Western Digital Corp at Goldman Sachs Communacopia & Technology Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Toshiya Hari - Goldman Sachs - Analyst : <_ALACRA_META_ABSTRACT>Great. Thanks, Amitesh. Thank you to both for attending. Really appreciate your time. So Rob, I wanted to start kind of high level. You joined the company about four years ago. It's been a journey with COVID and the market ups and downs. What's been the journey like so far? And as you look ahead, what are you and your team's top goals and priorities? Robert Soderbery - Western Digital Corp - Executive Vice President and General Manager, Flash Business Well, I think it's a good time to pause and reflect. When we -- this management team sort of was created four years ago around Western Digital, we had a pretty simple goal for the flash business in the HDD business. The very first step and I think the very first inspiration there was that we did want to manage these businesses in a more focused way. I was part of that transition in that I was brought in to run the flash business, colleague actually brought in to run. And so we actually started the process to think of these as more unique businesses at that time. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 10, 2024 / 2:30PM, WDC.OQ - Western Digital Corp at Goldman Sachs Communacopia & Technology Conference My own goal for the flash business really straightforward. Number one was increase our exposure to a more diverse set of end markets and particularly enterprise SSD. In order to do that, we had to do a bunch of retooling under the hood of our engineering capabilities and our execution capabilities because, frankly, those had been aspirations of the company and they have not been able to fulfill. And so that was the second was real like a really replatforming. And then the third was to evolve our capital models and our supply demand, our investment model to build a more thoughtful way of investing in the NAND business. So I think at this point, on the eve of separation, we feel really good about those initial goals. We feel really good about our guidance from the May 22 analyst conference, even though it's been a crazy journey, and we feel good about sort of really closing out the first chapter and looking ahead to all the exciting things that are in the market in front of us.

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. Shifting gears a little bit. On the near term, on your most recent call, you guided like-for-like pricing in the current quarter to be up in the low single digits on a sequential basis. That's a bit of a deceleration relative to the past few quarters. What are your expectations? What's driving that? And what are your expectations from an industry supply-demand standpoint beyond the current quarter?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. Just as a quick follow-up, Rob. You didn't mention mobile there. Is mobile kind of -- would you bucket that with sort of the transactional more consumer-facing applications? Or would that be sort of in the middle between a very strong enterprise SSD market versus the more trend?

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. Medium- to long-term NAND demand drivers, I wanted to sort of touch on, I think bit growth expectations for the industry have generally come down over time, not just for you but for the industry overall. I think that's due to a lot of large numbers and also the unit growth potential, if you will, across things like PCs and smartphones have come in a little bit. What are your most recent medium to long-term growth expectations, which applications are you most excited about? And I think at the 2022 Investor Day, you had guided to a 10% to 12% revenue CAGR target. Is that still the relevant to appropriate range for you?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. Great. And on that point, as it pertains to AI, as you noted, there's been a very sharp increase in demand, especially for high capacity enterprise SSD. It's very difficult from where we stand to sort of disaggregate that growth into AI versus restocking. What are you seeing in your business today? What are your thoughts there?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. And specific to some of the areas where perhaps you don't have 100% visibility, what's going on from an inventory restocking standpoint, again, specific to enterprise SSD. Do you feel like your customers are consuming inventory, building inventory? Is it sort of flattish? Any views there?

Question: Toshiya Hari - Goldman Sachs - Analyst : Great. sort of a side question. We're asking most of our companies at this year's conference, how you're using AI inside your company since this a big topic, whether it be R&D, whether it be design, whether it be day-to-day operations at Western Digital, do you guys actually leverage AI more so today than, say, two, three years ago? And if so, what are some of the benefits that you've been able to identify? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 10, 2024 / 2:30PM, WDC.OQ - Western Digital Corp at Goldman Sachs Communacopia & Technology Conference

Question: Toshiya Hari - Goldman Sachs - Analyst : It's pretty significant.

Question: Toshiya Hari - Goldman Sachs - Analyst : Cool.

Question: Toshiya Hari - Goldman Sachs - Analyst : It's not good for them. So not good for them. but good for us. So that scale and that focus have resulted in systemically lower capital needs and a better return I think the -- really the proof point of that was in the downturn. We headed into the downturn. I think the talk track in the downturn was other NAND vendors were ahead of Western Digital, and we're doing great. We go into the downturn, it turns out those other NAND vendors that were ahead of Western Digital didn't have the cost structure that was commensurate with what they're representing and their numbers were horrific. -- our numbers were not awesome, but on a relative basis, we showed much better performance through the downturn. And it's because it was reduced capital intensity, better architecture and just a better portfolio -- so big picture, look, the JV works. We're super happy with it. We think we'll keep working. We've renewed through 2034 for the -- or extended 2034 for new fabs in KidiCom and have a lot going on. Reaut that's a great segue into my next question. The market tends to focus quite a bit on layer count in 3D NAND. We're often led to believe that the higher the layer account, the more advanced the technology. But at WD, if anything, you prioritize lateral scaling and logical scaling while also pursuing vertical scaling. Talk a little bit about that dynamic and how you've managed to grow in line with the market despite, again, a lower capital intensity profile. I guess you sort of touched on that now, but Yes. So this new era of NAND topic essentially, as you increase the number of layers in your 3D NAND, you start to face dimension returns, right? 50-story hotel is a lot more expensive than 25-story hotel. You no longer get you no longer get incremental savings from adding layers. And that's kind of where we are in the NAND space right now where if you look at an industry level, a new node can generate about 60% more bits than a previous node, but it only generates about 15% cost reduction. So lots of bit growth, relatively small cost reduction. So it just reduces the incentive to be chasing layers. It's still efficient, still more productive, still gives you more capital efficiencies. So you still need to invest in that direction, but it's not like it's been in the past where there was a huge return to invest in layer account. So let's replace that? Well, I think the analogy here is in 2012, sort of the same thing happened in DRAM, right? DRAM technology innovation slowed -- and what you saw was a proliferation of DRAM and focus into LPDDR for power, kind of DDR for capacity and now HBM for performance. And we see a similar thing happening in the NAND market with this focus on mobile application -- power for mobile applications, right, capacity for big applications and then performance for core inter thread, AI and compute applications. And that's really where a lot of our innovation energy is going. And so it's not even so much 3D scaling versus 2D scaling, it's more about how fit are you for applications. And that makes a big, big difference because -- for example, I've delivered with BICS, I've delivered a 2-terabit die. That's a 2-terabit QLC die. That's all and wonderful, but if it's not highly performing, it's not very useful. So we really focused with CBA technology of delivering performance on that two turbos die that actually exceeds the TLC performance of the previous generation. So it's a combination of the performance and the capacity and the other capabilities that really matter. So we think you should be looking for more of those differentiation stories. And like that device will be the building block of ultra high cap enterprise SSDs. Okay. And Rob, you talked a little bit about this in your response, but can you speak to the significance of technology. And when you compare and contrast BIC with Big 6, what are the performance gains? And to the extent you've made public comments, which should we expect beyond (inaudible) REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 10, 2024 / 2:30PM, WDC.OQ - Western Digital Corp at Goldman Sachs Communacopia & Technology Conference

Question: Toshiya Hari - Goldman Sachs - Analyst : WD, I think, is in a very unique position given your presence in both NAND and HDD obviously, very soon, that might not be the case given the separation. But as of today, from your perspective, how do you envision the market share balance between enterprise SSD and nearline HDD evolving in the data center going forward. Right now, it feels like both you guys on the NAND side and the HDD side are enjoying really strong growth, but how do you see that evolving going forward? And how would you characterize kind of the TCO differential today and how that sort of moves going forward as well? Well, so the -- it's a great time in both NAND and HDD. So on the HDD side, we're sold out. We've got year lead long lead times, mid- to high 20% CAGR from a growth capacity growth rate. So there's no indications in the market that somehow there's something funny going on between these two products. What's new is that this AI data lake problem in the past might have been the kind of problem you throw HDD at. But HDD doesn't have the performance to go after the AI data lakes -- and therefore, you're seeing these high HDD scale SSDs going after that AI data lake application. As of today, depending on who you ask and how you measure there's a 4 to 5x difference between per bit cost between HDD and enterprise SSD. Maybe that comes down to 3 or 4. So for conventional applications, think about your family photos on Facebook that you're looking at once a year, None of those deep content applications are going to live anywhere but HDD, right? So that's going to go forever that works forever. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 10, 2024 / 2:30PM, WDC.OQ - Western Digital Corp at Goldman Sachs Communacopia & Technology Conference The question is what applications can afford to cost disadvantage because their TCO will result in a better equation. And there are definitely obviously, AI is one of those applications will be more of those applications. We are seeing kind of interest from data center operators for space and power and longer-term TCO benefits. So we see modest effects to the benefits of flash over time. but it's unlikely to be anything that's measurable in terms of influencing that HDD top line growth rate, particularly given the capacity constraints on HDD. That's helpful. In terms of your enterprise SSD competitive position at your Analyst Day a couple of years ago, I think at the time, you had about 8% market share. The goal was to double that to one in obviously, the market sort of went into a downturn post that. So all the design wins didn't necessarily materialize. Where are you today in that journey? And how confident are you that you ultimately get to that sort of market share level given the pipeline you Have today? Yes, Ye it was a rough journey. We did all that fundamental work I talked about earlier in terms of retooling the technology platform. We arrived in -- what was that the spring of there with actually a very competitive platform and essentially the eSSD market just vaporized in front of us due to this long-term kind of hyperscaler overrunning the system. So we had to pause. We almost went to 0. We've now come roaring back, and we're coming roaring back on the basis of three different platforms. . First of all, to the pre-downturn platform we built is still a good PCI Gen 4 storage platform. And so that is ramping up, and that's what you'll see as we report the quarterly numbers we talk about what we're doing in the market, we report the quarter of the numbers. And we're on track to get to about 10% of our bits. So it's becoming material. It's been a good part of the portfolio just based on that. And then there are two new offers. The first offer is a 30- and 60-terabyte high cap AI PCI Gen 4 device. -- for that fast data lake application. That's getting a lot of interest from the storage OEMs. We're doing a lot of the AI data lake work as well as the scale. And then the second new platform is that PCI Gen 5, a lower higher-performance platform that's got interest from major hyperscalers from China accounts from channel accounts. So those both have a lot of interest. So when I stand back and look at that, I think that David and I have talked about like let's get to a decent place for our own portfolio mix. And we think initially, that's 10% of our bids moving to more of a fair share where we have the same share in SSD as in the rest of the market, so I think 13%, 14%. So sort of the lower end of that range that I talked about. And I think that's all very doable in the next couple of quarters. That's great. Shifting gears, maybe a couple of questions on industry structure and how to think about supply-demand medium to long term. You've seen some consolidation in NAND over the past several years. You do still have five to six very capable, competent suppliers competing for market share. How do you at WD see the market structure evolving over the medium to long term? And do you believe you can still hit that 35% to 37% through-cycle gross margin target with the current setup? Or do you feel like there needs to be some consolidation?

Question: Toshiya Hari - Goldman Sachs - Analyst : I guess you sort of alluded to this in your response. But at the NAND event that you hosted a little while ago, you spoke to this market equilibrium rate of 18% to 20%, the WFE bookings and shipment numbers would suggest that your peers are on board and sort of acting rationally. But is that sort of the perception you have?

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. I did want to pause here and see if we have any questions from the audience. If you do have a question, please raise your hand and we's have mics in the room. Okay. If not, one last question. I think, Rob, you spend a decent amount of time with investors and analysts maybe less so than David and we saw them. But based on what you hear, what you read, the questions that come your way, anything about the WD story about the NAND story, the markets you participate in, that we collectively underappreciate or overlook or misunderstand if you will. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 10, 2024 / 2:30PM, WDC.OQ - Western Digital Corp at Goldman Sachs Communacopia & Technology Conference

Question: Toshiya Hari - Goldman Sachs - Analyst : Awesome. Thank you, gentlemen, for joining us at the conference, and congrats on all the success.