Western Digital (WDC) This fall 2022 Earnings Name Transcript


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Western Digital (WDC -5.87%)
This fall 2022 Earnings Name
Aug 05, 2022, 8:30 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Contributors

Ready Remarks:

Operator

Good day, and thanks for standing by. Welcome to Western Digital’s fiscal fourth quarter 2022 convention Name. [Operator instructions] I’ll now flip the decision over to Mr. Peter Andrew, vp, FP&A, and investor relations.

You could start.

Peter AndrewVice President, Investor Relations

Thanks, and good morning, everybody. Becoming a member of me at present are David Goeckeler, chief government officer; and Wissam Jabre, chief monetary officer. Earlier than we start, let me remind everybody that at present’s dialogue accommodates forward-looking statements, together with product portfolio expectations, enterprise plans and efficiency, demand and market tendencies, and monetary outlook primarily based on administration’s present assumptions and expectations and, as such, does embrace dangers and uncertainties. We assume no obligation to replace these statements.

Please discuss with our most up-to-date monetary report on Kind 10-Okay filed with the SEC for extra data on the dangers and uncertainties that might trigger precise outcomes to vary materially. We may also make references to non-GAAP monetary measures at present. Reconciliations between the non-GAAP and comparable GAAP monetary measures are included within the press launch and different supplies which can be being posted within the investor relations part of our web site. With that, I will now flip the decision over to David for introductory remarks.

David GoeckelerChief Govt Officer

Thanks, Peter. Good morning, everybody, and thanks for becoming a member of the decision to debate our fourth quarter and financial 2022 outcomes. I am happy that the Western Digital group executed nicely and delivered stable leads to mild of the continuing macro and geopolitical dynamics. We reported fourth quarter income of $4.5 billion, non-GAAP gross margin of 32%, and non-GAAP earnings per share of $1.78, all inside the steerage ranges we supplied in April.

Fiscal yr 2022 income totaled $18.8 billion, and we reported non-GAAP earnings per share of $8.22. This compares to income of $16.9 billion and non-GAAP earnings per share of $4.55 in fiscal yr 2021. We grew income 11%. And EPS elevated 81%, demonstrating progress in unlocking the earnings potential of our enterprise.

Along with robust monetary efficiency, fiscal yr 2022 was an indicator yr for Western Digital from an innovation, product growth, and execution perspective. Particularly, we regained innovation management with the introduction of a number of merchandise and applied sciences for the cloud. In Might, we introduced the 26-terabyte drive, leveraging our OptiNAND and UltraSMR applied sciences, in addition to ePMR. Impressively, this implies we have practically doubled drive capability relative to after I joined Western Digital simply over two years in the past.

In Flash, we expanded adoption of our NVMe enterprise SSD from one cloud titan to 3, in addition to qualification at a number of enterprise OEM suppliers. From a company perspective, we now have bolstered the corporate’s government administration group, additional strengthening our means to drive operational excellence, innovation, and disciplined monetary administration. On high of all of those achievements, we lowered debt by $1.7 billion and attained an investment-grade company score, inserting Western Digital on a stable monetary basis. Earlier than I leap into extra element on the quarter, I wished to supply an replace on our strategic evaluation.

As you understand, two months in the past, we introduced that we’re reviewing potential strategic options geared toward additional optimizing long-term worth for our shareholders. The chief committee of the board, which I lead, continues to supervise the evaluation and Elliott Administration is taking part alongside us underneath a nondisclosure settlement, together with different events. We’re evaluating a spread of options, together with choices for separating our market-leading Flash and HDD franchises. We’re transferring expeditiously, however this work will take time.

We is not going to be answering any questions concerning the strategic evaluation at present, given the continuing nature and confidentiality of the method. We are going to present updates sooner or later as applicable. Now, I will present updates on our HDD and Flash companies. Throughout the fiscal fourth quarter, robust demand from our cloud prospects for our newest technology energy-assisted drives drove near-record near-line shipments of 111 exabytes.

Complete HDD income declined sequentially due primarily to shopper and shopper HDD demand. We commenced business cargo of a lot of merchandise incorporating our OptiNAND expertise. Along with shipments of our 20- terabyte and 22-terabyte CMR drives, {qualifications} of our 26-terabyte SMR drive are underway, as we famous at our product launch occasion in Might. This SMR-enabled drive permits 20% larger capability than our CMR variants, providing considerably higher TCO for our cloud prospects and additional highlighting the performance-driven advantages of the innovation that Western Digital is packing into a tough drive.

Lastly, we’re ramping a second cloud buyer with SMR expertise this quarter and stay on monitor to steer the {industry}’s transition to SMR-based drives for the cloud. We’re very assured in our multiyear product roadmap for capability enterprise drives, which mix ePMR, OptiNAND, UltraSMR, and triple-stage actuators to ship a cutting-edge portfolio of drives in business volumes at all kinds of capability factors. We additionally proceed to spend money on HAMR and the commercialization of this expertise alongside our different HDD applied sciences which can be main the {industry}. The breadth and depth of this portfolio strongly positions us to be the supplier of selection for the most important and most complicated knowledge facilities on the planet.

Constructing on the experience cultivated over many years of bringing to market industry-leading applied sciences, we’re dedicated to leveraging our improvements to proceed driving enterprise leads to capability enterprise into the long run. Turning to Flash. Income grew sequentially on an enhancing product combine and elevated flash provide. Development in Flash through the quarter got here primarily from enterprise SSD, with income greater than doubling sequentially.

Gaming is one other key development marketplace for us, the place we proceed to display the power of our shopper SSD franchise, with exabyte cargo rising practically 70% yr over yr. We’ve a number one place in gaming with our WD_BLACK model being acknowledged globally for innovation, efficiency, and high quality. The newest instance of that is our WD_BLACK SN-850 NVMe SSD product licensed for Sony PS5 sport consoles, which permits gamers to develop the high-speed storage capability of their PS5 console and permits them to retailer and play each PS5 and PS4 video games instantly from the drive. On the expertise entrance, BiCS5 represented about half of our Flash income within the June quarter, up from 46% within the earlier quarter.

We’re getting ready to ramp BiCS6 late this calendar yr and into 2023. Primarily based on circuit underneath array structure, BiCS6 permits many thrilling high-performance merchandise for 5G telephones, SSDs, and QLC flash. Let me now supply just a few observations on the demand atmosphere. Within the cloud finish market, we skilled power within the fiscal fourth quarter as provide constraints at Western Digital and our finish prospects began to ease.

General, demand from our cloud prospects has been constantly robust, and we anticipate this power in cloud to hold into the second half of calendar yr 2022. We imagine the accelerated digital transformation will proceed to drive cloud development and imagine we’re on monitor to generate about half of our income from this market by fiscal yr 2025. Exterior of cloud, our expectations for calendar yr 2022 demand development have moderated since our final earnings name. Because the fiscal fourth quarter progressed, we noticed shopper spending soften, impacting each retail flash and HDD demand.

This weak spot has migrated to the buyer PC finish market as we enter the second half of the calendar yr. In shopper, the market typically anticipate PC shipments to say no roughly 10% in calendar yr 2022. We’re seeing our PC OEM prospects aggressively rightsize their stock to replicate present demand circumstances, which is able to influence our enterprise on this market within the second half of the calendar yr. After going by that correction, we anticipate a extra regular stream of enterprise going ahead as we imagine PCs will proceed to satisfy broader use circumstances as the inspiration of the more and more frequent hybrid enterprise, driving unit demand above pre-pandemic ranges in richer SSD content material.

All of those PC market dynamics are accelerating the ultimate section of the shift of shopper gadgets from HDD to flash expertise. Consequently, the shopper HDD market is now declining at an accelerated fee relative to the interval earlier than the onset of the pandemic. To replicate this actuality, we are actually taking aggressive motion to restructure our HDD manufacturing footprint to replicate this market dynamic. In cell, expectations for smartphone models have come down in current months, led primarily by lowered demand in China.

Business analysts anticipate the smartphone {industry} unit quantity to lower by a mid-single-digit proportion yr over yr in calendar 2022. Whereas we’re well-positioned in supplying flash reminiscence for 5G smartphones, we’re additionally seeing our largest prospects aggressively resetting their inventories for these merchandise. We anticipate the stock correction to be primarily influence our fiscal first quarter and return to market demand for the rest of the fiscal yr. In shopper, we now have a premium model and an ideal franchise within the market.

Particularly, we now have developed an enviable place and wonderful relationships with main brick-and-mortar retailers and on-line retailers throughout the globe, together with Greatest Purchase and Goal within the U.S., MSH Group in Europe, JD.com in China, and Officeworks in Australia. On account of these robust relationships, our spectacular scale, product breadth, and trusted model will lead most shopper storage product classes. Whereas macroeconomic components and COVID measures have impacted shopper demand within the close to time period, our prospects’ loyalty and desire for the efficiency and high quality of our options are key differentiators, which is able to place Western Digital nicely, for the upcoming back-to-school and vacation seasons. Earlier than turning the decision over to Wissam, I wish to go away you with just a few takeaways.

First, on the investor day, we laid out the case, the place the world of ever-increasing clever gadgets powered by the cloud is creating an astonishing quantity of knowledge, of which solely a small proportion is saved. Our conviction stays robust, and our view on close to double-digit income development stays intact. Over the previous a number of years, the storage market has entered an period of accelerated development, led by the power of the cloud market, which drove HDD income development for Western Digital and the {industry}. In Flash, capital investments for incremental NAND bit development have gotten costlier, leading to a extra disciplined funding throughout the {industry}.

At Western Digital, our long-standing and rising relationships with hyperscale and OEM prospects internationally, coupled with our management in commercializing improvements for capability enterprise arduous drives and momentum with NVMe enterprise SSD for knowledge middle, has made us a trusted associate. This mixture of fast demand development in storage, expertise management, and product momentum supply Western Digital alternatives for monetary outperformance. With that, let me now flip the decision over to Wissam, who will talk about our fiscal fourth quarter outcomes and supply an outlook for the fiscal first quarter.

Wissam JabreChief Monetary Officer

Thanks, David, and good morning, everybody. As David talked about, general outcomes for the fiscal fourth quarter have been in step with our expectations, reflecting the resilience and agility of our enterprise mannequin, in opposition to such a dynamic macro atmosphere. Complete income for the quarter was 4.5 billion, up 3% sequentially and down 8% yr over yr. Non-GAAP earnings per share was $1.78, inside the steerage vary we supplied in April.

For the total fiscal yr 2022, income was $18.8 billion, up 11% from fiscal 2021. Non-GAAP gross margin expanded 4.3 proportion factors and non-GAAP working margin elevated 5.7 proportion factors, as we proactively managed our bills, leading to non-GAAP EPS of $8.22, up 81% from final yr. Turning to our finish markets. For the fiscal fourth quarter, cloud represented 46% of complete income at 2.1 billion, up 18% sequentially and 5% from a yr in the past.

Inside Cloud, Western Digital’s continued success in main the {industry} transition to energy-assisted arduous drives drove the expansion. The continued ramp of our 18-terabyte and 20-terabyte drives drove a 7% year-over-year improve in nearline HDD income. Sequentially, nearline bit shipments elevated 9% to 111 exabytes. In Flash, enterprise SSD income greater than doubled sequentially and was up 38% year-over-year.

The shopper finish market represented 36% of complete income at 1.6 billion, down 5% sequentially and 14% yr over yr. On each a sequential and year-over-year foundation, shopper HDD led the income decline, whereas Flash income was roughly flat. Shopper represented 18% of income at $0.8 billion, down 9% sequentially and 23% yr over yr. On a sequential foundation, the income decline was primarily resulting from decrease HDD retail shipments.

The year-over-year lower was resulting from broad-based decline in retail merchandise throughout HDD and Flash. For the total fiscal yr 2022, Cloud income elevated 40% yr over yr, led by a 38% improve in nearline HDD. Flash product income for enterprise SSD functions greater than doubled yr over yr. Shopper income decreased 3% yr over yr as development in Flash was offset by a 30% lower in shopper HDD.

Shopper HDD for PCs and notebooks represents simply mid-single-digit proportion of complete HDD income exiting the fiscal yr. Lastly, shopper income decreased 6% for the yr, all attributed to a decline in retail HDD. Turning now to income by phase. Within the fiscal fourth quarter, we reported Flash income of $2.4 billion, up 7% sequentially and down 1% yr over yr.

Sequentially, Flash ASPs have been up 2% on a blended foundation and up barely on a like-for-like foundation. Flash bit shipments elevated 6% sequentially and 11% yr over yr. HDD income of two.1 billion was flat sequentially and down 15% yr over yr. Sequentially, complete HDD exabyte shipments elevated 1%, whereas the common worth per HDD elevated by 19% to $120 as our combine continues to transition towards the cloud.

On a year-over-year foundation, complete HDD exabyte shipments decreased by 10%, and common worth per unit elevated by 24%. As we transfer to prices and bills, my feedback will likely be associated to non-GAAP outcomes except acknowledged in any other case. We proceed to exert disciplined monetary administration to drive higher outcomes. Gross margin for the fourth quarter was 32.3%, up 60 foundation factors sequentially and down 60 foundation factors yr over yr.

Our Flash gross margin was 35.9%, up 30 foundation factors sequentially and 40 foundation factors year-over-year. On each a sequential and year-over-year foundation, development in enterprise SSD for knowledge middle functions led the development in gross margin. Our HDD gross margin was 28.2%, up 50 foundation factors sequentially and down 210 foundation factors yr over yr. Working bills of 760 million have been under our steerage vary as we proceed to prudently handle our bills.

Working revenue was 702 million, representing an 8% improve from the prior quarter and a 15% lower yr over yr. Our tax fee was 11% for each the fiscal fourth quarter and financial yr 2022. Earnings per share was $1.78, in comparison with $1.65 within the prior quarter and $2.16 within the year-ago quarter. Working money stream for the fourth quarter was 295 million, and free money stream was an outflow of 97 million.

Working money stream was impacted by income linearity. The ramp-back to regular manufacturing output on the flash three way partnership, timing of part deliveries to our factories, and COVID-related management measures in China contributed to a back-end-loaded quarter. Money, capital expenditures, which embrace the acquisition of property, plant, and gear, and exercise associated to our Flash joint ventures on our money stream assertion, represented a money outflow of $392 million within the fiscal fourth quarter. We stay disciplined in investing in manufacturing capability.

Gross capex and money capex for the fiscal yr 2022 have been $2.7 billion and $1.2 billion, respectively, under our expectation, as we actively managed our capital investments. We made a $150 million scheduled and discretionary debt compensation. Our gross debt excellent was 7.1 billion on the finish of the fiscal fourth quarter. We ended the quarter with 2.3 billion of complete money and money equivalents.

Our trailing 12 months adjusted EBITDA on the finish of the fourth quarter as outlined in our credit score settlement was $4.8 billion, leading to a gross leverage ratio of 1.5 instances in comparison with 2.4 instances a yr in the past. As a reminder, our credit score settlement consists of $0.9 billion in depreciation add-back related to the Flash Ventures. This quantity shouldn’t be mirrored within the money stream assertion. Please discuss with our earnings presentation on the investor relations web site for additional particulars.

I will now present our view of each HDD and Flash companies for the fiscal first quarter in addition to feedback on a number of key gadgets for fiscal yr 2023. For the fiscal first quarter, we anticipate Flash to steer the sequential income decline as our buyer’s rightsize their stock. We anticipate a comparatively modest decline in general HDD income, primarily pushed by shopper and shopper, with gross margin comparatively flat. As we glance towards fiscal yr 2023, we anticipate money capital expenditures to be in step with our goal mannequin, inside the vary of 8% to 10% of complete income.

Complete gross capital expenditures are anticipated to be roughly $3.2 billion. Concerning Flash capex, we stay enthusiastic about our expertise highway map regardless of what’s clearly a unstable interval within the reminiscence {industry}. As we now have mentioned on prior calls, BiCS6 is a extra capital-intensive expertise node that can require a rise in capital expenditures. Our capex outlook for fiscal yr 2023 displays our dedication to expertise management and can speed up our path to leapfrog from BiCS6 to BiCS+ within the subsequent a number of years.

I’m additionally happy to share that the Flash JV Fab 7 manufacturing facility at Yokkaichi plant has been authorised to obtain a subsidy of as much as 92.9 billion yen from the Japanese authorities, additional demonstrating the strategic significance of what’s the world’s largest NAND manufacturing facility. Given the macro atmosphere, we proceed to actively handle our capital expenditures and provide. We’re in dialogue with our three way partnership associate to regulate capital investments and align our manufacturing development with demand. In HDD, we are going to proceed to focus our capital spending primarily in heads and media as a way to meet the long run development in cloud demand.

Offsetting these investments, we’re taking aggressive actions to restructure our shopper HDD manufacturing footprint. We attempt to optimize free money stream technology in response to the macroeconomic dynamics. For our fiscal first quarter, our non-GAAP steerage is as follows. We anticipate income to be within the vary of three.6 billion to three.8 billion.

We anticipate gross margin to be between 27.5% and 29.5%. We anticipate working bills to be between 760 million and 780 million. Curiosity and different bills are anticipated to be roughly 70 million. Our tax fee is predicted to be between 28% and 30% within the first quarter and for fiscal yr 2023.

This improve is because of the tax legislation adjustments that turned efficient for our fiscal yr 2023, requiring the capitalization of sure R&D bills that have been beforehand eligible for speedy deduction from taxable revenue. These adjustments are anticipated to end in an instantaneous improve in our tax fee of roughly 12 proportion factors, which is able to then lower regularly over time. We anticipate earnings per share to be between $0.35 and $0.65 within the first quarter, assuming roughly 319 million totally diluted shares excellent. I will now flip the decision again over to David.

David GoeckelerChief Govt Officer

Thanks, Wissam. Let me simply wrap up, after which we’ll open up for questions. In abstract, we proceed to imagine that we now have constructed the fitting basis for long-term development. We’ve reignited our innovation, established self-discipline in spending and funding and stay constant in deleveraging our stability sheet.

The innovation engine that drives TCO advantages and worth to our prospects, the a number of channels to ship our merchandise to market, and the big and rising storage markets put us in an ideal place to capitalize on the chance offered by the proliferation of clever gadgets and quickly accelerating knowledge creation. Whereas segments of our finish markets are actually going by an aggressive stock adjustment as provide chain impacts of the pandemic begin to ease and the macro financial system softens, secular demand for storage continues to be robust and underpins the digital transformation that continues throughout all industries. I additionally wish to thank our staff for his or her arduous work through the fiscal yr. Regardless of ongoing geopolitical and macro challenges, our group labored collectively to ship robust monetary efficiency for Western Digital.

I’m pleased with what this group has completed and excited to see what we are able to do collectively within the subsequent fiscal yr. All proper, Peter, with that, let’s open it up for Q&A.

Questions & Solutions:

Operator

[Operator instructions] And at present’s first query comes from C.J. Muse with Evercore ISI. Please go forward.

C.J. MuseEvercore ISI — Analyst

Yeah, good morning. Thanks for taking the query. I assume, first off, simply wish to make clear right here. When it comes to what’s driving the weak spot, is it secure to say that it is totally shopper shopper and that on the hyperscale and enterprise facet you are not seeing any adjustments? And as a part of that, as you consider this stock correction on the buyer shopper facet, how lengthy do you assume the period will final? Is that this a one-quarter phenomenon? Too early to inform? Would love to listen to your ideas there.

David GoeckelerChief Govt Officer

Hello C.J., good morning. Yeah, I’d say, you have just about bought it proper. The one factor I’d add to that on the cloud facet is, we’re seeing some stock digestion in China cloud. The U.S.

hyperscalers proceed to chug alongside. However particularly within the PC OEMs is the place we noticed it first, a really sharp stock correction actually within the present quarter, taking down their demand considerably to reset their stock for what’s the actuality for the variety of unit gross sales. So, you understand, proper now, we predict that could be a comparatively quick time frame. Is it one-quarter, two-quarter? We’ll see that as we undergo the quarter, but it surely’s positively very, very sharp within the quarter we’re in.

After which within the smartphone market, we’re seeing it as nicely. As a matter of reality, it is even growing inside the quarter. Simply a few weeks in the past, we had certainly one of our greatest prospects take down their forecast within the quarter by over $150 million. So — and it is all just like the message, very robust message we’re getting instantly from our prospects, that is simply resetting stock.

So, you understand, that one, we anticipate to be a one-quarter phenomena. I feel in a bigger market, we’ll see over the subsequent couple of quarters. I’ll say that within the shopper and channel area, given our broad attain and the place we function around the globe within the shopper enterprise, we’re beginning to see some stabilization of these markets. Our channel enterprise, in the event you have a look at sell-through for the primary 4 weeks of the quarter, has been on plan.

And even some areas like Europe, we’re beginning to see some power. And I’d say shopper is just about in the identical place, beginning to stabilize, not nice development but, however that a part of the market seems higher than it did, as an example, two months in the past. And it is actually the OEMs which can be actually in a fast and vital correction of stock in addition to, as I stated, among the cloud enterprise in China.

C.J. MuseEvercore ISI — Analyst

Very useful. And only a follow-up query on the NAND facet of the home. You talked about rising cap depth at BiCS6 and what’s subsequent. However on the identical time, it sounds such as you’re speaking about tempering investments on the JV.

So, might you stroll by the way you’re interested by ahead capex given the adjustments you are seeing in the long run markets?

David GoeckelerChief Govt Officer

Yeah, I will make just a few feedback and Wissam can remark as nicely. However we have all the time identified that BiCS6 was going to be a extra capital-intensive node. I imply, once more, we’re coming off of a BiCS5, which is essentially the most capital environment friendly node within the historical past of the — our roadmap, in order that’s not shocking. And, you understand, we’re driving by that transition.

We really feel excellent concerning the node. It is simply it is a extra capital intensive word. Now, I’ll word, as we talked extensively about our investor day, our capital depth normally per bit is the perfect within the {industry}, and that is one thing we actually try for in our roadmap. So, once we’re speaking a couple of extra capital intensive node, keep in mind, that is a relative difficulty.

We’re nonetheless in the perfect place so far as capital per extra bit, and that is a really, very massive focus of ours. Now, the extra macro query is, we’re clearly having conversations throughout the JV about resetting our bit development normally, impartial of node, given the fact of what the demand atmosphere is. General, bit demand is coming down. We’re in an oversupply atmosphere, it is a demand-driven oversupply, it isn’t a provide pushed oversupply.

However we’ll reset. We’re taking a look at our capex. And we’ll make changes given what the present state of affairs is. Wissam?

Wissam JabreChief Monetary Officer

Yeah. If I can add, C.J. , the — we’re concentrating on our money capex per our goal mannequin, which is 8% to 10% of income. However, after all, because the macro circumstances develop, if we have to modify to that, we are going to handle dynamically.

Operator

Thanks. And girls and gents, our subsequent query at present comes from Aaron Rakers at Wells Fargo. Please go forward.

Aaron RakersWells Fargo Securities — Analyst

Yeah. Thanks guys. Good morning. So, I’ve bought a few questions, if I can as nicely.

I simply — I wished to unpack just a little bit extra the implied Flash income expectation you are making this quarter. With arduous disk drive income being flat roughly sequentially, it seems such as you’re speaking a couple of excessive 20% or 30% sequential decline within the NAND income this quarter, the Flash income. With that in thoughts, I imply, how are you guys interested by, you understand, bit shift versus what’s your assumption round pricing baked into that expectation? I am simply attempting to know, you understand, is that this extra pricing versus bit shipped? And is that this actually sort of — do you assume that this information represents a backside right here?

David GoeckelerChief Govt Officer

Yeah. I feel the way in which to consider it, as I stated earlier, it is sort of a demand-driven state of affairs the place we’re simply seeing are greatest buyer, and actually not all of our prospects throughout the PC area, simply resetting stock and actually dropping their demand within the quarter, to allow them to reset their stock. So, that results in pricing strain and quantity strain, so it is each of them. And so, as we work by the quarter they usually get their stock to the place they want it to, then I feel we’ll see among the quantity come again as we work by this.

, for a few of our prospects, I’ve extra confidence that it is a one-quarter change. However different ones, I feel it could take just a little longer than that. So, we’ll see — we’ll have extra data as we work by the quarter. And we’ll be speaking about that by the quarter within the applicable boards.

As I stated earlier than, I’ll level out, I imply, it is a very dynamic market. I imply that is — a few of this has occurred within the quarter. So, it’s extremely tough to certain this, however we predict we’re very — we’re assured within the information, do not get me flawed. However I am comfortable we guided once we did as a result of the — it is a very, very dynamic atmosphere on the market.

However I feel our prospects are aggressively managing their stock. And my sense is that they’ll get by it in a fairly expeditious trend. Like I stated within the ready remarks, we have sort of the provision chain is loosening up. We’re getting extra elements.

I feel our prospects are getting extra elements. Possibly that is giving them extra confidence in how they handle their very own stock. And on the identical time, we’re going right into a softer financial system. So, all people is in a giant reset and it is particularly impacting, you understand, the Flash enterprise, to your level.

The HDD enterprise nonetheless get constant robust development out of the hyperscalers within the U.S., and really feel very, excellent concerning the portfolio place there and what we’ll drive all through the fiscal yr.

Aaron RakersWells Fargo Securities — Analyst

OK. And as a fast follow-up, simply interested by the Flash enterprise just a little bit extra. These final couple of quarters, and appreciating that blend is an element, however these final couple of quarters, it seems such as you’ve seen just a little little bit of a slowing of your means to sort of drive price down within the Flash enterprise. As we take into consideration BiCS6, how are you interested by the relative price down construction of BiCS6 relative to BiCS5? Thanks.

David GoeckelerChief Govt Officer

Yeah. I imply the — as we have talked about price downs, we goal 15%. We all the time know there’s going to be some quarters under, some above. Hopefully, there’s extra on the favorable facet, and I feel that is been the historical past, however we have hit a few quarters the place that is not the case.

However in the event you have a look at our fiscal yr, we delivered proper on the 15%, I feel, even a tick over. Is that proper, Wissam?

Wissam JabreChief Monetary Officer

Sure, that is right, David. And one of many issues to bear in mind, Aaron, is we did have the fab contamination within the third fiscal quarter. And so for this reason — that is partly why we have not seen essentially the identical cadence of price discount within the final couple of quarters of the fiscal 2022.

David GoeckelerChief Govt Officer

So, Aaron, we really feel actually good concerning the BiCS6 transition and what that is going to carry. And I feel you may see within the upcoming quarters, the prices will get again to the place we anticipate it to be. , we explicitly drive our roadmap round this quantity. We explicitly drive the nodal transition and the roadmap growth round ensuring we are able to ship the 15% year-over-year.

And we’re more than happy that we simply delivered it once more within the final fiscal yr.

Operator

Thanks. And our subsequent query at present comes from Joe Moore of Morgan Stanley. Please go forward.

Joe MooreMorgan Stanley — Analyst

Nice. Thanks. I ponder in the event you might handle — I imply, I did not hear a particular reply to quantity versus costs in NAND in Q3, however I assume what’s your stock stability going to appear to be on the finish of Q3? And I do know up to now, you guys have been prepared to take fab utilization changes to maintain that quantity underneath management. Have you considered that on this atmosphere?

David GoeckelerChief Govt Officer

Yeah. I will make just a few feedback. I will let Wissam make just a few feedback. And we do not information to that stage of specificity, however they’re each roughly down about the identical.

Wissam JabreChief Monetary Officer

Sure. And that is the place the numbers form up, roughly among the many identical.

Joe MooreMorgan Stanley — Analyst

And your stock stability?

Wissam JabreChief Monetary Officer

Effectively, you understand, provided that that is principally demand-driven, we anticipate stock to be — to develop a bit this quarter as, you understand, the provision is larger than the — the place the demand is. Nevertheless, you understand, as we stated within the ready remarks, we’re in discussions with our JV companions to take applicable motion if — to the extent we are able to to restrict that.

Operator

Thanks. Our subsequent query at present comes from Patrick Ho with Stifel. Please go forward.

Patrick HoStifel Monetary Corp. — Analyst

Thanks very a lot. Possibly simply as a follow-up on the HDD facet, taking it on the constructive finish, Dave, possibly in the event you might give just a little shade in your confidence stage on the sustainability of the U.S. hyperscalers’ spending tendencies. What provides you the boldness that this may a minimum of carry by the second half of this yr and possibly into the early elements of 2023?

David GoeckelerChief Govt Officer

Yeah, a few issues. One is the message we get from them — clearly, we now have a really, very shut relationship and discuss each day. And so the message we get in planning for the second half continues to be a powerful and constant message. , we have an ideal portfolio round 22 and 26.

And SMR, you understand, I feel one of many massive highlights of final quarter on the HDD facet is we bought a second hyperscaler that totally certified SMR. And with our place with UltraSMR getting 20% extra out of a drive places us in an ideal place for that transition. So, it continues to be a really, very constant message from them about how they plan to eat the product within the second half and going into subsequent yr. And like I stated, from the portfolio perspective, we have a number of new {qualifications} underway on 22-terabytes CMR, 26-terabyte SMR.

And as we undergo the fiscal yr, you may see all of these merchandise begin to ramp and be adopted at quantity.

Patrick HoStifel Monetary Corp. — Analyst

Nice. That is useful. And possibly as my follow-up query, by way of following up out of your analyst day the place you probably did put a giant give attention to the NAND flash transferring to the SSD marketplace for the cloud phase itself as nicely. Do you see this, you understand, shift starting with BiCS6, or is that this extra of a BiCS+ sort of endeavor the place will probably be future generations the place you see the most important shift towards SSD NAND?

David GoeckelerChief Govt Officer

No. I imply, the shift is going on now. I imply, we simply delivered 1 / 4 of 105% sequential development on our enterprise SSD portfolio. Now, that is a very robust outcome.

However we’re very assured that as we work by the subsequent couple of years, we’ll drive our share of enterprise SSD from the 8% to 16%. We have got an excellent plan for that. It is an ideal market to take part in. Like I stated, we broke by with the {qualifications} and the success has been robust.

Now, will probably be lumpy, not each quarter goes to be up. However, you understand, the trajectory over the three-year time span is we now have a number of confidence, we’ll drive that to the 16% share in FY 2025.

Operator

[Operator instructions] Right now’s subsequent query comes from Wamsi Mohan with Financial institution of America. Please go forward.

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Sure. Thanks. Good morning. You are mainly transport nicely under demand ranges, given the stock correction if you have a look at the September quarter.

Are you able to possibly assist quantify that and assist us assume by if the digestion that you simply’re calling for is accomplished, as an example, in September, you understand, what’s roughly the fitting base we needs to be pondering of to drive any sequential development off of that in — for the December quarter?

David GoeckelerChief Govt Officer

Effectively, I imply, for — within the PC market, we predict the market is — you understand, there was consensus earlier within the yr of possibly 325 million models. We expect that is going to land extra round 305 million models. So, that offers you a way of the correction that is taking place aggressively proper now. And we noticed — I feel we talked about smartphone demand being down single digits, mid single digits on a unit proportion.

So, I feel, Wamsi, we’re simply going by this very sharp step-down proper now the place all people resets their stock, particularly as they’ve — I personally assume, as they’ve extra confidence, that the stock — the provision chain is loosening up. It is not utterly loosened up. There’s nonetheless tight areas. However normally, we’re capable of get extra upsides on merchandise that — elements that even a few quarters in the past have been very tight.

So, I feel all people is sort of resetting for that world they usually’re resetting going right into a softer shopper atmosphere. So, I feel that offers you just a little bit to bracket how we’re interested by it.

Operator

Thanks. And our subsequent query at present comes from Sidney Ho with Deutsche Financial institution. Please go forward.

Sidney HoDeutsche Financial institution — Analyst

Thanks for taking my query. So, taking a look at your Flash margins, they’re nonetheless at a fairly respectable stage within the June quarter, however, clearly, that can come down within the September quarter. However with margins coming down into, as an example, the subsequent few quarters given the place the pricing is heading, do you assume your margins will get again to that final trough in 2019 when it was under 20%? Clearly, pricing is out of your management, however are there issues in your management that you’ll make the combination trough be higher than the final one? Thanks.

David GoeckelerChief Govt Officer

Yeah, I imply I feel that we have accomplished an amazing quantity of labor on the portfolio within the final couple of years, and I feel that is goes to point out up. And the way in which we take into consideration through-cycle margin, we talked quite a bit about this on the — our investor day, we’re managing for through-cycle margin. We wish to drive the upper lows and better highs. And we predict we’re arrange nicely to do this, given the {qualifications} throughout enterprise SSD.

Our very robust place in gaming, that is been an ideal marketplace for us and a development space simply over the past yr and a half. So, sure, I feel it is — I feel we go into this case with quite a bit higher portfolio and quite a bit higher range, much more locations to place our provide. And we predict that is going to result in a greater outcome.

Operator

Thanks. And our subsequent query at present comes from Toshiya Hari with Goldman Sachs. Please go forward.

Toshiya HariGoldman Sachs — Analyst

Good morning. Thanks for taking the query. I had a multipart query in your HDD enterprise, primarily round utilization charges and capex and the restructuring plan that you simply talked about. When it comes to utilization charges, your nearest competitor talked about making some changes within the close to time period.

Is that one thing that you simply guys are interested by or doing in HDD? And on the capex facet, what’s contemplated in your fiscal ’23 outlook, once more, because it pertains to your arduous drive enterprise? After which on the restructuring, I hoped you would develop on what precisely you are doing, how a lot capability is coming on-line over the subsequent — you understand, within the medium to long-term? Thanks.

David GoeckelerChief Govt Officer

Thanks, Toshiya. So, let me simply add just a little context and, Wissam, give just a little extra element on capex and the way we’re interested by this. So, as we talked about that, you understand, the shopper HDD market has been attention-grabbing over the past couple of years. We went into the pandemic and we noticed a giant surge in demand for shopper arduous drives.

Simply normally, we noticed a giant surge in demand for PCs. That has circled dramatically. And what we’re seeing proper now’s that enterprise is down over 50% yr over yr. So, we’re seeing — you understand, it is returning to pre-pandemic trajectory, and even happening sooner than that now so far as the transition to flash occurs.

That is an excellent transition for us, as a result of we now have such an ideal portfolio in shopper SSD. So, we have been enjoying that transition for years. However it actually requires us to reset our — how a lot shopper HDD capability we now have within the system, and that is what we’re aggressively enterprise proper now.

Wissam JabreChief Monetary Officer

Sure. So, on that, Toshiya, on the restructuring, we’re mainly, as David stated, we’re taking — we’re lowering our manufacturing footprint on the shopper facet. And the expectation is this could profit us from a few areas, just a little bit on the capex facet, but in addition by way of the price of items offered. And so, if there’s any underutilization that was related to that or would have been related to that a part of the manufacturing capability, it is being mainly managed out.

And so that ought to assist us have the ability to — as we form of stated, by way of the gross margin transition for the HDD enterprise from the fourth quarter to the primary quarter, we’re anticipating it to be roughly flat. And so, primarily based on that, we should always in all probability see even additional enhancements within the following quarters.

David GoeckelerChief Govt Officer

On capex?

Wissam JabreChief Monetary Officer

And on capex, we sometimes do not escape the capex between HDD and Flash. However as I stated, we do plan to remain inside our goal mannequin of the 8% to 10% of income. And in the event you recall at investor day, I did say that the — we sometimes — we want to get to a degree the place for the HDD enterprise we goal 4% to six%, possibly larger than this, within the close to time period just because we’re investing within the capability enterprise facet of the — of the manufacturing of the home. The one factor although to bear in mind is, we’re protecting a detailed eye to the provision demand state of affairs, and we don’t plan to be investing or constructing overcapacity quick time period to have the ability to keep that provide demand stability.

David GoeckelerChief Govt Officer

So, Toshiya, only a few extra feedback on this so we totally paint the image. So, you are actually beginning to see this, what we talked about at our analyst day. In heads and media, we nonetheless have to take a position. I imply there’s — we want — these massive drives have a number of heads in them, so we’re nonetheless investing in heads.

Media, we transition to capability enterprise. However we simply have the manufacturing means to provide hundreds of thousands and hundreds of thousands of shopper drives that we do not want anymore. So, that is the half we’re resetting and to get that price out of the system.

Operator

Thanks. And, girls and gents, our subsequent query at present comes from Tom O’Malley of Barclays. Please go forward.

Tom O’MalleyBarclays — Analyst

Hey, good morning, guys, and thanks for taking my query. I simply wished to have a look at the general enterprise. Clearly, you have talked concerning the transferring elements into September. However might you discuss if you assume you may see the whole high line begin to recuperate? I do know, there’s a number of transferring elements.

I do know, there’s not a ton of visibility proper now. However clearly, from a internet revenue professional forma earnings perspective, do you guys see yourselves making losses within the coming quarters? And simply in the event you do, are you able to discuss concerning the depth through which you are sort of planning for that primarily based on, you understand, recessionary situation? Simply any shade on the place you may see this backside from a complete firm perspective. Thanks.

David GoeckelerChief Govt Officer

So first off, we do not see losses, no.

Wissam JabreChief Monetary Officer

We do not see losses.

David GoeckelerChief Govt Officer

So, look, you hit on it. It is simply very dynamic proper now. Let me paint the image and Wissam can say possibly just a little bit concerning the out quarters. We’re seeing — I’d say, if we went again a number of quarters, we began speaking about it very early this yr.

The patron began softening actually in Europe when the struggle broke out, in China with the lockdowns and that progressed all through the primary half of the yr. , the buyer enterprise is one thing that normally is comfortable. It is seasonally the weakest a part of the yr. April and Might, calendar Q2 is an attention-grabbing quarter for that enterprise as a result of it all the time begins off in April and Might and comes on robust in June.

That basically did not occur. It stayed comfortable. After which we began to see the unfold into shopper — shoppers buying PCs and now smartphones. And so, now, we’re seeing the OEMs and the PC and the smartphone enterprise, as we talked about, very aggressively reset their stock ranges.

On the identical time, we’re beginning to see the buyer in our channel enterprise stabilize. So, we’re beginning to see the early indicators of the buyer enterprise stabilizing, the channel enterprise, stabilizing. If I have a look at sell-through for the primary a part of the quarter, it was to plan. Promote-in, it is nonetheless just a little bit behind as a result of no person desires to construct stock proper now.

However sell-through has stabilized. And in some areas, like I stated, in Europe, we’re even seeing Q-over-Q development within the channel. So, all of it will depend on how we get — how briskly we get by the stock correction on the OEM facet. After which simply to cap that off, within the cloud, we proceed to see very constant demand from the U.S.

hyperscalers and we see some digestion in China cloud. And we anticipate that digestion in China cloud to work its manner by this quarter. Usually, China has been, I feel the phrase I’d say, has been quiet throughout all of the markets. There’s not a number of visibility.

, we’ll see how that comes again all through the quarter. However that offers you just a little little bit of sort of the evolution of how we have seen this and sort of how we see it going ahead, as I stated. Though the PC and the OEMs are going by — PC and smartphone OEMs are going by very, very sharp correction, we’re seeing different elements of the market begin to stabilize. So, I do not know, Wissam, you wish to add that up? We do not actually forecast the out quarters, however something to say about that?

Wissam JabreChief Monetary Officer

Yeah. I imply we do not forecast the out quarters. We do not see losses. The one — the couple of factors I’d add to that, David, is we clearly are — with this down cycle, we’re ranging from a a lot, a lot stronger monetary place.

We have accomplished quite a bit over the past couple of years to strengthen our monetary place. We additionally launched a really thrilling set of merchandise final quarter. So, we now have actually a really robust portfolio. We’ve good additions to the management group.

And so, we’re in a significantly better place to handle by this.

Operator

Thanks. And our subsequent query at present comes from Timothy Acuri with UBS. Please go forward.

Tim ArcuriUBS — Analyst

Thanks quite a bit. I additionally had a two-part query. I assume the primary query is on HDD gross margin. And you are still working a few hundred foundation factors decrease than, you understand, your peer.

And I am questioning in the event you can form of unpack that. Is that this associated to the shopper capability that you simply’re attempting to take out? After which on the NAND facet, you answered a previous query saying that — I feel you are implying that the decline is roughly equal between bits and pricing. And I simply wish to make clear, is that what you meant to say? As a result of if that is the case, then bits are actually — nicely, I imply, each bits and pricing are down greater than your friends. So, I am simply questioning in the event you can form of handicap why your NAND enterprise is performing worse than your friends.

Thanks.

David GoeckelerChief Govt Officer

So, on HDD, I feel the hole in gross margin is now 100 foundation factors. However initially, I be ok with the quarter we had on gross margin. We anticipated — nicely, let’s put it this manner. We’re capable of get the gross margins up in HDD just a little sooner than we thought.

Once we talked about final quarter, we thought they might begin going up sequentially going into the second half, and we have been capable of pull a few of that again into calendar Q2, our fiscal This fall. That was resulting from a lot of issues. One is pricing continues to be fairly benign to even up just a little bit, which is one thing we have been — I feel the {industry} has been striving for, once more, given all of the innovation we’re bringing to market. After which we have been capable of work some on the associated fee facet as nicely.

Us versus our rivals, keep in mind, all people has a distinct combine. They usually — you understand, there are some markets, particularly the efficiency enterprise markets that Western Digital exited a lot of years in the past, and that is a declining however margin-rich a part of the HDD market that we do not take part in. However normally, from a margin perspective, on HDD, I get again to innovation, the portfolio, the 22-terabyte drive, the 26-terabyte UltraSMR drives, you understand, these are in a novel place within the {industry}. And, you understand, we now have a plan as we transfer by FY 2023.

These will turn into greater and greater and, actually, the predominant a part of the portfolio and what we’re transport as we transfer by the yr. So, I feel that units us up in a really robust place to have a extremely good TCO dialog with our prospects as we proceed to drive innovation. Second a part of your query was in Flash. Once more, it is a very dynamic market.

Issues have modified even within the final week and half to 2 weeks. So, I feel that we’re at a distinct level of once we’re forecasting and we’re rolling in all the pieces we now have heard from our prospects. As I stated, we now have prospects which have very, very vital quantities of demand which can be altering inside the quarter. So, we put a information round that.

Clearly, we’ll work to make that higher, however that is the fact of the place the enterprise is at present.

Operator

Thanks. And, girls and gents, at present’s closing query comes from Mehdi Hosseini with SIG. Please go forward.

Mehdi HosseiniSusquehanna Worldwide Group — Analyst

Thanks. Thanks for squeezing me in. David, I simply wished to observe as much as the final remark. You highlighted earlier within the name that you simply stay comfy with nearline cloud demand, particularly in North America.

And then you definitely simply stated that demand could be very unstable. What provides you confidence that the North American cloud service suppliers undergo stock digestion later this yr and into subsequent yr? Is there something that you would be able to share with us? And I’ve a follow-up.

David GoeckelerChief Govt Officer

I feel it is simply our deep relationship with them and the dialog we now have. We even have multi-quarter agreements with a number of these prospects, which provides us extra visibility into what their plans are. We’re, clearly, in deep conversations with them about our next-generation merchandise, which could be very thrilling. We’re capable of carry a market-leading capability factors to them throughout CMR and SMR.

So, once more, 22-terabyte CMR is a novel product within the {industry}. After which we now have 26-terabyte SMR, which is, once more, a novel product within the {industry}. No one else can go to these capability factors. And so, we really feel excellent about the place the portfolio is.

These are being adopted and certified throughout our buyer base. I feel the power of the place we’re at within the TCO equation we carry to our prospects, in addition to the visibility that we see and given the connection provides us confidence as we transfer by the second half of the yr.

Operator

Thanks. And girls and gents, this concludes our question-and-answer session. I might like to show the convention again over to the administration group for any closing remarks.

David GoeckelerChief Govt Officer

All proper. Thanks, everybody. We respect you spending time with us right here early on a Friday morning. Thanks for all the nice questions, and we’ll look ahead to speaking to you all through the quarter.

Operator

[Operator signoff]

Length: 0 minutes

Name individuals:

Peter AndrewVice President, Investor Relations

David GoeckelerChief Govt Officer

Wissam JabreChief Monetary Officer

C.J. MuseEvercore ISI — Analyst

Aaron RakersWells Fargo Securities — Analyst

Joe MooreMorgan Stanley — Analyst

Patrick HoStifel Monetary Corp. — Analyst

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Sidney HoDeutsche Financial institution — Analyst

Toshiya HariGoldman Sachs — Analyst

Tom O’MalleyBarclays — Analyst

Tim ArcuriUBS — Analyst

Mehdi HosseiniSusquehanna Worldwide Group — Analyst

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