Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Okay. Good morning, and thank you for attending JPMorgan's 50th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst here for the firm. Very pleased to have Dave Goeckeler, Chief Executive Officer; and Wissam Jabre, Chief Financial Officer of Western Digital here with us today. I'm going to turn it over to Wissam, who's going to read the safe harbor statement. Then we'll go ahead and kick off the Q&A. Gentlemen, thank you for joining us today.

It's great to be here.

And Wissam, let me turn it over to you.

Thanks, Harlan. It's great to be here. We'll be making forward-looking statements, and I ask you to refer to our SEC filings for the risks associated with these statements. We will also be making references to non-GAAP financials, and a reconciliation to our GAAP and non-GAAP results can be found on our website.

Perfect. Thanks for that. And again, thanks for joining us today. The team has had a busy few weeks. I mean you had earnings on April 28, solid results and solid outlook by the team. Few days later, an investor announced that they initiated a very large position in Western Digital. They issued a letter, noting a very positive view of the company and its end markets, but they did offer some suggestions on how to unlock value. And then you had Investor Day on May 10 where you announced some great new products that we'll touch upon a little bit later. But I guess, firstly, what's your reaction as Western Digital's CEO and CFO to the suggestions contained in the investor letter?

Yes. So Harlan, again, it's great to be here. Thanks for the invitation. We always look forward to talking about the business. Yes, it has been a busy 2 or 3 weeks. There's no doubt about it. We were very happy with the quarter and the way it played out and where the business was. So we thought that was a great result of our execution and delivering what we said we were going to do. Clearly, we have been preparing for -- quite some time for our product launch in our Investor Day. And I think that was a very good demonstration of, quite honestly, why I came to Western Digital, which was to create value, like how do we create value? We have -- I think, we have great franchises. We're in good markets with good end market demand. The world needs -- always generating more data. How do you store it? How do you take advantage of it? And the fact that we were able to announce a number of market-leading products. I think on the drive side, we took the industry to 22- and 26-terabyte drives. I'm sure we'll talk about that a little bit more. I think that may have been a bit surprising to some folks. We also announced our new enterprise SSDs on BiCS5 and new WD_BLACK product. So a lot of really great innovation, which is -- was one of the big priorities when I got here, which was turn up the innovation engine, we have tremendous technology. Organize the company in a way that we can get back to market-leading products. I think that's working, again, all in that theme of creating value. And I think it's -- really, when I think about the last 2 years, we've really been trying to do a couple of things, which is -- well, a number of things, but the big picture, a couple of things. One is the business we have today run it better, I mean, get better results. I think the year before I came, we delivered about -- a little over $3 in EPS; last 4 quarters, over $8 in EPS. So we think we're performing better, products are better. But also look at the business and how can we restructure it and how can we give ourselves more optionality in the future, and we've done a lot of work around that, whether it's restructuring the business in a way into business units that give us more focus and the ability to execute, focus on our balance sheet. Really, we've retired over $2.5 billion worth of debt, which gives us more strategic optionality in the future. We've moved to segment reporting, which gives more visibility into the business. And even things like this IRS case we just settled, which is nobody necessarily likes to make payments of that magnitude, but to reduce -- to eliminate that uncertainty in the business and get that behind us, I think, gives us more strategic flexibility in the future. So we've really been in that vein of both execute the business better, structure ourselves in a way where we can get the most out of it and then also structure ourselves for the most strategic flexibility and then, of course, look at ways that we can structurally create more value going forward. And I think that leads me all the way back to the letter from Elliott Management, which was, from my perspective, a very constructive letter. They basically see our businesses as very attractive, and they like some of the moves we've made, clearly have some suggestions of some things that we'll talk about with them and are talking with them about how we can continue on this journey of unlocking the value of Western Digital. Wissam?

Yes. Maybe I'll just add a few comments to that, David. I mean I joined the company last quarter, and I also came to Western Digital to unlock value, create value, and I see everybody in the company from the leadership team now really focused on that. So -- and we have all the ingredients to be successful at doing that in the future.

It sounds like it from your opening comments, but have you and your -- this large shareholder held conversations since the letter was issued? And how have those discussions been?

Well, I mean -- so I go back to the basics. I mean we talk to all of our shareholders. So we always have an ongoing dialogue with all of our shareholders. And of course, we've had a dialogue with Elliott about their ideas. Like I said, I think their letter was very constructive. The conversations have been constructive. They really offered additional capital to help us on this journey of unlocking this value. And like I said, I think, that is a very, very positive step forward, and we'll continue the discussions with them. And we'll have more to say as we -- as those progress.

Perfect. And you mentioned a little bit about this in your opening remarks. But again, you held your Analyst Day just about 2 weeks ago. As we were discussing before, we started the fireside chat, I actually thought it was really well balanced, right? It was where has the team come from, the performance, where are we going, talk about execution, talk about road maps, talk about product strategy and then talk about the future financial profile, right, if the team executes to all that it says it can do. So maybe you can just give us an overview and some of the key takeaways from the Analyst Day.

Yes. So we've been making a lot of changes over the last couple of years in the company. That all culminates with the model we put out. I'll let Wissam go through the details of that here in just a minute, but that's what we really wanted to get to. We've restructured the company. We brought in new leadership. We're driving innovation. Again, I think the -- we started the day before our Investor Day with a product launch of a lot of different technology we've been working on across the business that I think I've been talking about this quite a bit since I came into the company, I mean, getting back on our front foot, market-leading technology. We're a product company, having market-leading technology, being able to bring innovation to your customers and offer them a better value proposition puts us -- puts everybody in a better situation. We move the whole industry forward. We move ourselves forward. We're in a market where there's no shortage of demand to store data. We just need to make it more economical and how do you leverage that data, and that's what we're very good at. And to have a day where we launch market-leading products across the entire portfolio felt really good, and it's a direct result of the changes we made about 18 months ago to bring in general managers and get the teams focused on driving innovation. So that was really important. From there, we talk through how the portfolio plays out with our big customers, some of the big moves we've made. We have -- I think we have a very unique business in that we sell literally over $1 billion worth of product to single customers, the largest data center operators in the world. And we go through that all the way to selling 300 million devices to customers all around the world. So we have a very large range and access to market. Of course, we deal with every OEM on the PC and smartphone side of it and then have a big at-scale distribution business. So I just talked about how we use that breadth of the company and how that influences the portfolio, and we want to get ourselves in the position where we have the ability to mix the portfolio in the best way possible to get the best financial return for our portfolio. And then talked -- we talked a little bit about how that shows up in big customers, especially this -- we've had a big breakthrough in the last year, which is NVMe enterprise SSDs. We've talked about this a lot, getting qualified at the major cloud vendors and major OEMs. It's very, very, very big step forward for the company. It's very difficult to do. There's very few companies that have done it. And when you make -- when you're able to do that, you have a lot of success in that part of the market. So there, I think we moved on to then give some visibility into just all of the changes we have made inside the company. I think, we clearly, when -- we restructured the business into a business unit model to focus on the technology, but we also made a lot of other changes. Over 70% of the people on my staff have been -- have changed in the last 2 years. So -- and we've got the team, including Wissam -- I want to publicly congratulate Wissam, I mean, literally a couple of months into the business and stand up at an Investor Day is quite an achievement. And he was instrumental in getting us there. But it's been a 2-year process to get the team in place that I think we need to drive this business forward, and we've gotten to that point just within the last quarter. So that doesn't mean we're waiting for that to make changes and perform. Like I said, the numbers are all better across-the-board in those 2 years, but that really got us to the point where we could put a model out there of what we think we're going to manage this business, to what we know we're going to over the next couple of years. So maybe, Wissam, do you want to go through that a little bit?

Sure. Thanks, David. So yes, I mean the -- what we also laid out is, as you noted, Harlan, in your question, the improved performance over the last couple of years. We've seen good revenue uptick. We've seen really good gross margin expansion, a little bit -- almost close to 6 percentage points from -- in the last couple of years. We've seen good improvement in the operating margin that shows the great ability of the operating leverage in the model. And then with that, obviously, EPS and free cash flow, EBITDA. So basically, when you look at all the metrics in the business, we've seen good -- the earnings power of the business has improved quite a bit over the last couple of years. What we laid out in terms of the target models for us at Investor Day, we did really lay out target models for hard disk and flash. So on the hard disk, our revenue growth CAGR range is 4% to 6%, with a gross margin of 31% to 34%. On the flash side, we're targeting a growth of 10% to 12% with a gross margin of 35% to 37%. And what this really adds up to for the company is a revenue growth target of 7% to 9% with gross margin targets of 33% to 36%, translating into 17% to 22% of range for the operating margins. And on the CapEx side, our target for the long term is 8% to 10% of revenue. So they're really good targets for us. Everybody is focused on obviously driving the business towards those. And what sort of gives me a bit more confidence around how the model works is when we look at FY '22, and we're pretty much approaching the lower ends of the ranges on the gross margin and the operating margin.

Perfect. Before I -- I want to jump into some of the near-term supply and demand dynamics. But before I do that, I wanted to see if there are any questions from the audience. Please wait for the mic.

Yes. After your Analyst Day, I was paying attention to your outlook on CapEx. So I wonder if you can walk us through what's driving the -- whether it's higher -- actually higher capital intensity or is it just the fact that you need to invest more because you're seeing a lot more demand for storage in the future?

Maybe I'll start making a few comments, and David, please feel free to add. The -- so what -- when you look at the CapEx, the 8% to 10% target, if you sort of think of it by business unit, we're seeing around 4% to 6% for the hard disk drive business, and the rest would go into the flash. And so this is over the long term. We do see a bit of increase in capital intensity over the shorter term. But in the long term, we expect to be within sort of historical ranges.

So I guess one thing I'll add to that is -- we talked about this a lot. The hard drive industry is changing. The hard drive industry has gone through a long period of basically capacity absorption as client has declined. And this is a 15-year transition if I look at the way our infrastructure is used. We've had a very long transition from hard drives, which client devices into the foundation of the cloud. 85%, 90% of storage in the cloud is on hard drives, and it will be for a very long time. So we've essentially reached the point where in media and heads, we have to invest for that growth now. All that growth over the last decade was just consuming the fall of client for the most part. And so now we're returning to growth in the industry. You can see it in the top line. We're forecasting growth. And that's going to take some level of investment on a CapEx point of view in the drive business, but we're going to be very disciplined about how we go about that. We're going to get -- we're going to invest for the growth that's actually there as opposed to building excess capacity. I think the history of the drive industry is how do you absorb all the excess capacity that's there. And the rise of the cloud has been based on that, and we're at the end of that period. And so now we'll be very disciplined about investing. So we can fuel the growth in the cloud. That's a great market to be in, a great business to be in. And we have to invest in heads and media for that. But again, we're going to be very disciplined about that to get supply and demand matched going forward.

How much of Elliott's proposal was already on your road map or if any of it? Or how much of this would be a, I guess, I'll call a rather sudden strategic shift?

Yes. I mean, look, since I got here, I've been doing -- like I said, I've been doing 2 things, which is, one, execute the business better. I think we have -- I think the franchises we're in are good businesses. We just talked about our model and -- but also you always look at structurally how can you change the playing field that you're on. And I think that's always something we look at and have been looking at. I think their letter and their engagement in that process has been very, very constructive because they're bringing capital along with it. So I won't go into any particular idea that we've looked at or haven't looked at, but I think that any money that comes along and invest in your business and wants to be a partner in driving that change is a very good thing, and we're going to engage with them with that point of view. And we are engaging with them in that point of view.

Perfect. Any other questions? On the near to midterm environment. So the team remains -- based off of the last earnings call, the team remains pretty optimistic on growth in the second half, a combination of seasonal trends, strength in your end markets. And you guys also are driving some nice new product cycles. So if I look at your end markets, cloud and hyperscale, which is about 40% of your overall business. CapEx spending by the cloud titans is up 30% this year with a stronger weighting towards the second half. Enterprise demand remains strong as well as commercial PCs and gaming. On the flip side, smartphone, consumer PC, retail is a bit weaker here in the first half and somewhat unclear as to whether or not we do get the seasonal step-up in consumer in the second half. Given your end market diversification, the mix, the visibility, give us the confidence on growth of the business in the second half and unpack the demand drivers, the product cycle drivers and maybe some of the areas, which you do think are going to be a bit weaker in the second half.

I think your question kind of got it all. You pretty much summed it up pretty well there. We -- the cloud demand, enterprise demand is strong, continues to be strong. I think in that part of the business, we're in the position and our customers are in the position of still chasing the supply chain to get all the components you need to meet the true -- to actually build to true demand. So that demand is there and it's still an environment where both us and our customers are trying to get all the pieces they need across the supply chain to build out what we would all like to build out. That said, we see strong demand and the ability to meet that demand in the second half. On the consumer, there's no doubt. I mean when you look at the consumer, there's increasing headwinds on the consumer. We see it across our business. Again, I think we have this unique position of having a global consumer business as well as a big hyperscale business and the pieces in between. And the headwinds on the consumer side, you got it, on consumer PCs, smartphones and just our consumer business in general. We do see increasing headwinds in that business. So it's a little bit of -- there's a lot of strength in the enterprise and cloud side of the business, and there's increasing headwinds on anything that's associated with the consumer on a global basis, whether it's lockdowns in China or the war in Europe or just inflation. So some -- very dynamic environment. You put that with the supply chain environment. Again, we still feel very good about the business. Big picture, the macro trends, more data in the world, our ability to store it and the big -- that all starts with making sure our innovation engine is fine tuned and running and we feel very good about that on both sides of the business, whether it's our ability to launch 22-terrabyte and 26-terrabyte drives in the last couple of weeks and bring those to market as we go throughout the year. Or accelerating our BiCS5 transition into enterprise SSD, consumer SSD, driving that, and then eventually moving on to BiCS6. But right now, it's all about BiCS5 and ramping that, and we feel good about where the portfolio is.

And so netting all of that out, the team still feels pretty confident about growth in the second half?

We feel good about the second half, right? I mean, again, it's a very dynamic environment. I mean, just like we always say, we only forecast 1 quarter at a time. But when we look at the -- when we look at where the worlds's at, still very dynamic supply chain; very strong cloud demand, enterprise demand, commercial demand; increasing headwinds on the consumer side.

Perfect. And then on the supply side, the team has actually managed the supply chain dislocations very, very well, right? COVID-19-related logistics and freight delays, lockdowns, tight component supply and higher prices. Obviously, your JV NAND flash fab had some issues in the March quarter. How do you see the component shortages as you move to the second half of the year? Are they starting to ease? And with the easing of the China lockdowns in the past few weeks, is that whole China production value chain starting to recover?

I'll make some comments, and then Wissam can make some comments as well. It's still very dynamic. I would say -- I would -- I had thought it would be -- things would be loosening up by now in some parts of the supply chain, and that hasn't been the case. So we're still really managing month-to-month, quarter-to-quarter to get the linearity in the supply we need across the portfolio. Obviously, we've got that dialed in a lot better than it was maybe a year ago when it was -- we were in the thick of it. I think everybody has settled in and just learned how to manage it now, but there's not enough components out there for what everybody wants to build to. There's absolutely no doubt about that. The China situation is -- continues to be very difficult. There's still lockdowns, still impacting us in our flash back in there. We're managing through it. There's no doubt about it. We managed through Shenzhen, where we had a media factory as well. We shut down for a couple of weeks, that rippled through the business, but we were able to manage that. But still just a very dynamic environment. And when I look at it from a cost perspective, the costs have been going up in the business. We were -- maybe a year ago, we were at $30 million a quarter, $30 plus million, then we bumped up to $50 plus million, and now we're at $70 million in COVID costs and logistics. I'm hopeful that, that will start to ease as we go through the second half, but we're going to have to start to -- it's very difficult to predict. We're going to have to start to see some loosening up of some of the restrictions in China. And hopefully, the supply chain gets a little more predictable. Anything to add?

I don't have much to add to that. I think you covered it well. Thank you.

So year-to-date, the yen has weakened against the dollar by about anywhere from 12% to 14%. I would assume that this is a tailwind on your flash gross margins, right, given that you purchased your wafers in yen from the joint venture. But I know that the team also, at the same time, hedges some of this. So Wissam, help us understand how this sort of sharp movement in FX may or may not be a tailwind for the flash gross margins for the near term?

Yes. I mean in the near term -- you just mentioned, we do have a layered hedging approach. And so in the near term, we won't see much of that tailwind in the P&L. There's a couple of things. There's obviously the fact that we do hedge and near term, our hedges are higher than longer term. But there's also the -- when you have to account for the product cycle, the manufacturing cycle and when this -- when we start seeing the products basically hitting our P&L. And so we -- in the near term, we don't see much of an impact from it, probably a few quarters down if -- depending on -- and I'm not going to sit here and speculate where FX is going to go. But depending on how FX goes, we may start seeing some of it.

Perfect. Any questions from the audience? So let's talk about some of the -- we've got one right up here.

I was wondering if you could highlight some of the products you brought to market with both hard drive and flash. You highlighted some of them in the call. And just what the use cases are in terms of the benefits of having both hard drive and flash under the same roof?

Yes. So the product side -- the product launch on the hard drive side was all about a couple of things. One is announcing a 22-terabyte drive. So that was a big step forward. I think the industry was at 20, and there was a lot of big -- all the discussion was how fast is 20 going to ramp. Now we've got 22 out. And then on top of that, we launched OptiNAND in the 20-terabyte drive. We launched energy assist in the 16, 18. And now those 2 things have come together with SMR, and we're able to bring something called UltraSMR to market, which is really SMR on top of an OptiNAND drive, and that gives you an extra 20% of density. And so that's where you can -- we announced 22 and 26. The 26 is the UltraSMR drive. And most all of the big data center customers are now adopting SMR. They see that as the future in how they're going to increase capacity on their storage going forward. So -- and a year ago, I think it was not quite as -- even 6 months ago, it wasn't quite as strong of a trend as it is now. Very clearly, most all of the really big players are adopting SMR. So that ability to bring UltraSMR with OptiNAND to market, I think, is a huge step forward with our ability to bring market-leading drives. And then on the NAND side, the BiCS5 enterprise SSD that we qualified across 3 hyperscalers and 2 OEMs and obviously a bunch of channel places, but that's a BiCS4 product, and you run out of supply at some point. So being able to get that up to BiCS5 now and get that in the qualification process and get that shipping is a very big deal because then we have more bit supply to then drive that product. So that was a big product. Obviously, the client SSD on BiCS5. So just in general, getting BiCS5 across all the mainstream parts of portfolio and then some products around WD_BLACK, again, which is a gaming product, where we've made very good progress. We talked about some about having both of these in the same companies, the ability to have just a very, very large relationship with our customers. It allows us to have a number of billion-dollar-plus relationships with our customers. That allows a very good position as far as how we talk to them about the future of their storage needs and how we drive our innovation and research organizations and target them on that problem. I think something like OptiNAND comes out of that intersection of these technologies. There's no doubt about that. And then the ability to have an at-scale channel and retail business. We sell in every country in the world where it's legal to do so. We sell over 300 million devices around the world, and we also have a multibillion-dollar channel business. So the fact that we have 2 very large portfolios to drive that go-to-market engine just makes that whole thing more efficient. It gives you a much better conversation with customers where you're selling an enormous amount of product to them and opens up a lot of optionality about the future of their storage needs and how we innovate together on that. I think most people know that in the big hyperscale market, it's a co-development model. You don't like go off by yourself and build a product for 3 years and then show up. You like work together on here's what my storage needs are, here's what our innovation is, how do we get those to match? And we have a enormous relationship across 2 portfolios to have that conversation. So -- and then it gives us scale on the go-to-market side. And of course, there's some research benefits where you start to see some interaction between the 2 portfolios.

OptiNAND is interesting, right, because that really helped to unlock some of the areal density acceleration combined with, let's say, SMR, for example. It's always hard to look back and pontificate if you were a stand-alone HDD company, but with strong relationships with your NAND suppliers, would the team have been able to develop this OptiNAND solution? And it feels like this is a good example of because you have flash team and HDD under one roof, that the 2 teams working together on a day-by-day basis, we're able to figure out this OptiNAND solution, which leverages the technology of flash but benefits the HDD team.

Yes. I really think that's kind of an unknowable question. I mean you certainly could make that case. You can make -- I mean you could say the only drive company that thought of this was the one that had both franchises. I don't know if I would then make the other -- I would be as strong in the other direction. But it certainly happened, and it's certainly a very valuable technology. Could it have happened otherwise? It could have. It would have been harder. But again, look, I think that there are -- just on this general topic, I think there are multiple ways to organize technology portfolios and technology franchises for the benefit of our shareholders and customers. There's not one single way that is the best way. And so I think what's important is to understand what is the playing field of ways that you could do it, what are the pluses and minuses, what are the opportunity and obstacles of doing that. And that is always something that is top of -- I think anybody, if you're running a company, you have to be thinking about that on a continuous basis. So surely, there's some innovation optionality, let's put it that way. But I wouldn't go as far to say that it's impossible to happen a different way.

Perfect. On the enterprise SSD side, 35% bit demand CAGR going forward, very, very strong growth outlook for this segment of the market, obviously, and it carries a higher profitability profile. You guys talked a lot about it at Analyst Day. And it was good to hear that the team is engaged, one of the 3 major NAND flash suppliers that is engaged with the large cloud guys on next-generation enterprise SSDs. You've got about 8% market share today. You've got a target to double that over the next few years. The good news is, as you mentioned, you're qualifying your BiCS5, next-gen NVMe platform. And you're getting set to ramp this in the September quarter. Combined with the strong cloud spending trends, is this painting a picture where you think that the enterprise SSD business actually grows in the second half of this calendar year?

We certainly think that the enterprise SSD story, and I think we've continued to say this for a couple of quarters, is an evolving story as we move through FY '23. We had to get the product out. I mean the one thing about enterprise SSD, we build our own controller. The controller is matched to the memory or the storage, the NAND. So you got to get the NAND out of the fab and understand all the idiosyncrasies of it and all the issues and get the controller right, and then you can start ramping the product. And we've gotten through that. And now we're going through the qualifications with the big players, and then we'll go through the ramp. And certainly, as we move through that process and we have the supply of BiCS5, we will see growth in that portfolio.

Perfect. And then you've been executing on the flash side to your long-term target of driving 15% cost per bit declines, and you anticipate a similar cost down profile going forward, but more near term for this calendar year. You're sort of at the tail end of the BiCS5 ramp. You won't get the cost benefits of BiCS6 ramp probably until next year because you're starting to ramp BiCS6 at the end of this year. So most of the benefits on the cost side probably comes next year. So given that BiCS5 was a very cost-efficient technology node, you benefited from this last year, is calendar 2022 maybe, from a cost per bit perspective, trending below that 15% level and then it trends above the 15% decline -- cost per bit decline level next year as you reaccelerate the BiCS6 ramp? Is that the way that we should think about that?

Yes. Let me make a few comments about this. We'll get into the particulars how it shows up in any one node. I think one of the -- for me, one of the most interesting things at the Investor Day is Siva's talk on just the dynamics of how we think about capital efficiency and investment in NAND technology. This is an area where the JV is just a huge benefit to us in Kioxia. We invest together on our road map. So that's the same BiCS technology for Kioxia and us. So you think about they invest all of their engineers, we invest all of our engineers. They work side-by-side developing one specific road map. So together, we think we invest more than anybody else in NAND technology and driving it forward. We have a very specific -- the team has had a very specific goal for 23 years, which is to -- they think about CapEx per incremental bit. Now that is a -- that's not an outcome of the innovation. That is a specific goal of the -- it's a requirement when you go in. How do I develop the most efficient CapEx per incremental bit? And then I think Siva kind of unpacked a lot about why we're in such a good -- why our business is so capital efficient when you look over a decade or 2 long period. It comes back to this idea, the charge trap cell. We have the most efficient charge trap cell in the industry that's demonstrable in a very significant way. You then take that charge trap cell and you organize it in a dye and then you stack them up, you do layers. So -- and then you can also change how many bits you're storing per cell, which is the logical scaling. Our team's ability to pack more cells in a specific area then allows us to build the same density of NAND with fewer layers. And this has been probably the one of the most interesting things for me over the last 2 years of being in this business where there's just a lot of discussion that if you have more layers, you're somehow ahead. And I think what Siva showed in like a 20-minute pitch is it's actually exactly the opposite. It's the fewer layers you have, means you're ahead because you don't need as much real estate to deliver the same amount of bit growth. That makes our business very capital efficient over time. Now obviously, the capital efficiency from one node to another is going to be different. And BiCS5 was specifically chosen because we wanted it to be very capital efficient and a very good transition, a lot of the same tooling in the fab, those kinds of things. So it was designed in a way to make that a very efficient transition. BiCS6 is a little bit more of an architectural transition, will be a little bit more capital-intensive. Average it all out, we're still comfortable with 15%. That's what we're driving to.

Perfect. And then just one last question for Wissam. On the target model, I've been getting some questions from investors. 17%, 22% sort of cross-cycle operating margins. How do we think about the free cash flow margins on that?

Well, we haven't -- I mean, look, we haven't guided free cash flow per se, but we're really focused on optimizing our cash flow generation. And we're taking a lot of actions. Whether on the working capital perspective, we have a long list of initiatives, whether on looking at our capital efficiency, capital management, and most of all, discipline and ROI-based investment. All of these are really meant for us to continue to improve on that free cash flow margin.

Great insights. Thank you, Dave.

Thank you.

Thanks, Wissam.

Thank you. Thank you for having us.