especially 18 capacity point.

Yes. And you mentioned, I think, on the last earnings call that you reached the goal of producing, I think, 1 million energy-assisted drives. And you mentioned a couple of customers at 18T. Can you remind us of those customers that you kind of talked about, or, at least, in the language that you've talked about them, and those opportunities that you have going forward?

Yes. So I mean, once you get the capacity point, then you got to get it qualified with all the customers, and I kind of consider the qualification process the last step of the development cycle. And so we've now been through 138 qualifications that we've completed on that platform. We have another 125 in process. You can see it's kind of an ascendant. We're still ramping there. The big ones around the cloud titans, we talked about last quarter that we have one of those completed at the 16 capacity point, and we have a couple of others that are going on at the 18 capacity point, and those -- we continue to work through those. So we feel good about where the product is. The bogey we put out there producing 1 million drives, because we need to ramp it to get the yields where we need it to be in production, and we feel very, very good about where that ramp is at. So it's kind of all systems go, continue to drive all the qualifications, and then, as they complete, continue to ramp the product.

Yes. And then more specifically on those data center drives, the hyper and web scales using HDS, you've seen some weakness throughout this year, but you've heard, in terms of just market strength, some positive commentary going into next year. Do you see that return to growth there in 2021? Is that going to be an important part of your growth driver in that business?

We do see a return to growth of that in '21. We talked about it when we went into our fiscal Q1 that we were entering our calendar Q3, we're entering a digestion cycle. We expect it to be a couple of quarters, and I think, we still expect it to be a couple of quarters, and we'll come out of that as we go into '21. I mean we're hearing -- and again, we would all assume that, looking at all of our use of cloud technology every day, the pandemic has accelerated that tremendously, and we hear good things for our customers about demand as we go through '21.

Great. So we covered 1 pillar. Let's switch over to the other pillar on the SSD NAND market. Before I ask you more specifically on the different market dynamics, obviously, we want to spend a brief moment on the JV with Kioxia. Clearly, it's probably a head scratcher for many who are just getting into the industry. Can you just remind, from a very high level, what makes this joint venture really special from a technology road map perspective? And also just the benefits of working with a partner in such a way in this memory industry today?

Yes. It is -- it's really important. And I can tell you, it's one of the very, very pleasant surprises as I come into the business from the outside just to see how strong this partnership is. It is absolutely incredible. It's a JV that's been going on for 20 years, which, in and of itself, in the technology world, is quite a feat. But it's highly functional, and it's extraordinarily important because it gives us scale in a business where scale is very, very important. And it's not just scale on the production side, which is what most people think about, "Oh, you have the -- you have very large fabs, and we co-invest in those as part of the JV." That is very important. But we also collaborate on our memory road map. So we have the same memory road map, which, in this business, is extremely important because each nodal transition is getting more difficult. We invest a significant amount of R&D in that as Western Digital. Kioxia invests a significant amount of R&D. And we're talking about hundreds and hundreds of millions of dollars each in defining that road map, the BiCS4, BiCS5, BiCS6. And so, in this business, I think, one of the underpinnings of it is your cost and technology leadership. That is extraordinarily important. And we do -- because we have scale, together, we are the #1 provider in the market. So you have the #1 provider in the market collaborating on what is our memory road map. So what is our base technology that gives us cost and technology leadership, and we're committed that we're going to continue to invest to maintain that cost and technology leadership. And then we have, obviously, the production side of it as well, where we collaborate and get scale on that side of it. So -- and as I said, we're the #1 provider together in the industry. So it gives us a very, very strong scale position in the NAND flash business. And of course, when we take -- we take the wafers out of the fab and we each go our own way as far how we go into the market. And then I think that's where our synergies on go-to-market that we've talked about across the hard drive and the Flash business are so important. Because those customers that we're going to sell flash to are the same customers that are buying our drives. In fact, all of our top 20 customers buy from both sides of the house. So it is an extraordinarily important JV. It is highly, highly functional. The teams work together on a day-to-day basis, hand in glove. And we look forward to continuing this JV. It's structured to continue for many, many years to come.

Great. It's a good overview. I guess, looking more at the product a little bit and just the NAND market in general. We've had the benefit of talking to AMAT here at the conference as well as talking to some of the other providers over the last couple of weeks. It sounds as though, from an industry perspective, DRAM is going to be the really big driver to next year, but there's different opinions on really how the NAND market will be. I think some are a little more positive, some are calling for more flattish growth year-over-year. Can you just talk about the drivers of demand on the NAND side? It seems like, from an end market perspective, you're hearing better things on a PCs, better things at a data center, better things that are mobile. What are you hearing from demand drivers? And do you think maybe demand picks up enough where the market is a bit more balanced than some may initially think?

We definitely see that happening through '21. I mean, if you look at the demand side of it, from a macro perspective, one is, again, we're coming out of a pandemic, right? We've been having a global pandemic. And although the pandemic is ranging, at least we're talking about the end game now. So that's good. We -- and then if you walk through the individual markets, we talked a lot about retail. Retail has been a strength for us. We have a large retail presence. We think that's the strength of our company. That's been strong for us for the last couple of quarters, and we haven't seen any change there. We -- the PC market, we continue to see strength in the PC market. I talked to some of our customers in that space, and they see continued strength. There is, obviously, a big burst of buying as we went into the pandemic as we all went into work-from-home and learn-from-home. And we're all making it work, but this is going to be more of the new normal. I mean, I don't think at the intensity we're at now, but it will be more the new normal. And I think there's going to be a cycle back here and how do we actually do this right, how do we make sure we get everybody enabled for this world that we live in today. So I think there's a lot to be optimistic there. We're seeing the 5G launch coming. Again, we talked about the cloud. We have a lot of visibility given the drive side of the business about cloud demand, and we hear good things from our customers there. And again, those are natural things you would think about given how much we all use cloud technology today. And then gaming, I mean, gaming is just starting to ramp. 2, 3 quarters ago, 4 quarters ago, it was 0% of our bits. Last quarter, it was 10%. And that's just starting to ramp. So -- and I think that's a great story of the NAND business in general. There's always going to be -- there's kind of this evergreen nature to it, where you're constantly driving the price down through technology innovation, which is expanding the TAM. So we think there's a lot of opportunity there. And we think, over the last couple of years, the industry has been pretty balanced about how they've invested. So we're optimistic as we move through '21. I mean, calling it quarter-by-quarter gets more difficult. But if you step back and look at what's the trend, we feel better about as we move through '21.

Yes, I think that's a perfect kind of segue into my next question is you have less control over the demand side in this whole market, but do you have control over your technology -- your road map and your execution of that. Could you talk about the transition to 112-layer that's now ramping, and some of the dynamics you're seeing on cost reductions and yields? And how much visibility do you have into what the next node is going to look like, and those node transitions kind of going forward from here?

Yes. So we feel very good about BiCS5 and the 112-layer choice we made. I mean, the team made a really, really important choice around capital efficiency and the cost downs we need. And the ability to transition to that in the fab and how seamless that is without needing a whole bunch of new tooling and all kinds of things. So we feel -- and the yields have been very, very strong on BiCS5. We've talked about that. It's been ahead of plan. So we feel very good about where the node is. The predominance of our portfolio is on BiCS4 right now because we're getting the cost reductions we need off of that node. And so we've got the whole transition in front of us. And then we -- of course, we continue to invest in BiCS6, and we'll have more to say about that as we move forward. But this, again, goes back to the Kioxia conversation we had and about why that is so important is, this is 1 of the major tenants is, given our scale, we're going to have cost and technology leadership, and we're going to keep up the investment to make sure we have that. And BiCS5 is a really good node for us, and we've got a lot -- we will transition to that more and more as we move through '21.

Great. I think we have time for one more, and I just want to kind of give an overarching one to kind of conclude things. So I understand there's a decent lack of visibility heading into this coming year, particularly with all the moving pieces as we exit 2020, particularly into the back half of 2021. But can you just spend the last minute here talking about why should we be excited about Western Digital into 2021? Any color on growth expectations? And obviously, the stock has underperformed a bit, but why should investors get excited about Western Digital here and right now?

Yes. If I think of the -- so start from the market in, I mean, the technology architecture that we all use every day, Western Digital can play across that entire architecture. I mean, obviously, the -- you can't build the cloud without our technology. And on the device side, we play in the NAND business. So this whole idea, this architecture with the cloud in the middle, intelligent devices tied together by high-speed networks that the whole rest of the world is innovating on top of, we are fundamental to building that entire architecture. It's an architecture we're all using more and more every day, quite frankly, accelerated by the pandemic, and we play all across that. And as that architecture continues to build-out, it will drive more and more data. Within that -- moving to within the company, our portfolio is ascendant, I think. We're moving -- on the drive side, we're moving into leadership on capacity at 18T. So we feel good about that. And on the flash side of the business, enterprise SSD, we didn't get time to talk about that in tremendous detail, but that's a big opportunity for us. We're -- that's another one where we're driving a product refresh around our second-generation NVMe product. We've got over 100 qualifications done. We're now working in the qualifications at the big cloud titans. So those take many quarters. But we're entering those quals and working through them. So that's going to open up a lot of TAM for us, so it will allow our mix to be better, if you will. And then we're organizing the company and bringing in very senior leaders to give us more focus, more agility, more fidelity on execution, and I feel very, very good about that. So going into '21, we feel really good about where the market is, and we feel good about where we're at as a company.

Great. Well, there's never enough time to cover it all, but I really appreciate it. David, Bob, Peter, thank you for being with us here. Have a great end of 2020, and, hopefully, a very successful 2021.

All right. Same thing. Same to you, happy holidays to everybody.

Great. Happy holidays, guys.

Take care.

Thanks, Tom.