Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Hi, everyone. Good morning, good afternoon and good evening. Welcome back to the Goldman Sachs Global Semiconductor Conference. My name is Toshiya Hari. I cover the semiconductor and semiconductor capital equipment space here in the U.S. For our next session, we're very excited to have David Goeckeler, Chief Executive Officer; and Wissam Jabre, Executive Vice President and Chief Financial Officer from Western Digital. This session will be approximately 45 minutes of length. I'll kick off with a list of questions for both David and Wissam. For those in the audience who'd like to submit a question, please drop in the Q&A box, and I'll do my very best to weave it in. Before any of that, though, I'd like to turn the mic over to Wissam for the safe harbor.

Thank you, Toshiya. Good morning, everyone. We will 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 of our GAAP and non-GAAP results can be found on our website.

Great. Thank you for that, Wissam. As my first question, David, I wanted to ask sort of an icebreaker type of question. You've been in your seat for a little over 2 years now, and you've already driven quite a bit of change at the company. In your view, how has the company evolved during your tenure so far? What are you most proud of? And importantly, what are the key priorities for you and the broader company, the broader leadership team as you focus on executing to what you presented at the Analyst Day?

Toshiya, first of all, thanks for having us. It's always great to see you and be with the larger group here. Yes, it's been a quick 2 years. I mean it was marked, I guess the biggest thing in the macro environment was COVID. I remember starting the week the actual pandemic was declared. And the big thing, of course, was keep all of our employees safe and keep the factories running and all that work, and that was I think there's a tremendous amount of pride in the team for what they did. I didn't do -- that was like a lot of work around the globe to make that happen and make sure our customers could still -- we could still deliver the critical products for their infrastructure. So with that, the big picture backdrop, we then started making a number of changes in the company that I think have -- we're seeing the results of in a major way. It starts with just being a fundamentally stronger company. We focused on our balance sheet and retiring debt. We paid down $2.5 billion worth of debt, our debt-to-EBITDA ratio is nearly where the target we set. I'm sure we'll talk more about that. We're very eager to get back to capital returns. We've got a little more work to do before we get there. But just fundamentally, where we were 2 years ago, we have a much stronger foundation under us. The next thing I'll say is the relationship with our JV partner of Kioxia is in a very, very good spot. It's something I've invested in heavily. There's clearly some people here, Siva Sivaram and Michael Ray that have been part of the relationship for a very, very long time, and there's a lot of strength there. But at my level, we strengthened it and just have a tremendous relationship with Hayasaka-sa, and I think the JV is as strong as ever. And then we started making some changes to the company, which is what I thought we could execute better, we can deliver more innovation if we restructure differently, and that started with creating a flash business unit and an HDD business unit and bringing in very, very senior and experienced leaders to drive those. I think that if you're a product company and you're a technology company, you need to have the best technology in the world and drive innovation. And I think that has worked extremely well to very, very senior and experienced leaders there and Ashley Gorakhpurwalla and Rob Soderbery. And I think you saw it at our product launch the day before our Investor Day 3 weeks or so ago now, probably the most innovation the company has ever delivered at a single point in time, including major advances in the HDD business and the flash business. So we feel very good about that. We continued on making other changes that's culminated in. Just in the last quarter, bringing in Wissam, strengthening our financial capabilities. And then a gentleman named Irving Tan, who leads operations out of Singapore, who is a very, very sophisticated and experienced leader and those changes have just been made in the last quarter. So I feel like we've made a tremendous amount of change. Fundamentally, we're a stronger company with stronger partnerships. And the results are showing up in the innovation portfolio, and not just the innovation portfolio, but of course, all the numbers that drive value. I mean I came here to create value. I think if you look at EPS, we've gone from about $3 a share a couple of years ago to over $8 a share this year. Double-digit revenue growth, debt paydown of $2.5 billion. I've talked about that. OpEx as a percent of revenue is down. We're getting more out of the money we're spending. That's a consequence of the organization structure we put in place and then gross margin growth and operating margin growth. So I feel like, again, we're just in a much better position. We're in good markets. If we execute the right way, we're going to get a lot out of that. Going forward, I made -- we made the changes around putting the BU structure in place and bringing in leaders there about 18 months ago when we saw the result that led to about 3 weeks ago. I think it's noteworthy that Wissam, although it feels like he's been here forever, given what he's been through in the last quarter and Irving, who leads the entire operations, supply chain, procurement, that's potentially 2/3 of the headcount of the company. These 2 folks have just shown up in the last quarter. So I think as we go forward, we're going to continue to see significant progress in those parts of the business as we -- at the same level we've seen on the side of the portfolio.

Great. Thank you so much for that overview, David. A lot to go into. Before we go into your 2 business units, I wanted to talk a little bit about the supply chain. Clearly, a very big topic for all companies, up and down the supply chain. If you can talk a little bit about what the key bottlenecks are today and what you and your partners are doing to alleviate the situation, that would be extremely helpful. And I guess, longer term, once we sort of come out of this pandemic, are you considering making any structural fundamental changes to how you operate the business, whether it be your manufacturing footprint, your procurement strategy, your investment -- inventory strategies given everything that's going on from a geopolitical standpoint as well as overall supply chain disruptions?

Yes. I mean I'd like to think of the supply chain in basically 3 major categories. One is we're a big vertically integrated company with our own manufacturing capability. And we have tens of thousands of people around the world and factories around the world and making sure those are all up and running and moving forward is extremely important. As I said earlier, a couple of years ago, it was all COVID and how do we get people to work and keep them safe. I think that's been figured out. We've had in the last quarter, 1.5 quarters, we've dealt with the issues in China and lockdowns in our capacities there. I means our factories there. That's getting better. It did impact us over the last 1.5 quarters or so, but we manage through it, but that is getting better and things are coming back to life. I want to -- in this environment, I know this is -- the audience is not our team, but what our team did in China over the last quarter is just incredible to keep things moving forward. So that situation is something we know how to manage really well and have been doing that. Now our own ability to procure different components for our products has been an evolving story, and it has been for everybody in the industry. We've gotten better at getting closer to our suppliers and managing supply many quarters out, even though we may order something 2, 3 quarters in advance, 4 quarters in advance. We still -- when we get close to that time, we got to make sure we're going to get it in a fashion that's linear to keep operations running. We're going to get everything we need. And that is just a day-to-day, week-to-week kind of conversation with our suppliers that we stay on top of, and that's what we've been doing to get the best situation we possibly can. Certainly, in the data center environment, it's very difficult. It's basically not possible to build the true demand right now. So we continue to work that. And we continue to see issues there into next calendar year, mid next calendar year where we're planning now, and we still see shortages in our ability to get all the pieces we need. So that's something we continue to manage. Now what are we doing to mitigate that? Stay close to suppliers. We're looking at reengineering our products to give us more optionality for more suppliers we could include in the product. We're doing some work on HDD to rationalize our head designs down to fewer to get more efficiency across the portfolio. That's a cost play as well as a supply chain play. So lots of things we're doing to continually control what we can which is the design of the products to help alleviate the situation as best we can. And then, of course, we stay very close to our customers and understanding what the demand environment looks like in the HDD business, we've gotten more visibility with long-term agreements on what that demand environment looks like, which helps us plan. And then finally, it's our customers' ability to get all the components they need to build out their infrastructure, which can impact our demand. And that continues to be an issue as well, especially in the data center space. We have customers that we're obviously very, very close to given the amount we sell to them and they just cannot get all the pieces they need to build out to what their demand is. So we just stay very close to it. It's a very dynamic situation. I thought it would kind of clear up a little more by now than it has. But as I said, we're going to be managing this for at least another year is what it looks like. The final thing I'll say what we're doing, I just brought -- I talked about Irving Tan, I just brought in a new Head of Operations and Supply Chain and Procurement for the entire company is very, very sophisticated seasoned executive, and he will focus with Wissam on driving the best efficiency we can in this part of the business.

That's great. And then I guess a couple of questions on your Hard Drive business. As you mentioned a little earlier, David, at your recent Analyst Day and Product Event, you unveiled your 22-terabyte and 26-terabyte products as well as sort of an updated long-term road map. Talk a little bit about the visibility you have, particularly with energy-assisted magnetic recording and OptiNAND, which is obviously very unique to Western Digital. How should we think about the HDD kind of industry's ability to compete with Flash in the data center over the long run?

Yes. So going back to your first question. This is something we feel really good about. I mean 2 years ago, 2.5 years ago, we were struggling with the 16 transition and getting to 18 and working through some technology issues there. We were behind. I've been very transparent about that. And now we -- in the period of a couple of years, we've gone to a significant leadership position. And that's back to the heritage of Western Digital. I mean, this company has driven innovation for a very long period of time across whatever portfolio we've been in. And it's been very, very it's been fun, quite frankly, to watch and see the reaction to the innovation that we've been driving. We know we've been executing the strategy. There's been a lot of questions along the way appropriately so. But now in our Product Day, we really saw it blossom into the portfolio that we knew we were driving towards. And that is a series of innovations. Like you said, in '18, we commercialized energy assist. We knew that, that was important to get to 18, but we also knew that, that was a fundamental technology we needed for the next many, many generations of our HDD road map, all the way up to 30 terabytes. So get that implemented, get it commercialized, get it ramped. And there were a lot of questions as we are ramping that around yields and all kinds of things. It's very common when you're launching new technology. It's there now, it's deployed at scale. There's no questions about that anymore. Now it's a fundamental tenant of the portfolio. Same for OptiNAND. We got to 20, we announced OptiNAND. It was important for that generation of technology, but we knew, again, it's another building block that's going to get us to 30. It's a series of innovations across the entire HDD that's going to get us the runway we need to satisfy the tremendous growth the industry is driving in the cloud over the next several years. So that is there. Now we've layered in UltraSMR. You put those 2 together, you put OptiNAND and SMR together, you get UltraSMR. And I think that was one of the big unveilings of our Product Day is. Coming into that day, the state of the art was 20 terabytes. Coming out of that day, it was 26. All of a sudden, we have catapulted the industry forward by 30% capacity growth. And that's what we need to do in this industry. The cloud is growing. We are the foundation of the cloud. The HDD is the foundation of the cloud. That's not going to change. But we need to continue to innovate. We need to continue to drive down the cost of -- total cost of ownership of that storage, and that's exactly what we're doing. And we feel really good about that innovation road map that's going to drive us many, many years into the future. And I think everybody is seeing Western Digital reassert itself as the innovation leader in this market. Now the way you framed that question competing with flash. I mean I think this is something I've been talking about for a couple of years now. In the data center, flash and HDD are complementary technologies, right? HDD has a very long road map. We talked about that at our Analyst Day, a very long road map to drive total cost of ownership down. It's going to be 30% exabyte for HDD in the cloud going forward. Flash is also going to grow in the cloud. Enterprise SSD is also a tremendous market in the cloud. Cloud is a great place to be. It's a great market to be in. I think Western Digital is in a unique position. We can satisfy all the storage with HDD. And now we have the portfolio for Enterprise SSD. It allows us to talk to our customers, bring a much broader array of storage solutions to them, open up a conversation about innovation around their entire storage platform and how we can drive that forward. So unlike the client where HDD and flash were substitute technologies in the cloud, they're complementary technologies and will be for a very, very long time. There's nothing -- looking at the research, looking at the road maps of HDD and flash, there's nothing that makes you believe that flash is going to replace HDD. Is flash going to grow faster than HDD? Of course, it is. Is HDD going to continue to grow? Of course, it is. So 2 things can be true, and that's exactly what's going to happen in the cloud. And I feel like we're in a tremendous position with the right portfolio to tap into both of those growth vectors.

That makes a lot of sense. David, since joining the company, I feel like I've heard you say how surprised you were as to how transactional the HDD business was when you joined the company and you've been focused on gaining predictability, if you will, with your customers. Can you remind us what percentage of your current HDD demand profile originates from long-term contracts? Do the contracts take on a take or pay form? How is pricing fixed, if at all and ultimately, how enforceable are these contracts?

So first of all, the overall market dynamic, it was clear to me when I came into the business, and I really started looking at the internals of the dynamics of HDDs and how they're built and all the factory footprint we have around the world, this is clearly a market in major transition. Like I'm not the first person that figures that out. I think everybody knows that. But what I said, we're coming from a period of significant decline of the client market. I mean, it's been 14, 15 years that we've been attriting client units, and that capacity has been constantly reapplied to cloud growth. That's been great for the industry. It's great. Cloud came along. Cloud is growing very quickly. We have a lot of capacity to fuel that growth. But it also led to a situation where the industry was pretty much chronically oversupplied in HDDs from year after year after year. So that led somebody that's going to buy HDDs to naturally buy them in a very transactional way. If they're always available and there's always -- there's a lot of them out there. I don't need to plan that far ahead. And also, it's an industry where total cost of ownership is going down, and we're constantly innovating, driving the cost of storage down. So in some sense, you want to wait, there's an implicit reward there waiting till the last minute because they're freely available and they get cheaper over time. So why commit ahead of time. Well, that -- that world is rapidly changing, and we're moving away from that world. And now Wissam and I spend a lot of time talking about how much capital we're going to invest in the HDD business because to fuel this 30% exabyte growth as far as the eye can see, like there's not enough client deterioration anymore to fill that gap. So heads and media are going to have to invest. I think if you go back to our Investor Day, Ashley talked about this and had a great chart about how we're now in an investment phase. That just means the dynamics of the industry are going to change. You're going to have to have more visibility to understand what demand looks like. I think pricing is going to get more. There's going to be more reward for innovation like how do we drive more value-based pricing that's coming into the industry, the rate of decline of pricing at the high end has slowed considerably over the last several quarters and even turned up a bit. So it's not surprising to see these dynamics, but is certainly something we're focused on. I get specific about your question, calendar year '22, 56% of our capacity enterprise exabytes are committed in multi-quarter agreements or long-term agreements. So that's up from 39% last calendar year. So 76% year-over-year growth and the amount of exabytes that are covered by an agreement. So what do these agreements look like? Well, you start small and then you start expanding. So the first round of them is just a couple of quarters. And then after you get that, you maybe go to 3 quarters or 4 quarters. And that's kind of where we're at. We're kind of expanding these now to the 3 quarter, 4 quarter range, which is a big difference than 2 years ago, which was the quarter you were in. As far as the dynamics of the agreements, there's certainly capacity volume-driven, and many of them are priced as well given the duration of them. So all that's good. And we expect them to continue and we'll continue -- are they the take-or-pay piece. Let's talk about that for just a second. Look, the relationships we have with our customers, where we're putting long-term agreements around them, we don't need that much specificity in the contract. These are relationships that go back decades. We're a big part of their spend. They're a big part of our business. Nobody is going to do anything in 1 quarter or 2 quarter that kind of really messes up that relationship for a short-term gain either way. And so they don't need to have those provisions in them right now, and they're working exactly as planned. We have customers that, quite frankly, because of their component shortages, if they didn't have the long-term agreement, they wouldn't be taking the drive, but they do and they take the drives because they made. It's not that their end demand hasn't changed. They're going to deploy them. They just need to get through some issues on their side. So I think they're working exactly as we had planned, and we're going to continue to drive them and get more visibility and more predictability into our business. I think it's a great development for the drive industry. And I think it's just a sign that the drive industry is returning to growth. And as we continue to innovate back to the thing we had earlier, again, we're driving innovation in HDD. That's very clear to see right now. As we do that, we're going to bring a better product to our customers, better value proposition for them. That allows us to participate in that through some value-based pricing conversations.

That's great. And then on profitability, I guess, for David or Wissam, again, sticking to HDD. You guys talked about 31% to 34% medium- to long-term model, if you will, for the business specifically versus 30% on a trailing 12-month basis. Can you talk a little bit about the puts and takes as you sort of get to 31% to 34%? And I guess the question that I get from investors the most, and I'm sure you hear this all the time. But why couldn't the business do better? It's essentially a 2-men race or a 2.5-men race. You talked about the complexity that's associated with the manufacturing process, right? So why not something higher than 34%?

So I'll start, Wissam can add from his perspective. First of all, I'd love to get this question. Because my first 1.5 years of the business, the question was constantly, can you ever get to 30%? Like will you ever get to 30% again in the history of the industry? Or is that just never going to happen? And now we're talking about how come you can't be more aspirational. And I think that's the way I think about it. I mean when Wissam and I put a model out, we put a model out that we feel like we have visibility too. We know how to get there. It's not what we aspirationally -- it's not what we aspire to. We certainly aspire to something much better, but we have to deliver this first. And I think we -- it's something that we have line of sight to given the fact that, first of all, we're still in COVID in supply chain shortages. The amount of puts and takes in the business is incredible on a quarter-to-quarter basis. So we've got to work through that. It's kind of impossible to predict at this point when that's going to end and how that's going to go away. But certainly something that has been a substantial headwind on the business over the last several years is going to turn into a tailwind at some point here. And so that's a big part of the business. But the other thing is we're doing design work to make the drive itself more efficient. What I said earlier about fewer head designs, more commonality in components across what we build that makes it -- that delivers value for us and takes costs out. But the big thing is innovation, like the innovation lever. You continue to innovate and you continue to bring a better product to our customers, then I think we have the opportunity to drive more value out of that innovation. And if we slow down innovation, then it will be harder to do that. So it's not a demand-side problem. I mean demand is going to be there. Like I think the cloud is going to continue to grow. It's a great market to be the foundation of the cloud. In fact, you can't build a cloud without talking to us. And so the ability to bring innovation into that market, and that gets back to the org change we made. That's why we started there, bring the innovation and then a lot of other things will get healthy in creating value off of that innovation.

And I think this is great. And so innovation, obviously, value-based pricing is a key element of the top line aspect. And as David mentioned, we're doing a lot of work on the cost side of things as well with reengineering products, harmonizing platforms, focusing on our supply chain. And also, there's the element of the COVID-related cost that's around -- today, it's around a little bit more than 200 basis points. So as we see over time, the supply chain and logistics headwind that we are experiencing today ease that should also help in terms of getting us to those -- to sort of this upper end of those targets as well.

That's great. And then I guess pivoting to the NAND side or the flash side of your business portfolio. David, you touched on this a little bit in response to, I believe, my first question. But talk a little bit about the JV with Kioxia. I think you've been pretty consistent and speaking highly of that relationship. It's certainly a very different setup vis-a-vis many of your peers or competitors in the NAND business. What are some of the key benefits advantages that stem from that relationship?

They are significant benefits. I mean, it starts with having the best technology in the world. And that means a lot of things. One is when we produce NAND, it gets qualified in all of the markets that are really important like we have very, very high-quality products, and we sell to the most discerning customers in the industry, and we stay qualified at those places, and that's hard to do. We have -- Siva Sivaram talked about the charge trap cell and how -- give a little more visibility into I think the NAND industry has really been hung up on layer count and who can go higher the fastest. That's not the real issue. The real issue is your charge trap cell and who's got the best one, how do you invest in that, then you scale that across 3 or 4 different dimensions to build NAND flash memory. And between us and Kioxia, we have the best charge trap cell in the industry. And that gives us the ability to have the most capital-efficient portfolio. And this is really a big deal, where our cost per bit, incremental bit is the lowest in the industry, and it has been for a very long time. And so that is a huge advantage. I mean it's such an advantage that people ask like the opposite question all the time, like you're clearly not spending enough CapEx because you're underspending your competitors, so you must be falling behind. It's like no, we're not falling behind. Our technology is just better. So our capital efficiency is really, really good and has gone on for like decades. So it shouldn't be a surprise at this point. But this is something we really focus on. And the next element of that is scale. The fact that between the 2 of us, we are the largest provider of NAND in the world. That gives us the most R&D dollars to stay ahead. And it's kind of a just a basic tenant of R&D investment. Once you get the most R&D investment behind your technology, if you do your job well, you should just keep distancing yourself and keep investing, and that's what we've done. And one thing I can tell you, Hayasaka-san and I talk every couple of weeks, at least, if not more, and we're all -- no matter what we're talking about, we're very focused, like JV is incredibly important. We're going to continue to invest in the R&D. We're going to continue to drive the road map forward. And then finally, we get scale the manufacturing. I mean, and Yokkaichi and Kitakami, it's just we produce just a huge percent of the world's NAND and we get a lot of economies of scale of that. So across a wide range of attributes, this JV is incredibly important to us. And I think I can say it Kioxia, we both know together, we are very, very strong, and that's why we continue to invest in it, and that's why it lasted so long because it works, and there's real tangible benefits.

That makes sense. And then, David, in terms of how to think about the near term, I'm sure you guys are getting a ton of questions as well. But clearly, there are signs of some weakness in low-end PCs and smartphones and other areas of consumer-facing sort of applications. You talked about the shift or the pivot, if you will, toward data center and you talked about enterprise SSD previously and how you're going to make that shift in your portfolio over the next couple of years. But when you look at your business today, I feel like you're still a little bit over-indexed to things like smartphones and client SSD and retail. How do you manage your business? And how do you manage profitability in a period when the consumer is clearly weaker at the margin?

I think the fundamental principle is the same, which is create optionality in the NAND business, which is the more markets we can be exposed to, the more we can mix across those markets to mix to the higher growth segments or the less volatile segments or the more profitable segments, whatever we're optimizing for. And we're really optimizing across all those variables and it's quite a complicated business. But that's where we feel really good about the portfolio. I mean we have -- we have a very enviable consumer franchise. We talked about that at the Analyst Day and the ability to create value through branding and SanDisk, SanDisk professional, WD Black. These are really well-known brands, and they're working very well. We're qualified as a premium mobile suppliers, very large channel business, obviously, the client SSD business and then adding the tenant of enterprise SSD to that and the ability to shift supply into that as we have it. So that's like the fundamental tenet of the portfolio, and we're going to continue to do that, continue to develop as much optionality as possible. More near term, you're right. I mean there's a lot of consumer headwinds. We talked a little bit about this at earnings. And quite frankly, the consumer headwinds are greater than we thought they were when we started the quarter, and they continued to intensify. So we talked about some earnings that we expected the second half in NAND to be more of an undersupplied market. We expect that to be more balanced given the headwinds we were seeing in consumer and in consumer PCs. We continue to see that. And as I said, as we move through the quarter, it's gotten more intense than even we expected. So it's something we'll continue to manage, stay very close to continue to develop the portfolio for optionality. And the thing is, no matter what the macro conditions are, you can't outrun macro at some level, but get the best possible result we can given the portfolio optionality we have.

Got it. And then I guess a similar question on the cloud side to your point. No doubt, it's a very good market to be in long term. You have a very good position in your line. You've got an improving position in enterprise SSD. You also talked about having a little bit more visibility now that you have multi-quarter contracts in place. What are you seeing in that market? There is investor concern that your cloud titans might be exposed to the macro headwinds as well. But relative to the consumer, are things hanging in? Or are you starting to see signs of weakness there as well?

At this point, I think we still see -- we definitely still see positive signs in the second half of the year. We see exabyte growth in HDD. And we continue to hear strong signals from our customers. We think it's a natural question given the weakness and the growing weakness in consumer. But where we look at it today, cloud continues to be a strength in the portfolio as we go into the second half. We're obviously going to stay very, very close to it. But from what we see right now, it's going to be strong.

Got it. And then a follow-up question on your enterprise SSD business. You guys talked about your goal to double market share from 8% today to 16%. Talk a little bit about the customer traction you're seeing today? And what points of differentiation do you expect your share growth to stem from over the next couple of years?

So this is one of the things, again, going back to your first question where you set the stage for our conversation, I feel really good about. I mean the company had been focused on building an enterprise SSD for a long time, and it's extremely difficult. I mean it is extremely difficult to get qualified at the big cloud titans, and we broke through at the beginning of calendar year '22. We got our first qualification at a major cloud customer. You go back to my Investor Day material, you can see what impact that had on the business at a customer when you basically open up enterprise SSD. It was a huge amount of sales that year. And now as we worked through the year, we got qualifications at 2 more cloud titans. We're just ramping deployment there. I'll come back around to the BiCS5 issue as well as qualifications with some of the big OEMs as well. So we feel good that the portfolio whereas a couple of years ago, there were questions about are we going to get over the hump with enterprise SSD now we have in a major, major way. Now that's a BiCS4 qualification. That's the product we had at the time. At some point, you run out of BiCS4 supply because the fabs have moved on to BiCS5. We're now going through the BiCS5 qualification. And Rob talked about that, again at Investor Day. We expect that to go smoothly. We've got the product shipping. So we feel very good about that as we go through '23, modular all the supply chain issues and getting controllers and all that kind of stuff. The demand is good, and we feel like we're well positioned, and we're going to have the bits to scale that business. Now what -- where are we differentiated, a couple of things. One is we build our own controller, just like in the client space, where we've got a great position, we build our own controller, control our own destiny, get the -- BiCS4 to BiCS5 transition is a lot easier. Easy is a word I shouldn't use, more straightforward when you have more control over all the innovation levers. And that's one of the reasons we expect that to go smoothly. So we feel like we're well positioned there. We set the target of 16% because quite frankly, at that point, we run out of supply because we want to maintain a healthy balanced portfolio across all of these different routes to market we talked about. And it's a big market. When you talk about doubling your market share in the enterprise SSD market with the CAGR that, that market is growing, you're talking about a significant amount of growth in that part of the portfolio. So we feel good about that and our ability to go get that business.

Great. And then my next question, David, is on how you're thinking about potential consolidation in the NAND industry. Clearly, the HDD industry is extremely concentrated from a market share standpoint. I think in a way, WD is sort of the product of a lot of consolidation over the past 10, 15 years. NAND is fairly competitive despite your JV setup. I think from a brand or a company perspective, you've got 5 or 6 players depending on how you look at it. Do you expect any market share consolidation in NAND to be organic in nature? Or could we see M&A to facilitate the cause here?

So first, let's talk about the structure of the market because I think it has incrementally improved in just the 2 years I've gotten here through the closure of Intel and Hynix. So if you look at the structure of the market now, Samsung, us and Kioxia make this -- I mean we make a capital investment decision together. So there's only one decision being made there for how the market is going to be supplied and then you have Hynix/Intel. And I think between the 3 of us we're mid-80s percent of the market, low mid-80s percent of the market. So it's a -- the market has moved to a point where there are fewer people making decisions. And I think the market -- the things we hear in the market are more rational, which is good. And it's also a market where there's technology, a little bit of technology headwind. The transitions are getting harder. It's a very difficult technology. It's capital intensive, more capital-intensive, some than others. And so I think you have a natural headwind for the ability to just how fast it's going to supply the market. Look, I think any additional M&A, it's very difficult to speculate on M&A. I mean additional M&A, I think, is possible. But it's a very complicated chessboard with geopolitical implications in lots of different places. So it's not easy, but I think I've been transparent since I've been here, we would welcome and are open to that if it's the right move for our shareholders. If it creates value, it's something we will very seriously consider, and that's really the key issue.

Great. And then I want to bring Wissam into the conversation as well. You're still relatively new at Western Digital. I'm not sure if you're counting your tenure in months or weeks or quarters at this point. But curious, as a CFO of the company, what are you most focused on? Any aspects of the company's operations where you've already identified potential for improvement going forward?

Yes. So well, first, I'm very excited to be at Western Digital. It's been a great few months coming up to speed. Look, the focus is on value creation, and it's really about driving that increase in profitability. We operate in large and growing markets, and we want to be able to drive sustainable improvement in terms of the profitability, whether on the gross margin line or on the operating margin line so that it translates to the bottom line as well as drive the -- and optimize the cash flow generation. And so there's a lot of focus on financial management, disciplined capital deployment as we think about the next few years and driving to our long-term targets. And obviously, it's important for us to optimize free cash flow, looking at working capital, the various elements as well, as I mentioned, the disciplined capital investments and driving more of our investments as we go forward to continue to delever, strengthen our financial position and get to a point where we can move to the next phase in terms of our capital allocation.

Got it. And then that was sort of my next question, Wissam, I think one of the first things I think David did with the Board was to terminate the dividend. And I think most, if not, probably most investors would agree that was the right decision to make. Your balance sheet is in a much better position today. Remind us what is the philosophy at Western Digital from a capital allocation standpoint? What are your priorities going forward? And what would you need to see to reinstate a capital return program. And to the extent you're having these conversations, how should we think about a dividend versus a buyback or both?

Yes. So in the last couple of years, we've seen some really good delevering on the balance sheet. We paid down around $2.5 billion of debt. At the end of fiscal Q3, we had $7.25 billion of debt. So we're in a much better financial position than we've been. And over the same time period, we saw also the earnings power and the cash flow generation of the business improve as we've done a lot of improvements from a financial and from an execution perspective. The way we look at capital allocation, obviously, it is designed to drive long-term shareholder value creation. And so first, our priority is to continue to invest in the business, to continue to invest in growing the business, improving the profitability and improving the cash flow generation and earnings power of the company. Then we continue to pay down the debt, continue that deleverage process that has been going on over the last few years. What we're targeting is a gross leverage ratio of [ 1:3.25x ]. It is -- I recognize it's a wide range, but we also have a certain element of cyclicality in our business, and we want to sort of recognize the sometimes fluctuation of -- driven by the cyclicality. From a gross debt perspective, we want to target a gross debt level that allows us to maintain a buffer capacity at the trough of the cycle. And so if you sort of translate that into dollars and cents it translates to approximately $6 billion to $6.5 billion of gross debt. And then once we approach those levels, we would be considering our options in terms of what is the best mechanism to restart our capital return. We are committed to returning capital to shareholders as we get -- as we approach those levels that I discussed in terms of leverage ratio and gross debt.

Great. And then as my last question, one for you, David. I'm sure you get these questions or comments from both sell side and investors. But there is a sum of the parts argument to be made with regards to your stock price. I think both you and Wissam have talked about value creation a couple of times throughout the session. But what are your plans as it relates to value creation? And what are some of the things we as a market are collectively missing or underappreciating about the Western Digital story in your view?

Well, we're improving business in great markets, right? And we've got the right product portfolio now put in place. We're going to go capitalize on that as we go forward. I mean I think we've seen the results of the of the changes we've made to date, showing up in the numbers in a really profound way. I mean, 410 basis points of gross margin expansion, 480 basis points expansion in operating margin. We talked about just much more foundationally secure in our balance sheet and the amount of debt that's been paid down. EPS generation is much stronger now. So I think we're in a great spot. And we have tremendous relationships with our customers. Given the breadth of our portfolio, we have billion-plus relationships with some of the most important technology companies in the world and the ability -- the innovation that can be driven from that is substantial. And then we now have the leadership team built out that I wanted to build out, and we've put the last couple of pieces of that in place with Wissam and Irving here, so I expect great things there as well. So we're going to continue to execute. I think we're getting a better result now. We're clearly getting a better result after across almost every financial measure. We obviously have much better portfolio than we had 2 years ago and are back to market-leading in both portfolios. We have a JV, which gives us tremendous scale benefits as well. We're going to continue executing that. And I think we're going to continue to get an improving result. All that said, if there's better structural ideas of how we can recognize the value, we're open to that, and we're going to consider that. So we're going to keep our eye across all of those levers that we can create value. That's what I came here for. That's why I was able to attract Wissam here. We know there's a lot of value to create it -- to be created, and we're going to stay focused and deliver that.

Great. On that note, I think we're out of time. I'd like to close. David and Wissam, thank you so much for the time and look forward to our next conversation. Appreciate it.

All right. Thank you very much. We appreciate it.

Thanks so much. Good to see you.