Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Thank you very much for joining us. I'm Toshiya Hari. I cover the semiconductor and semiconductor capital equipment space here at Goldman Sachs. We're very excited, very honored to have from Western Digital, David Goeckeler, Chief Executive Officer; and Bob Eulau, Executive Vice President and Chief Financial Officer. The fireside chat will be about 40 minutes long. I'll go through a list of questions I've put together, but we'll also go to the webcast to the extent we do get questions from the audience. Before any of that, though, I'd like to pass the mic over to Bob to go over the safe harbor.

All right. Thanks, Toshiya, and good afternoon, everyone. We will be making some forward-looking statements, and I ask that you refer to our SEC filings for the risks associated with those 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. Thanks.

Great. Thank you, again, Dave, Bob, for joining us and supporting the conference, really appreciate the time. This one is for you, Dave. Before we dive into detailed questions, I was hoping you could kind of reflect on the past 12 months. You officially became the CEO of Western Digital at a very tricky, challenging time. What was it like the past 11 to 12 months? What have you learned? And what are some of the goals for you as the CEO, but also importantly, for the team at Western Digital in 2021?

So Toshiya, first of all, thank you for having us. It's always fun to talk to you and talk about the business with all of our investors. So yes, I came into the business at a very interesting time, March 9. And I think on March 11, the WHO declared a global pandemic. So I wasn't quite expecting that. But did step in at a very tumultuous time. I think one of the first things that I learned about Western Digital is how resilient the company is. First of all, we're fully integrated manufacturing facilities all over the world, the Philippines, Thailand, Malaysia, China and Japan, so keeping everybody at work. It was an interesting time in the beginning of the pandemic. We had a supply side shock and a demand side shock right at the same time. And navigating through that was quite interesting. But we did, I think we did quite well, and the team just incredibly resilient in driving that, through that. So once things stabilize, got into the technology a little bit more, obviously, learned a lot about the flash market and the HDD market. I'm a technologist at heart. So making sure I understand the technology is always very interesting. And then really looking at the company and understanding where our strengths are, where are the synergies of the company, of these 2 great portfolios. And I learned all kinds of things. And I think some of the bigger things, first off, if you look at the company, the kind of go-to-market capabilities we have as a company is really pretty outstanding. I mean, we have a multibillion-dollar retail business. We have a multibillion-dollar channel business. We work with all the PC and mobile OEMs. And then we sell to all the big cloud companies and hyperscalers. In fact, if you're going to build a cloud, you pretty much have to use our technology. It's the foundation of the cloud for storage perspective, which is one of the reasons I came here. So the breadth and scale we have of how to address the market and the fact that we can sell from an individual consumer, all the way up to the largest technology companies in the world at very, very high scale is a really, really strong attribute of the company. And the fact that we have a broad portfolio that we can play across this technology architecture that the world depends more on every day of the cloud powering very intelligent devices is a real strength of the company. The other thing I learned, one of the other big things worth a call out, and I'm sure we'll talk about it later in some of the Q&A, is the relationship with Kioxia on the NAND flash side. And just maybe from the outside, it's a little harder to understand all the details of the partnership. But just the strength of the JV, how long it's been going on, the value it gives us in the market and the positioning and just how close the teams work together and how strong it is and fundamental to our business is very, very important. And then I also learned, quite frankly, that there are some things we can do a little bit better. We can execute better. I thought there was ways we could focus better on the technology to drive our road maps more strongly. And it's been good over the last, let's say, 4, 5, 6 months to start to put those in place and bring some leaders into the organization that can help us with that. But all in all, I felt like I left a fantastic situation to get to a better one, and I'm really happy to be here and the way things have gone.

That's great to hear. So Dave, I guess, one of the early moves that you made was to reorganize the overall company into 2 sort of discrete business units, if you will. I think you sort of alluded to it in the latter part of your response to my first question. But what drove the decision to have a NAND business unit and an HDD business unit? Given how long it takes to develop products, you're probably in still a wait-and-see mode in terms of what comes out of it, but in terms of what you've seen so far, what sort of benefits have you seen?

Yes. I'll get into it, but we're definitely not in wait-and-see mode. The benefits were immediate. So I'll talk about what those are. But when I came into the company, I think any time you come into a new environment, you really want to understand the business. You want to understand the customers. You want to understand the technology. You really want to understand where the synergies are in the company, where the strengths are and where can we do better. And I really developed a lot of conviction around what I said earlier, which is our go-to-market capability and the fact that we have relationships with every big technology company out there and we have a diversified portfolio to sell to them is a huge advantage of the company. And like I said, that scale and breadth ranges from individual consumers going into a store on the corner to buy a flash card or USB or one of our new WD Black enterprise SSDs, all the way up to $1 billion-plus relationships with the biggest customers, biggest technology customers in the world. But what we needed to do was focus the portfolio for execution. The technologies are very different. The customer is the same, but the technology is very different. And I'm a technologist at heart. That's my career path. And I've been building technology on a global scale for many, many years, and that requires focus. And you have to drive focus to get the best outcome. And we weren't really set up right. It was really kind of a flat organization where you got multiple people. You had an engineering leader that was worried about HDD and flash. You had a product management leader that was worried about HDD and flash. And I just thought, the technologies are so different that we need to get focused, make sure we're making the best choices of the projects we pick to engage in. We're getting the best ROI on that. And we're getting the best day-to-day execution on that. And the way you drive that is through business units. It's certainly not a new concept in technology. Most big technology companies have this model, and I thought we could benefit from it. So we implemented it, I think, in September, with Rob Soderbery joining from the outside to run the flash business. And then Ashley Gorakhpurwalla joined to run the HDD business in November. And you get almost immediate benefits because now we have 2 additional scale technology leaders in the company. And both of these gentlemen have run portfolios, quite frankly, at other places that are as big or bigger than our whole company. So they're used to dealing with scale. They're used to dealing with very sophisticated technology projects. They're used to understanding, how do you put a road map together, how do you optimize that in the near term and the long term. They're very sophisticated with dealing with customers, building teams. And so you had this immediate injection of very senior leadership that just things start getting better. They're figuring out their road maps. As we execute across that over time, I think we'll get better and better performance. So I'm really, really happy with the folks we brought in and the structure we're in.

Got it. That's helpful. And then in terms of the NAND business, Dave, you've mentioned on numerous occasions how happy and pleased you are with the JV structure with Kioxia. I think JVs can be a little bit tricky sometimes. I know this JV specifically has been in place for a long time. So clearly, there's something right about the structure. But just going back to your earlier comments, what specifically kind of surprised you the most in a positive sense?

Yes. I think when you've been in the technology business for a long time, especially and really owning really, really big technology franchises, you kind of look a little bit skeptically at JVs because it requires a lot of care and feeding to get it to really work. And when you get inside the company, you see how well this one really works and why it's lasted 20 years. It's incredible, a JV has lasted 20 years. We've got contractual commitments for another 14 years. So this is a long-term structural way this company is built. And it's important because it gives us scale. And we're in a high fixed cost business. Scale is important. We're in a business where technology leadership leads to cost leadership. Both of those are incredibly important in this business. And you get that through scale. When you're in the R&D world, the more you can invest, the better your technology is going to be and it's kind of a first order way to think about it. And together, we are the largest provider of flash memory in the world. And I think sometimes people think of the JV as just the fab and the production, but it's also the memory road map. So we collaborate on our memory road map. We have teams that work together on that. It allows us to put a lot more energy behind that. Each nodal transition gets more difficult, requires more R&D. So the fact that we have joint scale behind that side of the business and then we have joint scale in manufacturing as well, those 2 things are important to both of us. I think it leads to us having cost and technology leadership in a very, very important market. And then the other thing is, once you're on the inside, you see how well the teams work together. These are teams that work hand-in-glove together on a day-to-day basis. It really, really is impressive about what a well-oiled machine it is. I guess maybe I shouldn't be surprised by that business going on for 20 years, but it really is fundamental to the way we operate. And the relationships are fantastic, and I think the advantages we get from it are substantial.

Got it. And then sticking to NAND, a question on the market outlook. I think you guys spoke to a demand forecast of low to mid-30% growth in terms of bits for 2021. And when you think about the various applications that you guys serve, where are you most bullish on and how is your visibility for the balance of the year?

Well, I think we've been talking for a couple of quarters now that we saw '21 setting up well. I mean, we were early. We have a good position in gaming. That's a whole new area that's emerging for NAND. And not just in the controller side of it, we can play all sides of that. Our WD Black product in the retail market has been widely reviewed as the best product out there. So we have lots of ways to play that market. That's an exciting market for us. We knew we had a 5G cycle coming now that we're seeing get built out on the handset side. Clearly, we have a lot of visibility on what's going on in cloud infrastructure given the HDD business. And a big opportunity for us was to break into enterprise SSD. And that's a big focus of the company and we can talk about that in more detail, but we've taken a good step in that direction. And then client is a business that we've been, it's been a cornerstone of the portfolio for a long time. I think it's the synergies playing out, quite frankly. We can talk about that in a little more detail. We're playing the substitution of the hard drive into flash. It doesn't surprise me when you play that out over years that we end up with a very strong position on client SSD as well. We have great customer relationships. We know the requirements, and I think we've had great above-market growth in that part of the business because of that for a while. And then, so we're exposed to all those places, and we see good demand across it. And I think you're going to see us run a very balanced portfolio across those markets and the ability to move the supply we have to where we're going to get the most return.

Dave, to your point, I think your competitive position in client SSD is extremely robust. And it's been a huge contributor to growth over the past year or so. I guess the one concern that many investors have is, well, the PC market was very strong last year, the near-term outlook continues to be very healthy. What happens when we all go back to normalcy and we're not working from home and we're not learning from home? Should we be worried about that? How do you think about that?

I think about that from a little, let's take a little step-up from that because one of the reasons I came to Western Digital is, I just have a huge conviction in the technology architecture that we're all using today. And that technology architecture is a very powerful cloud that continues to make more and more capabilities available to everybody that uses it. And literally, the most powerful technology companies in the history of technology are behind driving that. And then that's tied to very intelligent endpoints, ever more increasing devices, flash penetrating that market. And those 2 things are evolving independently, but together they form a platform the rest of the world innovates on top of and goes and disrupts all kinds of different business models in different industries and different verticals. I think what the pandemic has done is -- so that was set. That foundation was set before the pandemic. And I had a lot of conviction in that because I kind of sat at a little different part of the ecosystem, but could see, had the ability to talk to lots of customers around the world and understand how they were using it and realized we have a long way to go for the full adoption of that model. Along comes the pandemic, and unfortunately, we have a pandemic, but it forces everybody to go rapidly adopt that model as quickly as bottle. Like all of us here on this session, this was planned as an in-person session. We were chatting about that before we start. Maybe it will go back to an in-person session after the pandemic is over, but I would imagine we're still going to have interactions like this because a lot of people find it efficient, good way to do it. It may have taken us years and years to adopt this methodology if we just let things take its course before, but now we were forced to, and it's adopted, and I don't think it's going back. I think when you get to things like learn from home, I don't know if I would say, learn from home is like a rousing success. We've kind of averted a catastrophe of not having kids go to school at all. So I think after we come out of this, there's going to be more of a phase of, okay, how do we do this right because we're going to have learn from home, so we got to do it right. Once you get a device, you're probably going to -- it's not like I bought a device for the pandemic, pandemic is over, I think I'll get rid of it. Now you probably have incorporated that into the way you live or work or your entertainment. And at some point, you go into an upgrade cycle on that. So I think there's been some structural changes in the way we all use technology. I think that the, like I said, I think the foundation was set before we went into the pandemic. The pandemic forced all of us to adopt all that technology, like I said, to avert a catastrophe. And as we come out of the pandemic, there'll be a new normal, but I think all of those use cases that we learned how to use will still be viable use cases. They may not be used every single day, but they're going to be used, and there's going to be adoption that was accelerated significantly. So how that plays out quarter-by-quarter? I think we're going to see. But when I look at it from a macro perspective, I see the world is much more technology-enabled than it's ever been. And I think Western Digital is positioned, like I said, in the device and in the cloud. And I think that's a very, very good place to be with very, very at scale routes to market to both of those.

Got it. Dave, enterprise SSDs, you talked a little bit about earlier in the session. On the earnings call, you talked about some of the qual cycles going your way and you're seeing positive development there. Can you elaborate on what, I guess, the typical qualification process looks like and what sort of positive feedback that you're getting from your customers?

Yes. So it's a really important market for us. To set a little context, what I talked about earlier in our position in client SSD, like I said, it doesn't surprise me. I wasn't here for it, but it doesn't surprise me looking at the history of Western Digital, SanDisk, essentially playing a market where one technology is substituting the other. And you have both of those, so you can play that market really, really well because you have deep relationships and you understand the product requirements, and I think that's borne out over time. We have that same opportunity in enterprise SSD, except I think the fundamental difference is, in enterprise SSD, in the drive business, they're complementary technology. They're not substitutes. And there's a lot of discussion about this sometimes, when are SSDs going to replace hard drives, and it's a long way away, if ever, just because a lot of the technical dynamics, which we could get into if we need to. But basically, right now, you've got all the big cloud providers deploying both. They're both great markets. They're both growth markets. And we have the opportunity to play both. But to play both, you have to have a product, like that's the important thing. So you got to get the product right. So that's why I've been talking about it that we have a second-generation NVMe enterprise SSD. The first generation wasn't exactly what we wanted, but that's okay. The team learned. We build our own controller. That's really important because it gives you a lot of control over your road map and building whatever features you want to build, be able to differentiate. But again, then you got to get the product done at the highest level. So that gets you back to the qualification, which I view as kind of the last step of a development process. And the qualification of the cloud titans is extremely, extremely rigorous, as you would imagine. These providers move very, very fast. There's a lot of growth going on. And once they decide to integrate a product into their infrastructure, they want to just go. They don't want to loop back and find more and more problems as they deploy it at scale. So you can see qualifications that are hundreds of thousands of hours of units under test. And that's what we've been going through, and we broke through with one of the cloud titans in the last quarter and are now moving off to the deployment phase. So those qualifications, they're all different, depending on the provider. They're extremely rigorous. They take many quarters to get through. Quite frankly, the fact that you even have a slot to go through a qualification is important because most customers aren't going to slow down to qualify something new if they already have something that works. So the fact that we have slots to do the qualification, and we're now starting to come out of that, I think, is, it's a good sign for the portfolio.

Got it. One of the bigger, if not the biggest, surprise in the most recent quarter was the rate of cost downs in your NAND business. I think you spoke to BiCS4 as the key driver. But how should we think about the sustainability of cost downs in your NAND business as you continue to transition to BiCS5 and over the medium to long term BiCS6?

Yes. So I'll start with, loop back to the conversation on Kioxia and why the JV is so important because to get -- I mean, our strategy is cost and technology leadership, grow with the market, don't gain or lose share. I mean, we're going to grow with the market. But the key part is technology and cost leadership, like you have to have technology and cost leadership. And to get technology and cost leadership, if you're the biggest investor, it's a pretty good proxy of who's going to have the best technology. And I do think we are in a position where our technology is very, very strong, and we do have cost and technology leadership. We'll be talking a little bit more about our technology publicly. I know we haven't talked a lot about that. We'll be having some sessions on that to give a little more detail. But you're right, BiCS4. So it's not a surprise to me given what I said earlier. This is why I've been talking about the JV so much because when you're in R&D and you're a product builder, when you're in a market where cost is so important because technology needs to get cheaper and cheaper, and as that technology gets cheaper and cheaper, it opens more TAM, it's a great dynamic, making sure that you stay focused on the technology is extremely important. And so we're very comfortable as we've messaged 15% year-over-year cost declines. Some quarters are going to be better. Maybe one of the quarters will be a little bit worse, but we're very comfortable with the 15%. And we're at a point where the predominance of our portfolio is shipping on BiCS4. We're getting fantastic yields out of that. It's underpinning the cost downs we need in the portfolio. And the exciting thing is we got BiCS5. We got the whole transition in front of us that will happen throughout this calendar year. As we get into the back half of the year, the predominance of the portfolio will be on BiCS5. And then we got BiCS6, which we haven't talked about publicly yet. And we will soon, but that's ready for productization as well. So we feel like we've got years of runway on the technology and feel very, very good about where we are. And we feel very good that we can deliver the technology at the right cost, right performance, power, all of it in a very, very capital-efficient package.

Great. Definitely look forward to the update there. So on NAND supply and how you guys think about CapEx, Dave, to your point, I think the goal medium to long term is to kind of grow in line with the market. I totally hear you on that one, but at the same time, I think it's easier said than done, right? Because you want to keep spending and you want to stay on this technology and cost curve. At the same time, you don't want to overflood the market. So striking that balance is always really, really difficult, not just for you guys, but for all your peers, particularly when you have 6, 7 players in the market. So how do you debate CapEx internally and how do you think about potential industry consolidation going forward in the NAND business.