Western Digital Corp at Wells Fargo TMT Summit Summary

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

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : <_ALACRA_META_ABSTRACT>A lot of things going on in Western Digital. But I want to start at a high level. I know that you gave an update on kind of the longer-term mindset of the flash industry. I think it was a couple of months ago. I'm going to get to kind of like what maybe thought about in terms of the guidance for this current quarter, the Flash business. But why don't we level set? Like how do you see the flash industry? What's the key drivers? We'll talk about supply and demand, how Western Digital currently views the status of the NAND industry? Robert Soderbery - Western Digital Corp - Executive Vice President and General Manager, Flash Business Yes, absolutely. So we started that macro. I did a webcast called the New Era of NAND, which is still available on our site. And that really went through like what happened in the downturn and I think to invest in a new stand-alone flash company, you want to understand that question because you definitely don't want that to happen again. And fundamentally, what we saw was essentially an overdrive of the WFE number. I saw a $20 billion WFE going into this business for a couple of years, produced a level of production volume that was unsustainable and that drove a downturn. I think coming out of that downturn, the industry is actually set up for a much, much different dynamic. And I won't repeat everything I said in that but there's a lot of reasons to understand the incentives that fundamentally changed. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit And so you're now in a situation where you have market participants who are all essentially aligned in terms of their strategy. And that's setting up for, I think, a sustained period here of a different dynamic in the market. And the market itself is, of course, based on all the different demand swim lanes, client, consumer, embedded mobile and of course, the one that we're spending a lot of time talking about such as enterprise SSD. And probably the biggest thing that's happened now that is a little different is we're seeing a bifurcation of that enterprise SSD kind of market dynamic from the rest of the market. And so you have your client, consumer and mobile markets going through a little bit of a mid-cycle pause here while the enterprise SSD AI tailwind is at full blast. And so that's changing, that's resulting in a bit of a different dynamic for us depending on your mix. But we think that's a couple of quarters phenomena and that the general thesis that is in place here is the correct thesis, which is clearly a more balanced supply-demand environment, very moderated capital, sustained demand drivers on both the data center and the edge from AI and consumer and the digitization of our lives.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : That's perfect. So -- and for those that aren't familiar, one of the things that was unpacked is obviously the capital structure, the balance sheets and the differential between what goes where in the companies. But one of the common questions I get in the structure and going all the way back to when SanDisk was standalone, it's just the mechanics of the JV, right? And when we look at the capital structure, the balance sheet, it's not consolidated. So how do I think about the Western Digital piece of the asset side in the JV structure, meaning the equipment really?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : That was very helpful. So you depreciate equipment on 5 years but the duration of the useful life is well over 10.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. That's very interesting. And just the JV, again, understanding that it's 50.1% ownership, Kioxia, you, just the mechanics of how it works...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Yes, that is. That's perfect. And just so we level set too, like we do have some visibility into your JV partner now that they're progressing to an IPO.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : It's not a 50-50 split of the total capacity between the 2 companies, right? There's some capacity that resides outside the JV...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst :

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. I'm going to move away from all of that mechanic stuff, and we'll anxiously wait for the Analyst Day. Going Back to where maybe I started the discussion. When you thought about the guidance into this current quarter, we talked a little bit about there's client SSD, there's some churn in the consumer market, the mobile market on the smartphone side seems to be still relatively tepid. But what underpins the expectations for the Flash business as we kind of think about this current quarter?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Yes, that's perfect. Maybe before I go double click on that enterprise side, can you -- I know in the Form 10, there are some disclosures around cloud and consumer and client breakdown. But how do I think about the mix of the Flash business from a client SSD? I guess I'll throw gaming coupled with that, maybe retail consumer solutions, mobile and enterprise. How do I think about that split as we stand?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : So 1, 2, 5, 7, 12, 15, I'm trying to...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : So where do you stand on client -- the client SSD market? Because that's been a tough space. I mean, we've seen a lot of discussion around, look, PC shipments are relatively tepid 1% or 2% plus or minus a quarter but there is a narrative around AI PC and that's starting to maybe materialize in the next year. Are we through inventory digestion here? When do we start to see more of... REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Just getting to that inventory level depletion.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : And WD's view is that we will see either be at Windows 10 plus AI PC?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. On the enterprise SSD side, you mentioned the progression of 15%. Is the target 15% for fiscal '25? Is that -- what was that number?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : For the December quarter, okay. And for the full year should be... Unidentified Company Representative 15% to 20%. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : The idea is that that's going to continue to move higher.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : And you mentioned the NVIDIA qualification, which was very notable, and congrats on that. Where do we stand on the hyperscale cloud qualifications?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Perfect. So I want to go back to kind of the earlier question a little bit is that you've got the demand side. Just remind us again of how Western Digital sees like the bit demand growth algorithm for the total flash industry. Like when you're thinking about allocation of CapEx, what is the underlying views of your mindset or the company's mindset of demand growth in aggregate and you mentioned $20 billion of CapEx. Is $20 billion of CapEx now normalized at $15 billion of WFE? Just...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Yes. And let's say, we start to see maybe that, that moves higher. Remind me again, when that becomes a bit output like the duration of time?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : It's a full year.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. That's perfect. So I try and juxtapose all of this because everything you just said is really, in my opinion, structurally good for the industry, right? The setup looks good into 2025. We've got separation, you've got Kioxia IPO. However, it seems like the pricing dynamics, the spot market seems to be still under pressure. And I get this question all the time, have you seen spot pricing? Why is -- is that the right way to think about this? Or...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : So this AI inertia around enterprise SSDs, there's a push to 120-plus terabyte capacity points you get some maybe reprieve or finalization of inventory digestion in client, we'll put mobile to the -- I mean, couldn't we see a scenario where things get somewhat tight in the next year? No.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. That's perfect. One of the things that came up last night, not to put you on this but there was an announcement by a system vendor, Pure announced a hyperscale win for flash. Obviously, you're in the flash business. I'd love to -- how do you see flash relative to nearline hard disk drives? You've got an interesting purview being still at both companies. So how do you see that kind of dynamic?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Yes. I appreciate that. And I think just to kind of think about that, I mean, correct me if I'm wrong, Western Digital talked about like the cost curve down for flash is mid-teens.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : And the parallel line is...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : So maybe I'll pause if there is any questions in the audience, I'm happy to field them. But otherwise, I'll keep going. Raise your hand if you do. I want to talk a little bit about one of the things that I often for a long time, have had a lot of discussions around is technology progression, right? This BiCS6 to BiCS8 hey, WD, Kioxia has 162 layers. Other guys have, pick your number, 220 whatever.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Why is that wrong? Like walk us through the technology.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Right. Yes. I understand. I mean I think part of it is to the Y-axis scale or there's x and y. So you we get more...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : It means your etch holes are closer.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : So as we work towards the spin commencing, where do we -- how do we think about the BiCS8 transition? Where are we at today? Where do you think we'll be at a year from now? It seems like given the fact and it's a CMOS bonded array architecture, is a different architecture than what you've had, just the relevance, the importance of that transition. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Perfect. And that CBA architecture maintains that idea that you can keep a 15% mid-teens per annum kind of cost down?

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. That's helpful. The final couple of questions in a few minutes I got left, I'm just going to kind of rapid fire a few things off. I'm

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Right. And that's preface against a through-cycle flash gross margin target of 35% to 37%... REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Okay. What's -- in the final minute, what do you feel like -- I didn't ask that I should be asking you like on the Flash business. I'm sure there's a lot of different other vectors. But to me, it's all about how we feel about the structural aspects.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Yes. And just to be clear on that point, like leveraging that business to kind of take on the leading edge of node transitions is kind of gets you up the learning curve...

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : Rob, why don't we wrap it up there? And I appreciate you taking the 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. DECEMBER 04, 2024 / 5:30PM, WDC.OQ - Western Digital Corp at Wells Fargo TMT Summit