Western Digital Corporation (WDC) Q3 2025 Earnings Call Transcript

Western Digital Corporation (NASDAQ: WDC) Q3 2025 Earnings Call dated Apr. 30, 2025

Corporate Participants:

Unidentified Speaker

Ambrish Srivastava — Vice President and Industry Relations

Irving Tan — Chief Executive Officer

Don Bennett — Interim Chief Financal Officer

Analysts:

Unidentified Participant

Erik Woodring — Analyst

Aaron Rakers — Analyst

Karl Ackerman — Analyst

C.J.Muse — Analyst

Wamsi Mohan — Analyst

Asiya Merchant — Analyst

Amit Daryanani — Analyst

Tom O’Malley — Analyst

Steven Fox — Analyst

Mark Miller — Analyst

Harlan Sur — Analyst

Ananda Baruah — Analyst

Mehdi Hosseini — Analyst

Tim Arcur — Analyst

Vijay Rakesh — Analyst

Krish Sankar — Analyst

Presentation:

operator

Good afternoon and thank you for standing by. Welcome to Western Digital’s third quarter fiscal 2025 conference call. Presently all participants are in lesson only mode. Later we will conduct a question and answer session at that time. If you would like to ask a question, you may press Star one on your phone. As a reminder, this call has been recorded. Now I will turn the call over to Mr. Ambrish Srivastava, Vice President and Industry Relations. You may begin.

Ambrish Srivastava — Vice President and Industry Relations

Thank you and good morning everyone. Joining me today are Irving Tan, Chief Executive Officer and Don Bennett, Interim Chief Financial Officer.

Before we begin, please note that today’s discussion will contain forward looking statements based on management’s current assumptions and expectations which are subject to various risks and uncertainties. These forward looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligations to update these statements. Please refer to our most recent financial report on Form 10K and on other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non GAAP financial measures today and reconciliations between the non GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website@investor.wdc.com with that, I will now turn the call over to Irving for introductory remarks.

Irving Tan — Chief Executive Officer

Thanks Abrish Good morning everyone and thank you for joining us today. I’m honored to be speaking with you for the first time as the CEO of Western Digital. It is a privilege to lead this exceptional organization and I want to start by recognizing the outstanding work of our employees across the company who managed a complex separation process over the last several months while also continuing to drive the strong performance we are reporting today. Throughout that time, they remained deeply connected to our customers, continued pushing the boundaries of leading edge innovation and sustained a strong focus on operational excellence.

This combination of customer focus, innovation and execution positions us well for the opportunities ahead. In the past month we’ve also welcomed our new Chief Product Officer Ahmed Shihab. Having held leadership positions at two large hyperscalers, Ahmed is a seasoned expert in cloud storage needs and requirements, making him the right person to lead our product strategy and engineering teams as we continue to drive innovation and deliver solutions that meet the evolving demands of our data driven world. We are excited to have Akama join Western Digital as its customer. Centric perspective and deep industry knowledge, particularly with data centers, will be invaluable to us going forward Let me now provide you with a few updates on our business.

Since stepping into this role, I’ve been spending a great deal of time with our customers, employees and the investment community. What’s clear to me is that Western Digital has an incredibly strong foundation, a resilient business model and incredible potential to benefit from the demand in the age of AI Even in a world marked by geopolitical uncertainty and shifting trade dynamics, one thing remains constant the exponential growth of data. From enterprise workloads to the explosion of AI generated content, such as the millions of images and viral videos generated through AI data generation is accelerating at an unprecedented pace.

When it comes to storing data at scale, no technology rivals the cost efficiency and the reliability of HDDs. We continue to serve as the backbone of the world’s data infrastructure, delivering unmatched value for mass storage needs. As we deliver our critical HDD technology to our customers, we are focused on continued innovation to provide the highest capacity drives with improved performance, energy efficiency and lowest total cost of ownership. Our industry leading 11 disk drives with capacities of up to 26 TB CMR and 32 TB Ultra SMR are now ramping rapidly with over 800,000 units shipped in the March quarter.

We are also on track to ship well over a million units in the June quarter. The swift qualification and adoption cycle is a hallmark of our technology roadmap, demonstrating reliability, ease of implementation and scalability with fastest time to value for our customers. On hamr, we remain on track with respect to our milestones and roadmap that we communicated at our Investor Day in February. We are working closely on HAMR with two hyperscale customers and continue to receive encouraging ongoing feedback on our drives. Let me now turn to our quarterly results for the third fiscal quarter. Western Digital delivered revenue of $2.3 billion, non GAAP gross margin of 40.1% and non GAAP earnings per share of $1.36.

Free cash flow for the quarter was $436 million. At our investor day, we outlined the three pillars of our shareholder friendly capital allocation approach. They are to reinvest in the business, reduce debt and return cash to our shareholders. On April 14, we redeemed $1.8 billion of our 2026 senior notes, thus further strengthening our balance sheet. I’m also pleased to announce that we are initiating a quarterly dividend of $0.10 per share in our fiscal Q4. These actions are underpinned by our strong belief in the strength and durability of our business. Don will cover this in greater detail in his remarks.

Now turning to our outlook. First, I want to acknowledge the current environment which remains highly uncertain and volatile, driven in a large part by tariffs and global trade tensions. At Western Digital, we are addressing these challenges on two fronts. In the near term, we’ve established cross functional teams to minimize disruption and mitigate the impact of tariffs on our customers and operations. At the same time, we’re taking a strategic view, evaluating the longer term implications of supply chain shifts to ensure we stay agile, resilient and are well positioned for the future. Though the broader environment has some uncertainty, demand from our hyperscale customers remains robust in a tight supply environment.

We are thankful to our customers who increasingly recognize the complexity of the HDD supply chain and are partnering with us to provide visibility into their future needs. This collaboration enables us to plan more effectively and we now have long term agreements that extend through the first half of calendar year 2026 with two of our largest customers. However, there are areas such as in the enterprise and in certain parts of our distribution and retail business where there could be more uncertainty with respect to demand driven largely by the current tariff environment. Taking these factors into account and looking ahead into the fiscal fourth quarter, we expect sequential revenue growth driven by sustained strength in data center demand.

We continue to work closely with our customers to align with their long term requirements while delivering the best possible total cost of ownership. Let me now turn the call over to Don who will discuss our fiscal third quarter results and fiscal fourth quarter guidance in more detail.

Don Bennett — Interim Chief Financal Officer

Thank you Irving and good morning everyone. In the fiscal third quarter, Western Digital delivered strong financial results and successfully completed the planned separation of the company’s flash business on February 21. As such, the historical results for the flash business segment are reported as discontinued operations and excluded from these results unless otherwise noted in my comments. Total revenue for the quarter was $2.3 billion, down 5% sequentially and up 31% year over year. Non GAAP earnings per share was $1.36, driven by gross margin of 40.1%. Disciplined cost management and tax benefits. Total X vite shipments were down 6% sequentially, driven by lower nearline shipments related to deployment plans of our customers.

Average price per unit increased 4% sequentially to $179. Looking at end markets, Cloud represented 87% of total revenue at $2.0 billion, down 4% sequentially and up 38% year over year on a sequential basis. The decline was due to a 6% reduction in nearline bit shipments to 145exabytes while pricing per unit in cloud was up 5% on a year over year basis. Both revenue and BIT shipments grew at 38% and 32% respectively, driven by the strength of our product portfolio. Client represented 6% of total revenue at $137 million, down 2% on both a sequential and year over year basis.

Compared to last quarter and last year, revenue was down due to lower unit shipments. Consumer represented 7% of revenue at $150 million, down 13% sequentially and 4% year over year. The sequential decline in Consumer was primarily due to lower unit shipments, while year over year the decrease was largely due to pricing moving to the rest of the income statement Please Note My comments will be related to to non GAAP results on a continuing operations basis unless stated otherwise. Gross margin for the fiscal third quarter was 40.1% sequentially. Gross margin improved 1.7 percentage points ahead of our guidance of 50 basis points improvement.

Operating expenses were down sequentially to $324 million. Our results demonstrate continued focus on cost discipline as we concluded our business separation process. Operating income was $596 million, up 85 basis points sequentially driven by higher gross margin and lower operating expenses partially offset by lower revenue. Operating margin was 26.0%, up 1.5 percentage points sequentially and up 17.3 percentage points on a year over year basis. Income tax expense was $12 million and the effective tax rate for the fiscal third quarter was 2%. The decline in the company’s effective tax rate from Guidance is as a result of the recognition of one time deferred tax benefits in conjunction with the separation of the flash business.

Turning to the balance sheet at the end of our fiscal third quarter, cash and cash equivalents were $3.5 billion and total liquidity was 4.7 billion including undrawn revolver capacity. Gross debt outstanding was $7.4 billion at the end of the fiscal third quarter. Inventory was $1.3 billion representing 86 days of inventory, up $63 million sequentially and down $174 million on a year over year basis. Our net leverage ratio at the end of the fiscal third quarter was 1.7x. Please note after the close of the March quarter, We successfully redeemed $1.8 billion of our 2026 senior notes using cash on hand.

The redemption reflects our commitment to strengthening the balance sheet and achieving our target net leverage ratio of 1.0 to 1.5x. As outlined at our investor day. Operating cash flow for the fiscal third quarter was $508 million and cash capital expenditures represented a cash outflow of $72 million resulting in free cash flow generation of $436 million for the quarter. Please note that this is on a consolidated basis for the quarter. As Irving highlighted in his opening remarks. We are pleased to announce that we’re initiating a quarterly dividend of $0.10 per share reflecting the strength of our balance sheet and confidence in the long term cash generating ability of our business.

This decision underscores our commitment to delivering value to our shareholders. I’ll now turn to the fiscal fourth quarter non GAAP guidance. This guidance includes our current estimate of all anticipated or known tariff related impacts on our business in this period. We anticipate revenue to be $2.45 billion plus or minus 150 million. Gross margin is expected to be between 40% and 41%. We expect operating expenses to increase slightly on a sequential basis to a range of 330 to 340 million dollars. The increase is due to variable compensation reflecting improvement in the underlying business hiring to fill critical open positions resulting from the business separation and increased investments in research and development.

Interest and other expenses are anticipated to be approximately $70 million. The decrease on a subsequent basis reflects our lower debt levels. Following the notes redemption previously discussed. The tax rate is expected to be between 8 and 10%. We expect EPS to be $1.45 plus or minus $0.20 based on approximately 360 million shares outstanding. Additionally, for modeling purposes, we would like to highlight that fiscal year 2026 will be a 53 week year for us. As a result, our first fiscal quarter in FY26 will have 14 weeks. In addition, we expect the tax rate for FY26 to be between 16 and 18%.

In closing, Western Digital is well positioned to navigate the current dynamic environment. We remain focused on creating value for our stakeholders and investing in our future to capture the significant growth and data ahead while maintaining a healthy supply and demand environment. With that, I’ll now turn the call back to Irving.

Irving Tan — Chief Executive Officer

Thanks Don. Western Digital’s results this quarter and guidance reflect the ongoing structural transformation of our business with continued progress towards a business that delivers sustained profitability. We continue to maintain strong conviction in the business and are confident that we will weather this uncertainty and come out even stronger. With that, let’s now begin the Q and A.

Ambrish Srivastava — Vice President and Industry Relations

Thank you Irving. Operator, you can now open the line to questions please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow up Question operator.

Questions and Answers:

operator

Thank you ladies and gentlemen. We will now begin the question and answer session. If you have a question, please press Star one on your phone. If you would like to withdraw your question, please press the pound key. One moment please for the first question. Our first question comes from Eric Woodring with Morgan Stanley.

Please go ahead.

Erik Woodring

Hey, good morning guys. Thanks for taking my questions and congrats on the nice quarter out the gate. Instead of asking a demand question, I wanted to actually ask about capital allocation. And so Irving, you have a dividend yield of about 1%, soon to be lower than that given how your stock is trading in the premarket. That’s about $100 million of annual cash outflow. Can you maybe just help us understand how we should be thinking about both dividend growth going forward, given it seems like you have some capacity there, but then also maybe how you’re thinking about potential share buybacks.

I know your intent is to delever with the sandisk stake, but just help us understand on the cash return side to equity holders how we could be thinking about the CAD of both dividend growth and buybacks. Thanks so much.

Irving Tan

Erik. Thanks for the question and I appreciate it. Well, as we laid out in our Investor Day, our goal is to get our net leverage down to the 1.1.5x range. And once we are there, we intend to return 100% of our excess cash to our shareholders and that will be in the form of both dividend and share buybacks. As we also indicated at Investor Day, which we have honored and committed to today, we’re starting off with a relatively small dividend to begin with and then as we progress, we’ll look to increase that and complement that with buybacks as well.

So stay tuned for that.

Ambrish Srivastava

Ok Eric, did you have a follow up?

Erik Woodring

Yeah, just the quick follow up was Irving, what I hear from you is kind of more visibility because of some of these LTA’s and I’m curious with customers. Customers now giving you some indications into the first half of calendar 26, does that mean you have enough visibility to expect revenue margins and EPS sequential growth through calendar 25 or is it too early to make that call? Thanks so much guys.

Irving Tan

Good luck. Yeah, Eric, thanks. Well, I think the shift to LTAs has given us greater visibility and as I highlighted in my opening comments, we now have two hyperscale customers that have given us LTA’s up to the first half of calendar 26 and that’s really helped us plan our supply chain appropriately along with the CapEx investments that we need to make and give us a lot more confidence in the business. And so as I’ve highlighted in the past, I think especially when it comes to the hyperscale business, we see demand continuing to be strong and robust throughout the calendar year 25 and now, as I mentioned, into the middle of calendar 26 as well.

operator

Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Rakers

Yeah, thanks for taking the question. Also, congrats on the first quarter out of the gate. You know, in the comments around the guidance you guys alluded to into the fiscal fourth quarter, you did point out that it reflected all known or anticipated, you know, tariff impacts. I’m curious if you could unpack that a little bit. I believe the majority, if not all of your manufacturing footprints in Thailand. So, you know, just curious of how you’re thinking about how your best assessment of what, you know, these tariff impacts might be or any indications that you’ve seen with customers at this point.

Irving Tan

Hey Aaron, thanks for the question and good to hear from you again. Well, in Q4 we don’t anticipate any direct tariff impacts in relation to its translation into pricing or cost to customers. But where, as we’ve highlighted in our prepared statements, we do see some potential demand uncertainty in enterprise, distribution and retail segments of the business just due to the unpredictability and volatility. And you would have heard a lot of comments in the marketplace around enterprises and consumers sort of pausing or holding back on making purchases as well. So factoring all that in, that’s the guide that we gave.

But again, the growth that we’ve guided to is really driven primarily by the strength that we continue to see in the data center, specifically in our hyperscale business.

Don Bennett

And Aaron, I’ll just add that in Irving’s prepared remarks we talked about establishing cross functional teams to minimize disruption and mitigation to both our customers as well as our internal operations. Additionally, we’re taking a strategic view on looking at multiple alternatives depending on what the tariff situation looks like tomorrow or in mid May or June, whenever the next round of tariff guidance comes out on our products. As you know, we’re part of the semiconductor group and we currently have zero percent tariff on our products.

Ambrish Srivastava

Aaron, did you have a follow up?

Aaron Rakers

Yeah, I do. Thanks ambrush. So you know, when I think about the Gross margin, right. 40.1%, you know, I think at the analyst day you talked about 38% plus as kind of being the longer term model. When I look at the guidance into this next quarter, if my math is Right. It looks like the incremental margin that you’re alluding to is like north of 45%. So I guess my question is, is there anything structurally in the business or kind of the path forward that keeps us from thinking that gross margin could Trend into that mid 40, if not higher range over time?

Irving Tan

Yeah, I think Aaron, at Investor Day we provided a guide or a model on gross margin. There was a floor of 38% and that’s over a five year period. As you know, there are market vagaries and ups and downs along the way. So 30% was the floor. We obviously were able to deliver very strong gross margins. This quarter we crossed a 40% threshold and that’s really driven by the value the customers see in the technology that we are providing them as well as very strong operational discipline and also pricing discipline that we’ve experienced within the market.

So as we continue to deliver total cost of ownership value to our customers, innovation capability whilst maintaining their operational discipline within the customers, within our operations. Sorry. We see gross margins continuing to remain strong.

operator

Thank you Aaron. Thank you. The next question comes from karl Ekerman with BNP Paribas. Please go ahead.

Karl Ackerman

Yes, thank you gentlemen for my first question. I know you have focused on technology transitions to drive exabyte demand from here. However, what are the hurdles for you to add manufacturing capacity? Is it driven by certain visibility you have on LTA’s or other things we should consider? Thank you.

Irving Tan

Thanks for the question Carl. A lot of our exabyte growth has really been driven by areal density improvement and technology improvement as we’ve highlighted. Our Ultra SMR technology which is unique to us, gives us a 20% capacity uplift over the standard recording media. So our ability to deliver incremental exabytes without having to put in capex in terms of more production units has been one of the big differentiators that we’ve been able to create. And so that’s an area that we continue to invest in in our R and D function to continue to drive greater aerodensity performance.

We’ve recently just launched our 26 and 32 TB industry leading platforms and we’ll bring out in the next few months our 28 and 36 terabyte platforms as well. So those increases through area density will continue to enable us to deliver exabyte growth without having to invest in capex for additional unit growth.

Ambrish Srivastava

Do you have a follow up, karl?

Karl Ackerman

I do. Ambrish, please. Thanks for that Ervin. I wanted to follow up on the comments you made with regard to LTA’s it sounds like demand for hyperscale is quite good and has strong visibility into 1H26. However, I was hoping you could provide a bit more color on the growth curve of private cloud and SMB customers. I’m curious whether you have seen perhaps any pull Forward in counter Q2 ahead of tariffs and secondarily how you think about the demand dynamic for those customers in the second half. Thank you.

Irving Tan

Thank you. We definitely do see opportunities, especially in sovereign clouds and private clouds going forward. Even in the age of AI where the primary beneficiaries have been the large hyperscalers, we also see growth sort of at the edge happening. So that’s an opportunity that we look to pursue going forward. As well as a growth driver, we haven’t seen any pull forwards. The linearity that we saw within Q3 was very consistent with the linearity that we’ve seen in the past. And then also as we look at sequential quarter on quarter growth, very consistent with what we’ve seen in the past.

So no real change in terms of pull ins both last quarter and what we see happening this quarter as well.

operator

Thank you Garb. Thank you. The next question comes from CJ Muse with Cantor Fitzgerald. Please go ahead.

C.J.Muse

Yeah, good morning. Thank you for taking the question. I guess to follow up on the prior question was hoping you could speak a bit about supply and what kind of exabyte growth you can get just from delivering higher capacity drives and I guess what is the time frame where you would potentially consider adding more capacity?

Irving Tan

Thanks for the question. CJ look, we feel confident right now with the forecast that we have and outlook that we see in terms of exabyte growth, we are able to deliver that through again the technology and innovation we’re delivering that provides us that capacity uplift without putting in any capacity. If there was any need to put in any capacity, it would probably be more on the hidden media side of the house, but we don’t anticipate any capacity investments in those areas for the near term.

Don Bennett

And CJ I’ll just add that in this uncertain environment we’re very tightly managing our capital expenditures and we continue to manage the business to the low end of our guidance range of 4% to 6%.

Ambrish Srivastava

Do you have a follow up? C.J.

Don Bennett

I do. Ambrish, thank you. I guess could you speak to gross margins obviously great results and guide Curious in terms of the drivers from here, is there still kind of a fixed cost benefit that would arise or is it really all about higher capacity drives delivering higher asp is that main driver or are there other factors that we should consider? Thanks so much. Yeah, cj, you hit it right. It’s really about the product technology that we’re delivering to our customers. We continue to add TCO benefit to them and we’re participating in that value that we’re bringing to the customers.

We’re tightly matching supply and demand. So we’re not going to see great impact from increased production over time because we’re, you know, we’re very tight in our supply allocation. So it’s really about delivering value to our customers through technology and continuing to drive leading edge products at scale.

operator

Thank you, cj. Thank you. The next question comes from Vamsi Mohan with Bank of America. Please go ahead.

Wamsi Mohan

Yes, thank you so much. Nice results here, Irving. If I heard right, you noted the. Potential for some enterprise slowdown driven by tariffs. I was curious, have you seen anything. In your order patterns to suggest that or is this sort of more anticipatory. In terms of what could happen if. A tariff regime became more onerous?

Irving Tan

Yeah, thanks for the question, Wamzi. It’s more the latter. We haven’t seen any slowdown just yet, but obviously there is demand uncertainty because of the tariffs. And obviously we’ve heard a lot of news coming out of enterprises and earnings over the last few days around customers being a bit more cautious in terms of spending and capital investments as well. So given that we’ve just factored that into the guide, but nothing untowards for the time being. That’s why we’ve just widened the range in terms of Our guide for Q4 follow up.

Ambrish Srivastava

Wamsi.

Wamsi Mohan

Yes, thanks, Ambrish. Maybe for Don, as you look into. The September quarter where you’re calling out the 14 weeks, any parameters you can help us think through in terms of revenue and OPEX into that quarter, please.

Don Bennett

Thank you. Yeah, so we guide one quarter at a time, but the reason I mentioned a 14 week is because obviously we’ll have 14 weeks of expenses. Typically our customers order on a quarterly basis, so the revenue will be. It’ll follow typical seasonal patterns, but at this point, we’re not guiding revenue for that quarter.

operator

Thank you, Wamzi. Thank you. The next question comes from Asean Merchant with Citigroup. Please go ahead.

Asiya Merchant

Great. Thank you for the question. And great quarter, by the way. Just, you know, there seems to be some concern like just around hyperscalers. I know your competitor talked about demand. Being very strong there as well and good visibility. Just anything on why you don’t think this could be double ordering anything as it relates to pricing negotiations that would. Limit the impact if indeed there was any double ordering.

Irving Tan

Thank you. Thanks for the question Aisha. We definitely don’t see any double ordering at this time. I think one of the key things is we are in a very tight supply demand environment. So even if there were double orders, I think we would be challenged to fulfill them right now. And I think more importantly the demand profile that we’re seeing, given the LTA visibility that we have all the way to middle of 2026 is we’re seeing order patterns very much follow the LTA demand. So there’s nothing really abnormal. It’s as Don mentioned, it follows very much both seasonality quarter to quarter and linearity within quarter as well.

So we don’t see any double ordering if anything on pricing. Obviously as we transition to new platforms, that always gives us an ability to deliver better TCO value to our customers and an opportunity for us to deliver greater pricing upside as well.

Ambrish Srivastava

Asia, did you have a follow up?

Asiya Merchant

Yes, sure. Thank you very much. On gross margins, it was better than. Expected in the current quarter that you reported. Why can’t gross margins do similar incremental step up? You are seeing better revenues in the. June quarter and then as you think. About the remainder of the calendar or the fiscal 26, should we continue to. Expect margin expansion from these levels? Thank you.

Irving Tan

Yeah, thanks for the question. I think the strong gross margins that we have delivered and also guided to is a reflection of the value that we bring to our customers, particularly through the technology enhancements that really gives them both better tco but also very fast time to value. And that’s what we continue to focus on. And if we are able to continue to deliver that innovation, continue to deliver that total cost of ownership benefit and giving them fast time to value, we don’t see any reason why gross margin could not expand going forward as well.

So that’s our focus. We don’t worry too much about the gross margin but continue to focus on delivering value to our customers and think the gross margin will flow from that.

operator

Thank you Asya. The next question comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani

Thanks a lot. I guess maybe just to start on the tariff dynamic. I realize you don’t have much of an impact on tariff right now, but as you’re signing these LTA’s into calendar 26, can you talk about if you sort of have tariff escalators embedded in them to ensure you can pass through. The cost of these to your customers? Or would that be a different set. Of discussions to be had once you know what the tariff scenario looks like.

Irving Tan

Yeah, thanks for the question. We are obviously working very closely with our customers as we all know. I think the situation is evolving on a daily basis and extremely fluid so it’s hard for us to really speculate what the outcome would be right now. As I mentioned in my prepared remarks and dawn emphasized as well, we have teams that are working across the company closely with our customers, really understand how we can mitigate the impacts of tariffs and also any supply disruptions in the near term and then in the long term we’re also evaluating with them what their supply chain shifts may be so that we can also align to that.

So we are also prepared both from agility, resiliency and long term readiness perspective to be able to work for our customers as they shift their supply chains to be able to best support them as well.

Ambrish Srivastava

Amit, did you have a follow up?

Amit Daryanani

I do. Thanks Amrish. Maybe just on the HAMR side, I. Think folks mentioned you’re working with two. Cloud customers at this point on hamr. Just any sense on when you expect these qualifications to happen and as you. Work towards them, should we think of. Some sort of upside bias to your R and D or OPEX investments through that process?

Irving Tan

Thank you. Thanks for the question. I think we laid it out very clearly at Investor Day. We are looking to start qualification in the second half of calendar 26 and then ramping up production at scale in the first half of calendar year 27. We have engineering samples with two large hyperscalers already today. We’re in close contact with them on the performance of those drives. We’re getting regular feedback from them. I would say so far the performance has been meeting the milestones that we both laid out and on a quarterly basis based on the feedback that we receive from them, we are delivering the next generation of enhancements on those drives.

So I would say we are comfortable with where we are. We’re on track with that roadmap that we laid out. At the same time we’re also preparing to introduce our new 28 terabytes and 36 terabyte EPMR platforms as well. So our whole focus is on ensuring that we really de risk transitions. Customers continue to deliver very scalable, predictable, reliable capacity points that gives them the fastest time to value.

operator

Thank you Amit. The next question comes from Tom O’Malley with Barclays. Please go ahead. Hey guys, thanks for taking my questions.

Tom O’Malley

I just wanted to focus in a little bit on the LTA so we had this period in memory on the NAND and DRAM side through the pandemic where in the end LTA’s were pretty. Much torn up and were largely hyperscalers. Advantage over suppliers so could you talk about what benefit you get from these LTA’s? Is this take or pay agreements? Are these in writing where you get some sort of compensation if your customers aren’t going to take these? Or is this just a framework that. You have with your customers that says. We will supply this much over this period of time? Can you just maybe dive into those a little bit? Because historically they really haven’t meant much.

Irving Tan

Yes, thanks for the question Tom. Well, first of all we don’t disclose the terms of the commercial contracts that we have, but I think it’s important to note there’s some quite significant structural changes that have happened within our business, I would say across the entire hard drive industry over the last year where a lot of the excess capacity and existing inventory within the supply chain has been removed from the system to really reset the entire supply base to where we think the right demand profile is going forward. And the LTA’s play a very critical role to ensure that we have that right supply demand balance.

And given the criticality that hard drives plays to the business of our hyperscale customers, I think as I’ve mentioned in my opening comments as well, they’ve been working very closely with us to ensure that sort of supply demand imbalance that we saw during COVID and for period post. Covid as well doesn’t reoccur. And I think we’re in a good place where the LTA’s really give us good visibility. We’re seeing pretty much demand. Stick to those LTA’s that we’ve outlined with them. And the LTA’s have moved from pretty much three to six months now to nine to 12 months as well.

So that’s giving us a lot more visibility to plan our supply chain very closely with our customers as well.

Ambrish Srivastava

Do you have a follow up Tom?

Tom O’Malley

Yeah, I just want to dive into the differences between the unit and pricing and the guide. So you had a pretty consistent track over the last couple of years of increased pricing. Is there any different type of dynamic we should think about? I know you guys don’t guide by more than 1/4 out, but looking into the June quarter units versus pricing, any commentary you have that get you to that guide?

Don Bennett

Sure. Tom. Yeah, we’ve had, as Irving mentioned, a structural change in our business. So the majority of our business today is in data centers or at the edge.

And so we’ve seen this continued progression of ASP. Currently we announced we’re at $179, which is up 23% year over year on an aggregate weighted average basis. So as that mix continues to move to cloud, we should see sustained increases in asp. Obviously it’ll move around quarter to quarter depending on what our client and consumer mix is because that typically is a lower capacity drive overall. So it’s impacted by segment mix, customer mix as well as we continue to drive TCO value to our customers. So we see price per unit stable or up in most cases as we deliver further technology into those accounts.

operator

Thank you, Tom. The next question comes from Steven Fox with Fox Advisors. Please go ahead. Hi, good morning.

Steven Fox

Thanks for taking my question. I guess first one, I just was curious if you could sort of give yourself a grade on the free cash flow for the quarter. Seemed pretty good to me at 78% of net income and how we can think about sort of what you’re measuring yourselves against in future quarters for free cash flow. And then I had a follow up.

Don Bennett

Thanks. Yeah, thanks for the question. So free cash flow, we don’t guide cash flow on a quarterly basis because there’s a lot of moving parts in cash flow. As you mentioned, we did have very strong both operating and free cash flow.

We are driving the business to operating profit and to free cash flow generation so that we can execute on our capital allocation priorities. And Irving laid those out in the script, but I’ll just repeat them. One is to reinvest in the business so deliver leading edge technology at scale to our customers. The second thing is to delever our balance sheet. And you’ve seen us do that with taken out $1.8 billion of our 2026 notes. So we’re now down below $4 billion of net debt on the balance sheet. And lastly is returning capital to our shareholders.

We started that with the initiation of the dividend and there will be more to come on that in the future.

Ambrish Srivastava

Do you have a follow up, Steve?

Steven Fox

Yeah, I was just curious when we think about non enterprise and non cloud markets, how you’re managing those against all the demand you’re seeing, do you feel like you’re de emphasizing those or figuring out a way to maybe more efficiently managing them? I’m just curious what we think about those markets over the next year. Thanks.

Irving Tan

Yeah, we’re definitely not de emphasizing them. They’re still a material part of our business. The supply chains for cloud and non cloud business are really quite discrete and separate and we sort of manage them independently. If anything, we are looking at opportunities to see whether we can sort of drive incremental growth in those areas.

operator

Thank you, Steve. Thank you. The next question comes from Mark Miller with Benchmark Company. Please go ahead.

Mark Miller

Congratulations on your first report. After the spin out, I’m just curious, can you tell us how many shares you Currently hold with SanDisk and have your plans changed because of the relatively low price of SanDisk about what you’re going to do with the shares?

Irving Tan

Yes, we own 19.9% of SanDisk. That’s the retained stake that we have. And as we’ve communicated in Investor Day, we will look to disposition those shares ideally over a 12 month period starting in February as part of our deleveraging strategy going forward.

Mark Miller

Thank you.

operator

Thank you. The next question comes from Harlan Soor with JP Morgan. Please go ahead.

Harlan Sur

Good morning. Thanks for taking my question and great. Job on the quarterly execution. You know, back in February the team outlined a three year nearly exabyte growth CAGR of around 2025% which is what some of the third party research firms are kind of forecasting for this calendar year. Which is also consistent, you know Irving, with the strong cloud data center capex spending trend that you talked about this year. Given your fairly good visibility, does your forward demand profile also suggest a low 20% exabyte growth profile in this calendar year or better?

Irving Tan

I think you’re in the ballpark.

Ambrish Srivastava

And Harlan, this is Abrish. Remember we had given a three to five year forecast. Right? Did you have a follow up, Harlan?

Harlan Sur

Yeah, no, I know, I know Ervin had given a three to five year forecast but that, that sort of 23%. Kind of aligns with some of what. The third party research guys are kind. Of forecasting for this calendar year. But appreciate the answer there. Also back in February, Irving, you did. Articulate about a 40% like current mix of your nearline capacity was ultra SMR based. As you look at your order book. And shipment plans, where do you expect. That mix to be? Either second half of this year or. Exiting this calendar year. And you’re driving obviously strong TCO benefits, you’re driving strong pricing power. But on a like for like basis capacity wise, which carries the higher gross. Margin profile, is it your CMR or Ultra SMR based drives?

Irving Tan

Well, I think we look to deliver value across the portfolio. So I think we see a pricing leverage across both our CMR and Ultra SMR platforms. Obviously our Ultra SMR platforms give us better ESPs per drive because of the additional capacity we deliver from also helps us with Capex. As I’ve highlighted earlier because of the technology benefit we have without having to put Capex into it. In terms of mix in any given quarter, it’s probably around 40 to 45% ratio. So it depends on, you know, because these are large hyperscalers and they have different deployment time frames and different hyperscalers use different technology.

So it can fluctuate from quarter to quarter. But somewhere between 40 to 45% in any given quarter is what we see.

operator

Thank you, Harlan. Thank you. The next question comes from Ananda Barua with Loop Capital. Please go ahead.

Ananda Baruah

Yeah, hey guys, thanks for taking the question and congrats on getting out the gate here as Newco, I guess. Yeah, Ambrose too, if I could. I guess the first one is really an architectural question. So as assuming Seagate continues to progress with Hammer and you guys continue to progress over the next call of 24 months with your legacy tech kind of pre getting to Hammer volume just as per the analyst day, does that create any new architectural realities inside the data center with what can be mixed and matched or how folks begin thinking about storage system stacks? Would love any context there if there’s anything.

And then I have a quick follow up. Thanks Ambrose.

Irving Tan

Yeah, look, I think there will be some architectural adjustments accordingly. Obviously at the highest level, the interplay between what’s on flash, what’s on hard drives and what’s on tape will continue to be there. As we’ve highlighted in investor day, hard drives again will be the predominant storage media with over 80% of bits stored on hard drives. We don’t anticipate that changing whether that’s, you know, EPMR or Hammer going forward. There are some rack level changes that will be required for the deployment of hamr, so you’re not going to be able to mix and match the drives that easily.

Similar to Ultra smr, There are some whole site software changes that are required as well, but these are very sophisticated customers. Their data center architects are very familiar with what’s needed to be done. And again, the success that we’ve had and the continued growth that we see in our Archer SMR portfolio is a great example of people really embracing the technology and really making and investing in the architectural changes within both their data center environment in their software stack to be able to take advantage of that benefit. And we see that going forward.

Ananda Baruah

Yeah, thanks. Maybe this is for Don, I guess. The March quarter gross margin. Am I correct in recalling that March quarter gross margin was actually originally anticipated to be impacted by product transition, yield dynamics, normal stuff. And if that did in fact occur, does that actually mean that the normal the structural margin is actually set up higher than what you guys reported?

Don Bennett

Well, I think we guided at 50 basis point improvement. We actually saw better yields in utilization and the ramp of our new product technology was faster than expected as we announced in our press release.

So we shipped over 800,000 units of our new 11disc platform and that’s being produced at very high quality, reliability and yields in our factory today. So that was one of the things that improved gross margin above guide.

operator

Thank you, Anand. The next question comes from Mehdi Hosseini with sig. Please go ahead.

Mehdi Hosseini

Yes, thanks for taking my question. Your main competitor recently announced their intention to acquire Intevac and I want to learn more how you’re thinking about procuring the key components for Hamr technology, especially as you engage with two hyperscalers that you highlighted in the prepared remarks. And I have a follow up.

Irving Tan

Yeah, first and foremost, I think the Intervac acquisition by our peer doesn’t have any impact on us because we have obviously two sputtering systems that we. So we have fisiliency within our technology supply chains as well. We’re obviously looking out for opportunities in which we can continue to capture even more value and accrete even more value to our products through potential acquisitions and vertical integration.

So we continue to keep a lookout for them in many cases. In terms of tool providers, we actually do feel, and our philosophy is that they actually benefit from actually servicing multiple customers because that’s how they can innovate better as well. But that’s generally our rule of thumb. But we’re constantly looking at opportunities to see how we can continue to vertically integrate and capture more value within our portfolio.

Ambrish Srivastava

Do you have a follow up, Mehdi?

Mehdi Hosseini

Yes, sir. And a follow up has to do with the CFO search, especially since you’re executing well right out of the gate and committing to dividend, cash dividend and to what extent. What’s the update on the CFO search and how should we think about the execution and search for the cfo?

Irving Tan

Yeah, thanks for the question. First and foremost, I really must thank Don for agreeing and stepping into the interim CFO role. He’s done a great job. As you can hear from the results as well. The search is progressing very well and will communicate in due course once we have a CFO identified.

operator

Thank you, Mehdi. Thank you. The next question comes from Team Akuri with ubs. Please go ahead.

Tim Arcur

Thanks a lot. Drive units were down from 13.5 million down to like 12.1 in March. So is 13.5 million, is that kind of like should we think about that as the high water mark for the number of drives you could produce in a quarter?

Irving Tan

I wouldn’t use that as a watermark. I think it really depends on mix. It also depends on the various capacities that we are delivering. As Don mentioned, the teams continue to do a great job on really pushing the boundaries of yield and output that we can within the, the supply environment that we have. So again it fluctuates really based on yield and the mix of products that we have.

Don Bennett

And I’ll just add there’s you know, segment mix, client and consumer was down for the quarter. As we ramp into seasonal periods with prime day and back to school and Christmas, we may see some of that volume come back in the client consumer space as well and we have capacity there to expand.

Ambrish Srivastava

Did you have a follow up Tim?

Tim Arcur

I do, yeah. Just back on this question about these LTA’s. I mean these same large customers have similar deals for memory and they routinely overstate what they need. So why would they not be doing that with you as well? So I mean I certainly understand that demand is good but. But for this stuff that is booking out to next year, why would they not, if they need two drives, why would they not tell you that they need three? And if they didn’t take the drive, are you going to enforce a cancellation policy on them?

Irving Tan

Thanks. Yeah, look, I think we’ve got into a good healthy relationship with our customers. They have understood that in order for the hard drive industry to be healthy, for us to continue to be able to be profitable and invest in innovation that they benefit from, from a TCO advantage, it’s in both our best interest to provide as best as possible the demand outlook given the long lead times, especially when it comes to nearline drives. So that’s something we’ve clearly gotten visibility and in fact for the two LTA’s that we have into the first half of calendar 26th, we actually have firm POS associated with them as well.

I guess the question is do we put in a clause around take or pay? To be frank, we are not a fan of that because all you’re doing is creating problems down the road. And so we rather work with our customers to smooth out demand and make sure we continue to work with them to have the right and appropriate supply demand balance to sustain a profitable business that we can continue to invest in innovation for them going forward.

operator

Thank you Tim. The next question comes from Vijay. Rakesh from Mizoho. Please go ahead.

Vijay Rakesh

Yeah. Hey, just a quick question. On the hammer side, when you look at the two hyperscale customers you mentioned, is that are you still looking at ramping those like in calendar 26, like second half 26? I think as you mentioned on the

Irving Tan

Yeah. So as per the roadmap we’ve communicated which has been shared with our customers for quite a while at analyst day was when we made it more public to the general population. But that roadmap has been done in partnership for customers for quite a while. Just to reiterate what we shared, we’re looking to start qualifications in the second half of calendar 26th with high volume production ramp in the first half of calendar year 27.

Vijay Rakesh

Got it. And then on the tariff side, just a quick clarification. When you look at shipping into China, is that going from your Malaysia facilities or do you ship hard drives into China and likewise in the us how much of that is, you know, you have production here versus coming in from Malaysia, etc. If you can give a little bit. Of color around that.

Irving Tan

Thanks. Yeah. We have production facilities throughout Asia. So none of our products that we ship into the US is coming from China. Most of it’s coming in from Southeast Asia. Products going to China are not subject to any tariffs as of April 11th. Products that we ship into the US are also not subject to any tariffs. Obviously that situation is evolving and fluid so we stay very close to it. Thank you, Vijay. Thanks.

operator

Thank you. The last question comes from Krish Shankar from TD Cohen. Please go ahead.

Krish Sankar

Hey guys, this is Eddie for Krish. How should the investors think about the. Impact from rare earth export control from China? I think historically you guys were able to recycle some of these metals, but at some point it did impact your margins. I just wonder if down the road. It’S an area investors should be thinking about.

Irving Tan

Yeah, thanks for the question and it’s a good one. We over the last few years have really been on a supply chain resiliency program where we have been able to develop alternate sources of supply for both rare earth and precious minerals as well. So we don’t anticipate there being any material impact as a result of some of those controls.

Ambrish Srivastava

Did you have a follow up? Sure. Thanks, Ervin. And as you guys ramp the 11 disk platform, how should we think about the margin impact? Because my understanding is as you add disks, it may reduce the gross margin. Accretion or do you think it’s at a point where it’s mature enough, where. Margins would be unaffected by that ramp. Thank you.

Don Bennett

Yeah, so the margin accretion is included in our guidance. So we factor the ramp of the new technology into guidance.

Irving Tan

Yeah, maybe just to add on to Don’s comment, you know, we were already ahead of our ramp plans in Q3. As I mentioned in my prepared remarks, we shipped over 800,000 units of that new 11. This platform will be shipping well over a million units in Q4. We are seeing very high yields and productivity coming out of those platforms. So I guess to your question, they are actually margin accretive as opposed to being dilutive.

operator

Thank you. Thank you, operator. This concludes our question and answer session. I would like to turn the conference back over to Mr. Irving Tan, Chief Executive Officer for any closing remarks.

Irving Tan

Well, first, thank you all very much for joining us today. And it’s very exciting to have our first quarter out as a standalone HDD company. As you can see from the results in the guide, we’re executing well on our strategy that we’ve laid out at Investor Day. Really being focused on our customers, driving leading edge innovation, being extremely disciplined on operational excellence, and having rigorous financial discipline and a very capital friendly return policy this quarter and the guide that we have shared I think truly reflects that. And so we ask that we thank you for your ongoing interest in WDC and I look forward to catching up with all of you in due course.

operator

This concludes today’s conference call. Thank you for joining us. You may now disconnect.