Western Digital Corporation (WDC) Earnings Call Transcript & Summary

Good morning, everyone. We share this good morning. I hope you all are doing well. I'm really delighted to have with us Western Digital today, and we have David Goeckeler, the Chief Executive Officer; and Wissam Jabre, the Chief Financial Officer from Western Digital. We also have Peter over there sitting, from the IR team to make sure we all stay honest. I guess, before we kick it off, I'm going to turn it to Wissam to read some of the safe harbor statements.

Good morning, everyone, and hang on and great technology here. Thanks for having us. It's good to be. Let me first start with, we will be making forward-looking statements based on current assumptions and expectations, and I ask you to refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on risks and uncertainties that could cause actual results to differ materially. 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.

Perfect. Thank you. All right. So Kirk and I, will just kick this off with a few questions. We'll stop in the middle, if anyone has any questions in the audience, feel free to jump in at that point.

I guess, maybe before I kick off into all the questions, David, I know you can't talk much about the strategic review that you have underway. But maybe you can just touch on the timeline one could expect to conclude this by. And more importantly, maybe just as you reflect back, what are the benefits of the JV? What does that enable you to do from a go-to-market basis? I'm just talking about like what are the benefits there and maybe the timeline when it gets wrapped.

First of all, thanks for having us. It's great to be here. We appreciate it. So first of all, 2 little different questions. The strategic review, I've said last week or so, we're kind of in a home stretch at this point. So we expect to wrap it up by the end of the year. We're looking at different implementation scenarios. So, and the issues that come with that, working through it. So that's the kind of timeline we're thinking about. As far as the JV, look, the JV is an enormously beneficial asset to the company. It's a great relationship. It's 23 years going now and going strong. And I think anything lasts that long because it's very valuable to both parties. It allows us to produce at scale in a market where scale matters. So our technology road map is exactly the same. We have a combined team that work on it every single day. It's like a hand-in-glove relationship. We just announced BiCS8, which maybe we can talk about a little bit later. I think a major step forward. 16 nodes of NAND technology now throughout the lifetime of this. I think really just sustained excellence in innovation and engineering in the NAND market is what that JV is all about. The second step of that is manufacturing. We manufacture together. So supply comes out of the same fab. We invest in those together so we get the benefits of scale there. And then when those wafers come out of the fab, we just take our own and we go our separate ways as far as how do we take those to market, what products do we build, lots of different products you can build in NAND, we have different portfolios, different go-to-market. So the JV on that whole defining of the NAND road map, the capital efficiency of that road map, the way we design it, what we're designing for, the manufacturing of the NAND itself, all part of the JV and all very beneficial to us and kind of the foundation of the business, if you will.

Got it. Perfect. I know we'll talk about BiCS8 in a bit, but maybe just on a broader level, there's a lot going on from a macro perspective and at best, it looks like it's a very uneven macro environment across geos, across product categories, if you may. I'd love to get a perspective from you. What are you seeing from a very high level on the demand side, the good and the bad, and then we can dig into some of the questions more specifically from there.

Yes. I think 1 of the things I really enjoy about Western Digital is our visibility into the market. So we have everything from a consumer business, where we sell hundreds of million hundreds of millions of devices in every country in the world where it's legal to sell and every e-tailer platform, all the way to selling products to the biggest technology companies in the world, enormous amounts of products to those companies. And of course, distribution in the middle of that. So when we look across that business, we kind of -- we think about the downturn and where it started last year. Consumer business was kind of the first into that. We're at the point now where the consumer business is stable. We think that business and the players in it are past their inventory correction, businesses behaving in a way we expect it to, we're heading into some seasonal strength in that business as we go into the end of the year as Wissam had told me, no matter what happened in macro. We're not going to cancel Christmas. So there are some good drivers in that business. It's behaving how we expect it to behave. The next kind of into, from a macro perspective, the correction -- inventory correction was the big PC OEMs. We saw that last summer, went through that inventory correction. We think that market is now pretty much building to demand. Nobody is building a ton of inventory just yet, but building to demand. And then finally, the data center market was kind of the last into the inventory correction. I think we still got a little bit to go on that, right? It's not -- we're still seeing some inventory correction there, some depressed buying patterns in both HDD and NAND. We think we're at the bottom of the HDD now and things will get sequentially better throughout the year. NAND is going -- we can talk a little bit more about the NAND environment. I think NAND is going through a couple of quarters of stabilization here. Clearly, we've been undershipping demand for a while now, and that industry is coming back into balance.

Right. Perfect. And just a longer-term dynamic here at the Flash Memory Summit, I think Western Digital, you folks had a keynote. And it was an interesting dynamic. You talked about the challenges of balancing bit growth with sustainable cost downs as you go forward, right? I thought it was a very interesting kind of perspective. So I'm curious, what is the optimal long-term, let's just say, a margin-neutral industry bit growth rate look like in your view? And what are the sustainable cost downs in that paradigm?

So this is -- goes to the heart of what's really important about the JV and the way we think about how we develop flash. And we can talk all we want about the flash, different end markets, client SSD, enterprise SSD, what's happening in the cloud consumer. It all starts with the fundamental NAND technology and what -- how well is that built, what's the capital efficiency of it. The way the JV is thought about this for a very long time, is we want to get this balance right of driving bit growth. So obviously, NAND is 1 of the areas where if you will, Moore's Law is alive and well, every node, we get more productivity per wafer, and you balance that productivity against what are the costs down of that. And that goes directly into the design philosophy of the JV. We're designing for a specific growth rate, specific cost down. For us, that cost down is 15%. We've met that. We're talking about bit growth rates in the, let's call it, mid- to high 20s in the industry. So getting that calculus correct and making sure the designs deliver both, not just more bits, but the right kind of cost down. Of course, the market storage market, you want to drive the cost down, that expands the TAM, always kind of this evergreen market, finding new applications. And I think this has been the hallmark of the JV, the question you started with is really staying focused on that balance with each successive node of the BiCS road map. And 1 of the things the JV really focuses on is what is the capital required to get that incremental next bit out of the road map? And how do we optimize that? And that's something I think we've done very well on over the years. Like I said, we've had 23 years of sustained excellence in innovation. And we went back -- Peter, who you mentioned earlier, went back and looked at the numbers for us. So, over the last 5 years, the amount of CapEx we've had to put into our -- to get those extra bits out is 1/3 lower than the industry. And that's really what that conversation that you're referring to talks about is how do you get that balance right. It's not just a race to who can build the most layers. It's not just a race to how do I get more bits out all the time. It's like getting this balance correct. I got to get the supply, got to get the cost downs, and I have to do it in a very capital efficient way. That's the way the JV is focused. And we've had really years and years of results of being able to drive that BiCS road map in a very capital efficient way to make that equation work for the economics. Then once you get that right, then you can start building all the products on top of it, and you have a very solid foundation of being able to get the supply, high quality product at the right amount of CapEx investment to continue to drive the growth of supply.

Being able to get that capacity a bit at 1/3 of the CapEx is actually phenomenal. I don't think I ever appreciated that dynamic, but that's impressive. I guess maybe on the SSD side a little bit. Last quarter, I think you folks talked about sort of return to growth at least on the client and the consumer side that's starting to happen on the flash side, along when you talked about like normalizing inventory, increasing content per device kind of stuff, and you talked about pricing kind of decline -- moderating price declines, right? Can you just talk about the sustainability of these trends? And how do you think about the current downstream inventory management?

Yes. I think this is a reflection of those parts of the market are through their inventory correction or no -- more building to demand. You talked about PCs. We're clearly coming off of a pandemic era of, I think a year ago or 1.5 years ago, we were talking about different people and players in the industry. We're going to about 1 million units per day. We're kind of coming off that now back to kind of pre-pandemic levels. So I think the industry is reset to that and is shipping to that demand. And to your point, we're seeing the NAND market work in the sense where elasticity starts to kick in. Across our client portfolio, we're seeing 20% more capacity per unit than we did a year ago. Across the consumer portfolio on portable SSDs, it's 40%. Across the entire consumer portfolio, it's 35% year-over-year growth in the amount of capacity per unit. And so those markets, they're kind of readjusted to a post-pandemic reality of what the demand is. And now we're seeing that we've kind of reset and now we're starting to see some year-over-year growth again with that elasticity kicking in.

Got it. Perfect. Kirk, I'll give you...

Yes. So maybe just clicking on the NAND supply-demand environment. Current ASP levels are widely considered to be unsustainable. One of your competitors actually recently indicated that NAND pricing is bottoming right about now. Just curious how you're thinking about the timing of an inflection and the linearity toward more sustainable pricing levels.

It's -- I think we've been -- I'll talk about our business. We've been undershipping or underproducing demand for a while now to get the market back in balance. We've talked about this of utilization of the fab. The market is -- if you look at the last 4 quarters of our cost -- of our price declines, [ 22, 20, 10, 6 ]. So we're kind of moderating the ASP declines, I think we're in a period now of a couple of quarters of stabilization of the market. There's different markets inside of NAND, everything from wafer markets to extremely large customers that buy an enormous amount every quarter. Those aren't all going to move in tandem. But clearly, we're at a point where we're finding the equilibrium point in there before things are to inflect up where this kind of underproducing demand kicks in and the market has stabilizes. So I think we're in that period. I think it's going to be a couple of quarters. And then I think we'll -- as we go into '24, certainly, if not before, we'll have a better pricing environment. I wouldn't be surprised to see a little bit of lumpiness here as we all kind of search for that point in the industry.

Makes sense. Maybe just changing gears a little bit. I wanted to touch on SSD underutilization. I believe in January, you indicated a roughly 30% reduction in wafer starts. We understand that you continue to manage dynamically from an utilization perspective. But can you just give us a sense maybe of where we sit roughly today and also sort of the path and cadence to zeroing out those underutilization charges over time.

Yes. So yes, as you said, we continue to manage dynamically because we are always trying to balance our supply with where we see the demand for our products. And so since January, we've underutilized the fab on the NAND side, we continue to do so in this current environment and the expectation probably as we talk, this -- probably another quarter of this, at least based on what we see today. Of course, as I said in my -- at the beginning, this is dynamic and it depends on where the supply-demand balances for our products.

Yes. Great. And then maybe just as a derivative to that, on the cost-down side, things really remain challenged near term. Can you maybe discuss some of the puts and takes around returning to that mid-teens year-over-year cost down targets including sort of a shallower node ramp at BiCS6 and also the timing around BiCS8.

Yes, sure. So the way I would talk about cost downs is I will strip out the underutilization effect because it really distorts what the technology does and how the cost downs really happen. So in fiscal '23, we came very close to that sort of 15% cost down maybe a tad bit below that. What we're projecting also for this year is to be within the same range, again, excluding the underutilization cost. And all this is -- assumes and reflects all in all, the transitions that could potentially be happening, let's say, in going -- the start of the next BiCS6. And as we go forward, cost downs are equally important with respect to looking at capital efficiency and how the technology is being developed. So there's no reason for us not to continue to target similar type of cost downs. But it all depends also on how the -- when we see that supply-demand balance and when the market starts -- turn up because that will influence the transition -- the sort of the nodal transitions on the flash side.

Sure. Yes. Makes a lot of sense. I think before we continue, maybe we'll turn it over to the audience, see if there are any questions.

A little bit about the China...

Maybe I'll just repeat that. I guess the question is really around competition in China and what you're seeing from that perspective.

Competition for?

NAND.

So, I mean we -- I'm struggling with exactly how to answer that question. I mean, we competed a lot of -- I mean the NAND market, there's a number of suppliers. I guess the answer is we're not seeing anything in particular that we'd would call out, say, the competition in China is any different than competition than any other supplier we deal with on a daily basis in the NAND market.

The floating market [indiscernible] they overbuild probably...

China overbuild in the last few years. Not to my -- I mean, look, I mean, the NAND industry is oversupplied. I don't know if that's a particular country issue or just a general issue that -- we're certainly focused on our -- Wissam just talked about our utilization of our fabs to make sure that we're producing what makes sense for what we see as our demand and that we can keep our inventory under control. I think this is something we've done quite well actually during the downturn as being able to generate -- still generate market-leading profit off the portfolio and not let the inventory get out of control. So I think we've done a good job of balancing that. But clearly, the market is oversupplied right now and coming back into balance, as I said, over the next couple of quarters.

Got it. Perfect. I guess you talked about BiCS8 earlier. So it's the upcoming NAND node and I think it has like 218 layers and without getting -- I'm not the technical guy, but a lot of your peers would say, "Well, we have, I don't know, 222, 238 layers. We have a road map going to 300 layers." I guess the assumption is more layers is better. But I would love to kind of get your perspective, how is your process differentiated? Maybe you can talk about the cell density optimization? And how do you see the strategy evolving beyond BiCS8 really?

Yes. This is something, I think, that deserves a fair amount of attention. And what you said there is sometimes I think -- I don't know, I think some people maybe do believe that more layers is better. More layers means more CapEx. So when I talked earlier about our technology road map is more CapEx efficient. These are the reasons why. So there's multiple layers of architectural scaling in NAND, and you first have architectural scaling like circuit under array, wafer bonding, these kinds of architecture, you have lateral scaling, X Y dimension, how big is the die. And then you have vertical scaling, layers and then you have logical scaling, which is how many bits per cell. Like is it TLC, QLC. So you got literally this 4-dimensional problem and you're trying to optimize that for the variables we talked about earlier. How do I get the right supply at the right cost with the least amount of CapEx, that's the objective. And so that's essentially the problem that's given to the engineers in the JV and say, "Okay, go solve this and come back with something that gives us the supply we need, the quality of product that our customers expect, the right level of cost downs." And if you can do that in fewer layers, that just means you've built a better mouse trap, right? You've built a better product. I can do that with fewer layers, requires less CapEx to build that stack than more layers. So this has always fascinated me that we really haven't heard this conversation in the last year because like having a higher stack and basically running the flag up the flagpole that says, I have a higher stack and I spent more CapEx is not really a great thing in a down market. So nobody talks about this anymore. But we have always been very focused on -- if you -- just maybe a very simple way to think about it, why have we been more CapEx efficient for a decade plus is because our engineers are able to build a product that requires fewer layers to accomplish the same thing. And so another question maybe somebody would ask, "Well, is your product as good?" Well, our product is in all the premier products in the world, right? So it's a world-class piece of technology. There's no doubt about that. So look, BiCS8, so that gets us to BiCS8. So I think the team went through that calculus, how do we -- we're going from BiCS6 to BiCS8. We need to deliver more bits. We need to do it in the most cost-efficient way possible. And we need to deliver the cost down. So how are we going to design a package to do that. So on the architectural scaling, let's go to array bonding -- or wafer bonding, let's move away from circuit under array where you build the CMOS and then you start stacking the NAND on top of it in the same manufacturing process. When you do that, you start to degrade the CMOS under it. It's a more complicated process. What if we could separate these 2, send 1 wafer through that builds all the CMOS, send another wafer through that builds the NAND stack and then bond them together at the end. Like kind of sounds ambitious, quite frankly, 2 years ago or 2.5 years ago when the team was talking to me about this, I said, "Wow, that sounds very, very ambitious." Here we are. They accomplished it, right? So that first dimension logical scaling, major innovation on wafer bonding. So what does that mean? That means I can get -- first of all, the CMOS I sent through is much more pristine because I'm not building NAND on top of it in the manufacturing process. So interspace -- interface speeds are faster, much better product on that part of it, much more fidelity in the product. I can also send each wafer through separately and drive the yields higher, faster, right? So I get faster yield ramps, faster yield ramps means more capital efficiency, more cost downs, right? I get up those yields faster and get to higher yields. So that's the first thing in BiCS8, go through this major architecture change, if we can get through this architectural change, we got a better product. We did it. It's something I think everybody in the industry is eventually going to have to go through. We've now commercialized it at scale. Lateral scaling, X Y dimension. How do I think about the die size, X Y dimension. I won't go into all the details here, but I would encourage people to look at the patents that are there and the work that's been done, the very, very clever work about how to get the X Y dimension packed more into the same die, okay? You got both of those solved now. Now we're going to go to -- now we're going to start talking about stacking. So you look at all that stuff underneath, and you say, okay, how many layers do I need now to deliver the number of bits I need, and we came up with 218, right? So we're operating, and of course, you've got the logical scaling, which is how many bits per cell. Is it 2? Is it 3? Is it 4? And clearly, we're going from TLC to QLC. So when you look at that whole equation, and that's how we think about NAND architecture in BiCS8, like how are we going to think through each of those dimensions of architectural change to deliver this product. Team was able to do that, and they were able to build a world-class product with 218 layers, right? Now that's fewer layers than everybody else. And that just tells you that the innovation in the lateral scaling, the innovation in the architectural scaling is outstanding, and we don't that many layers to deliver the same product. That leads to the capital efficiency. And that's what people -- sometimes people ask us, how can you stay competitive because you consistently spend less CapEx than everybody else in the industry. This is exactly what I just described is exactly why because we have this JV. And we've got 23 years and 16 nodes of sustained excellence and innovation to build a really world-class product. And so we're very excited about BiCS8, that's all in front of us. As we continue to move the portfolio, we're going to move a number of products directly from BiCS5 to BiCS8. We'll move other products through BiCS6 because we need the capacity of BiCS6, some of the capabilities. But we have all of this in front of us of ramping on to a really, really stellar node in the road map.

Got it. You mentioned a lot of really good stats there. But when you talked about sort of lateral scaling and you sort of said, "Hey, listen, our yields are much better than anyone else and others have to go through this journey as well." If you think about like what sort of advantage do you have from a time basis, if you may, right? You think you're 12 months ahead of your peer? Is it 2 years? It's...

I'm not going to handicap that one. You can talk to our technical guys and maybe they can handicap. There's a lot of smart people in the world, right? I we have -- we cornered the market on that. But we've -- we clearly have now commercialized a technology in BiCS8 of wafer bonding. And then you put all the -- I kind of went through all the rest of the stuff because you started the question on stacking, right? As if stacking is the only issue. One thing I would -- again, just to encourage people, you cannot understand NAND architecture by just thinking about stacking. It is way, way more complex than that. So look, we -- it was a long project. NAND -- these nodes, although they come out, let's say, every 18 months, they're in the R&D cycle for years leading up to that. So it's a significant process -- and we feel very good about. We've commercialized something that is going to allow us to scale the portfolio for years to come, quite frankly.

Fair enough. Maybe moving to a less intellectual topic. But more important perhaps is SSD gross margin targets. I think you folks have a target of like 35%, 37% through the cycle. Just talk about what's the path to achieve that, what does mix look like, especially with eSSDs ramping up? Just talk about the journey to get there, what do you need in the mix that works into that?

Yes. So, look when those targets were put together, there was a lot of thought going through to basically get to these targets. And the way we think about these targets is obviously through-cycle manner. So we still have the same targets as we laid out at our Investors Day a year or so ago -- 1.5 years ago. And the way to get there is very much focused on the portfolio mix, how do we sort of mix more towards the enterprise SSD from our pretty much big presence today or big content today of consumer business, but also the nodal transitions and the continued efficiency and the ability for us to continue to transition to more efficient nodes, like, for instance, going from that BiCS5, BiCS6 to BiCS8 as well as the ability to scale. These -- the fundamentals haven't changed for us because the long-term growth of the business hasn't necessarily changed. What we're going through obviously now doesn't necessarily translate into where the long term of the business is expected to be.

Got it. Fair enough. So those targets are very much alive. We just need some of this challenges, let's just say, in the NAND market to abate and...

Well, the biggest -- remember, the biggest thing that we're -- that is impacting -- that impacts also the gross margin is pricing, and pricing depends on the supply and demand imbalance or balance.

Fair enough. If you move to the other side of the business, the HDD side of it, if you may. Maybe just talk about what are you seeing, especially around the nearline HDD demand trends right now? And perhaps you can talk about what you're seeing in hyperscale versus enterprise, U.S. versus China. Just anything on the drive side would be helpful.

Sure. I mean if you -- we're clearly at a point of depressed demand in HDD as well. We -- I will -- just to start, we expect sequential improvement throughout the fiscal year from here. If you look at -- you ask hyperscale versus enterprise, the enterprise business has pretty much stabilized, right? If you look at it on a year-over-year basis, it's really about hyperscale and demand there. And we have -- we've talked about this a bit. We have some customers that are significantly depressed buying, maybe not buying anything in a quarter for several quarters. We have other customers that are buying at a lower level than usual. And then we have some other customers that kind of move in and out of the market quarter-by-quarter depending on what their inventory level is. So -- as I said earlier, in the data center market, we're still getting to the end of that inventory digestion phase. Now, we have incrementally better visibility because we're more of a build-to-order type model now. So we're looking for more visibility from our customers. We can talk about a little bit. We've taken a lot of cost out of the system on HDD. We had a lot of capacity in the system for building client units, quite frankly, that we've now just removed from the system over the last year, year plus. So we're getting that supply. We're getting the demand-supply infrastructure more aligned. So we're asking our customers for more visibility into what they're going to buy. So that gives us some confidence that we're going to now start to work our way out of this. But that -- it's really that hyperscale market that is still significantly depressed in the nearline market, and -- but we expect some improvement from here.

Got it. And is the depressed hyperscale market, just a reflection of, "Hey, they bought a lot of stuff and they got to digest it," or are they changing how long they want to store my e-mails on Gmail, for example, or some other factors?

I think there -- like anything in life, where you have something that is this consequential. It's a culmination of a number of things. I'll give you my point of view. One, I think there is -- it's extraordinary time coming out of a pandemic and now going into a lot of macro uncertainty. So managing the dynamic between those 2 has been a sharp inventory correction in all the markets we've seen. As we talked earlier, we saw that in the consumer market where people that are -- have consumer-facing businesses, it took them a while to work through the excess inventory they had accumulated. Then in the PC market, we're talking about going from a significantly elevated number of units now to a more kind of more pre-pandemic level number of units, you can imagine the transition between the amount of inventory you're holding for the higher to get down. So the lower you have to go way below true demand for a while. In the data center, clearly, the same thing happened. There was some over purchasing or oversupplying, whatever way you want to look at it. So there was a lot of inventory. And of course, these customers are kind of markets of one, very -- they're not all the same. So there was differences amongst them. So that's a big impact. And that was the last market to start to correct, so it's not surprising. We're still kind of working through -- we're working through it here. On top of that, in that period, of course -- well, on top of that, you had -- the cost of capital environment has changed on us, right? It's like working capital is more expensive now than it used to be. I think every company in the world is managing OpEx a lot more tightly, maybe in ways they haven't before. And so when you just have that much more cost visibility or cost discipline in your business, that's going to impact how much inventory you're willing to hold, how fast you're willing to accumulate it, those kinds of things. On top of that, you've got macro uncertainty, like what's going to happen in the future? Is now the time to take a big inventory position,? Like what's going to happen with -- what's going to happen with different economies? Are we going to have a soft landing? Is there going to be a recession, is there not? What's going to happen in major economies around the world? Are they coming back as fast as they used to? So a lot of uncertainty, another reason maybe to be more conservative. And then I think you've got a priority question a little bit, which I'm sure will come up where a lot of people spending on building out infrastructure for AI, which is extremely important. I mean -- I think that's great news for us. We're kind of the second-wave beneficiary of that. And I think this is the brilliant thing about the cloud that the cloud can deploy really exciting new technology very quickly and make it available to literally billions of people and then they can start using it, and that's going to generate more storage. So I think you put all of these things together. And then the utilization is part of that. When I'm in an environment where I'm more concerned about how much I'm spending, how much I'm going to be willing to hold. Of course, if there's optimizations I can make, I'm going to choose to make those and that's going to push the recovery out a little bit. So I think all of these things are going on at once. We're working through it. It's a longer-than-usual digestion period, if you will, because I think there's probably a little bit more going on than just digestion. But -- the good news in all of that is, one, we're getting through it; two, I don't believe in any way possible, the long-term thesis for storage has changed, right? Storage is 29%, 30% of the TAM in the data center. I don't think that's going to change. I think that we're on the precipice of a major new technology revolution in AI that is going to enable us all with tools to kind of automate the creation of data, if you will. That's one way to look at it if you're in the storage business, like all of us are being enabled with a set of tools where now we can generate data even faster than we could before. And I think that, that is going to drive demand for storage. I think we're going to get through this inventory correction. We're kind of resetting the business for what we see is a continued long-term growth. We'll get through that. And I think we're now going to start working our way out of it. And we're going to have both businesses with the same demand drivers in place and kind of better structural cost dynamics inside those industries -- inside of those businesses.

Totally fair. A few minutes ago, you talked about this build-to-order dynamic, and you kind of mentioned it, but I think on the last earnings call, you and 1 of the other only-HDD peer talked about this as well, to implement more of a build-to-order strategy, if you may, right? Can you just talk about how does that impact -- how do you see that impacting your utilization rates, your pricing going forward? And then how is that different from perhaps the LTA stuff that you all through the pandemic?

Well, yes. So when you think of what we've done over the past year in the hard drive business and the manufacturing footprint, we've taken down our capacity, we've taken capacity really out of the system, in many ways, we continue to do so. And so we've basically now resized the business to where we see the long-term demand going forward. And so for that to be able -- for us to be able to manufacture and deliver product in a very efficient way for our customers. We do need that visibility to be able to -- because it is the manufacturing cycle is quite long. We do need that visibility to be able to provide the product on time. The -- in the past decade plus, there was quite a bit of capacity that sort of was more targeted towards the client side of the business that was used to manufacturing the products for the capacity and price on the nearline. And that capacity is now -- has been taken out of the system. So we resized it based on where we see the demand, going forward. That would allow us to be much more disciplined as well in our capital investment and to be able to sort of maintain the supply and demand for our products in a good balance.

Got it. Perfect. Great. So I think we'd probably be remiss not to hit on the flash versus HDD debate, at least for a question or 2. So I would like to sort of discuss this from a few angles perhaps, a flash array vendor has suggested that HDDs will be extinct in a few years as QLC flash gains momentum and cannibalizes near term -- cannibalizes nearline demand. Western Digital is in a unique perspective to speak to this with HDD and flash in the portfolio. So would love to know your perspective both, on the current market backdrop and how you sort of see that also evolving over time given AI proliferation and how that can potentially impact flash versus HDD use cases and also sort of the total cost of ownership consideration?

So, look I'll just say we don't see any change in the architectural structure of the data center. And I'm talking like the mass scale data center, the biggest data center operators in the world, this thing where we sell 30% of the storage into that. Storage is 30% of the total TAM of that. That market is roughly 85%, 86% HDD. The rest is flash. The way that architecture works is it's use case driven. It's not like you just have this big sea of storage, and it's like all interchangeable. You have different storage for different types of things like you have a big set of storage for boot drives, for example, for all your servers. You're going to store all the images for your servers, like that's going to be stored on flash. All of your object storage, files, videos, the kind of the mass amount of storage that's all stored on HDDs. So it's not a question of the simple substitution of price or cost. It's a -- that's part of it. It's about access times, it's about when do you need it. And HDD for the vast majority of those use cases provides a just much more economic way to store. And that's not going to change. Both technologies have a very robust road map that is going to continue to drive the cost per bit of storage down. As long as that happens, there will be minimal substitution between the 2. And again, this is -- there's a lot of conflation that happens here because on the device, on your laptop, on your mobile device, they're pure substitutes, right? You used to have a hard drive in your laptop. That market is diminishing quickly. In fact, apparently more -- faster than people expect. The first iPod that came out had a tiny little hard drive in it. That doesn't happen anymore. All that has been substitution of NAND. In the data center, it's a very different equation, where they're highly complementary technologies, where customers have defined their architecture in a way they use the right product in the right use case. And so this whole debate is this like kind of -- it's a great pithy little statement, but it's just not tied to reality. And I think if you go talk to customers, they're going to give you a very different view of this. Now clearly, like we're a big fan of flash. Don't get me wrong. Like we think flash is great. There's going to be more flash in the future and clever people are going to think of new use cases to deploy flash. That's not going to come at the expense of HDD. And then the final thing I'll say is just -- it's like just do a very simple spreadsheet and you will find that the economics of this I guess, assertion simply don't make any sense, right? I actually -- I've actually done that. I'll let you go do it. It's an exercise left to the reader, but let's say, the HDD industry is going to ship 800 to 900 exabytes this year. That's going to grow at 25% CAGR. The entire flash industry, everybody and every fab in the world is going to maybe ship 600 exabytes, okay? And that's going to grow at 25% CAGR. So go, put that in a spreadsheet and then figure out in 5 years, how many zettabytes of storage have to be shipped and the amount of fabs that would have to be built in the world to support that, and you will find it is a preposterous assertion. And the only people I'm going to believe on this is if a customer tells me that or if somebody that's investing the capital to build the NAND, tells me that. And there's not a single data point from either 1 of those 2 that would tell you that's true. And the rest of it is just a big echo chamber of people talking to each other about like what they think about, like, I think this is good. I think that is good. It's just -- it's not grounded in the reality of the market.

By the way, to your point, the vendor that's making that statement who you know well, ships 17 exabytes a year. So of the 800 for the drives in total sales. For them to ramp that up 17 to 800. It's a long way to go to your point.

Look, I mean there's a lot of smart people in the world. And there's a lot of very good products in the world. And when you -- I don't actually -- that's an interesting number. When you have a market that's 17 exabytes, you can grow to 30 exabytes, right? That's good. Like that's all good, you can grow to 50 exabytes. It's very different than a market that's a zettabyte, hundreds and hundreds and hundreds of exabytes and the people investing to deliver hundreds and hundreds and hundreds of exabytes. That's the business we're in. These are different things.

Almost up on our time so maybe I'll ask you the last 1 here. I think prior to the current downturn, Western Digital talked about $6 billion, $6.5 billion kind of gross debt target for you folks to reengage with capital returns, if you may, right? I'm curious, is that still the right framework? Or has the depth of this correction changed that or prompted you reevaluate it? And I guess, in theory, when you do elect to reengage in capital returns, have you considered what method would be the most optimal one?

So look, on capital allocation, when we put these targets out there, those were also based on an analysis and thought about how the business would perform through cycle over several years. And so there's -- we haven't moved from these targets. Our capital allocation framework is still intact. The way we think about capital allocation is still similar to what we've laid out, which is investing in our business, paying down debt and then returning capital to shareholders. When we are in a very -- severe, sorry, cyclical downturn. And so yes, the realities today are different. However, the targets and the capital allocation framework have not changed.

Got it. We're up on our time here. So maybe I'll pause and turn the mic back to you folks and see if there are any closing remarks, anything we did not touch on that you want to make sure gets fleshed out.

Yes. Look, we appreciate time. We appreciate the discussion, a lot of really great topics. I'll just reflect on we've -- Western Digital has changed a lot in the last 3 years. We've made a lot of changes in the business, a lot of changes in the portfolio. the downturn is -- it's a severe downturn. But I think it is showing that the franchises we have and all the changes we've made are performing very, very well. In the drive business, we're gaining profitable share, that's something you always want to do. It's hard to do in a technology business. In the NAND business, our business is performing from our ability to extract gross margin out of the business. Although it's negative, it's still, I think, 30 points ahead of where our nearest competitor is. So both businesses are performing very, very well. On top of that, we're making structural changes in the business, on HDD, to take cost out, to resize the amount of fixed costs. It's the lowest it's been in well over a decade that will support profitability as volume comes back, which it will. We've talked a lot about the NAND business and how focused we are there with our JV partner, making sure we have foundational technology that is the most capital-effective world-class product in the market. On top of that, we build a very robust portfolio where we can sell to literally every consumer in the world and we do all the way through to the largest hyperscale players in the world, and have a portfolio that spans that. And so we feel very good about where the business is. We think as the market recovers, the business is going to perform very well. On top of that, we have an active strategic review going. We know it's been going a long time. We're looking very, very closely. We'll have more to say about that over the next several months as we work our way to the end of the year. But if there's a way -- we do think the business is undervalued. We're looking for a way to unlock that value when we develop conviction around that, we will implement it. And I think that just in general, I feel very good about where the franchises are, where the business is and our ability to create value in this business.

Perfect. Thanks a lot for your time. Really appreciate it.

All right. Thank you.

Thank you. Appreciate it, guys.