Western Digital Corp. 2026 Q4 Earnings Call

Good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer, and Chris Senecal, WD's 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 obligation to update these statements. Please refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis unless stated otherwise.

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 at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. I will now turn the call over to Irving for introductory remarks.

Irving? Thanks, Ambrish. Good afternoon, everyone.

Thank you for joining us today. Let me begin by reflecting on our first full fiscal year of WD as a focused pure-play HDD company. We drove strong year-over-year revenue growth of 36% while expanding our gross and operating margins significantly. We doubled EPS, generated $3.5 billion in free cash flow, and strengthened our balance sheet to a net positive cash position while continuing to make significant capital returns to shareholders. These strong financial results are an outcome of meeting our customers' growing storage demand by focusing on innovation and driving operational excellence across the global WD organization. We enter fiscal year 2027 with robust customer demand, increased visibility, and continued confidence in the durability of demand, as well as our ability to service this demand with our industry-leading products and technology roadmap.

Demand for storage is being driven both by AI as well as by core cloud services. Within the AI infrastructure market, there is a key dynamic taking shape. While compute cycles can be reused, data compounds. Training and inference workloads share and reuse compute resources over time. Yet the data generated by these workloads, including model inputs, outputs, logs, and retained context, continues to accumulate. As AI usage scales, this creates a growing need for storage infrastructure capable of economically storing and managing these massive data sets. The inflection we have discussed in the past, from AI training to inference to agentic AI, has only become more pronounced. Training models create significant initial data requirements, but inference generates and retains data continuously.

Today, the largest AI platforms process tens of billions of tokens per minute and billions of prompts per day, creating a rapidly expanding body of data that must be stored, managed, and accessed over time. Recent disclosures show token volumes growing severalfold year-over-year, underscoring the pace at which inference is scaling. Meanwhile, AI is moving rapidly from merely answering questions to agentic AI that does the work, coordinating tasks, accessing data, and operating continuously across multi-step workflows. This transition creates a fundamentally more data-intensive workload and one that is increasingly persistent rather than transient. The storage implications are significant. Agents generate data at every step of a workflow, increasing both the volume of data created and the amount that must be stored over time. This is why we continue to view agentic AI as a structural and step function driver of capacity-oriented storage demand.

Beyond inference and agentic AI, we are also seeing the emergence of physical AI, autonomous vehicles, robotics, and industrial automation systems and humanoids, where the volume of real-world data needed to train these systems is insufficient, thereby requiring the generation and storage of synthetic data sets, creating another driver of storage demand. Infrastructure investment is important, but it's only the beginning. Training creates the initial data foundation. Inference generates data continuously. Agentic systems multiply the volume and frequency of that data. Physical AI accelerates the cycle further. Together, these trends create a more durable demand environment for data storage, driven not just by building AI infrastructure, but by the continuous creation and retention of data once that infrastructure is deployed. As AI workloads move from deployment to sustained use, storage demand becomes less about the one-time infrastructure build cycle and more about the compounding of data.

That is the underlying secular demand growth driver for our business. Today, roughly 80% of data stored in a hyperscale data center resides on hard disk drives. That is likely to continue. That reflects what HDDs do exceptionally well, delivering the scale, economics, and power efficiency required for long retention, large-scale data storage. Let me now turn to why these secular growth drivers play to WD's strengths. WD's robust technology roadmap is based on the industry-leading areal density per platter, with a focus on innovation to meet our customers' capacity needs at scale, along with our growing ability to meet their requirements by providing cost-effective storage solutions in additional layers of the AI storage stack. We are on track to ship our 44 terabyte HAMR product in the first half of calendar 2027.

Customer feedback on the qualification process continues to be very positive, with the capacity, performance, and reliability of our drives exceeding customer expectations. For our next generation 40 terabyte ePMR drives, we commenced shipments in our June quarter, and are now entering volume production with two customers. We are currently ramping our UltraSMR technology with a third major customer. We expect that UltraSMR will make up around 60% of our nearline exabyte shipments as we exit fiscal 2027. Since our last update, we've continued to broaden our customer engagement and qualification pipeline with additional hyperscale and cloud customers advancing through qualification and deployment planning. Beyond capacity, we are also extending innovation into new layers of the AI storage stack. We are making progress on improving drive performance with our high bandwidth drives and are now sampling with five customers.

We are targeting up to eight times the throughput of today's drives without the corresponding increase in power draw. Exactly the kind of performance AI workloads require. In closing, the opportunity in front of us is real, and at WD, we are well-positioned to capture it. Data creation isn't slowing. It's accelerating. As the value of data grows, so does the infrastructure storage requirements to store, manage, and protect it. That's a durable long-term tailwind for our business, and we intend to fully capitalize on it. Our technology roadmap is strong, our customer relationships are deep, and we have the operational discipline to translate this opportunity into sustained earnings and free cash flow growth and long-term shareholder value. With that, let me hand it over to Chris to walk you through the financials and our outlook for Q1.

Thank you, Irving, and good afternoon, everyone. Fiscal 2026 was an outstanding year for WD, driven by broadening demand, deepening customer engagements, and disciplined execution. We grew revenue 36% to $12.9 billion, while expanding gross margins 970 basis points to 49.1%, and increasing operating margins by 1,290 basis points to 37.3%. We more than doubled earnings per share to $10.22, and we generated $3.5 billion of free cash flow, delivering a robust 27% free cash flow margin. We returned $3.1 billion to shareholders, reflecting our confidence in the durability of the business and our commitment to long-term value creation. Let me now turn to our fourth quarter of fiscal 2026. Revenue came in at $3.75 billion, up 44% year-over-year on the back of strong exabyte growth and favorable pricing dynamics. Earnings per share grew 109% year-over-year to $3.56.

Revenue, gross margin, and EPS all came in at or above the high end of the guidance range. We delivered 231 exabytes to our customers, up 22% year-over-year. Nearline continued to drive our exabyte growth, complemented by solid non-nearline exabyte growth in the quarter. We began shipping the next generation ePMR drives with capacities up to 40 terabyte in our fiscal fourth quarter and expect a strong ramp over the next few quarters. Cloud represented 89% of total revenue at $3.3 billion, up 43% year-over-year, as demand for our high-capacity nearline products was strong with a favorable pricing environment. Client represented 6% of total revenue at $225 million, up 61% year-over-year. Consumer represented 5% of revenue at $187 million, up 38% year-over-year. Both segments benefited from improved pricing.

Gross margin expanded 1,310 basis points year-over-year to 54.4%, resulting in strong year-over-year incremental gross margin. This was driven by a mix shift towards higher capacity drives, favorable pricing across our portfolio, and disciplined execution in our manufacturing operations. During the quarter, the blended average year-over-year price increase per terabyte improved from high single digits last quarter to high teens this quarter, reflecting the impact of our predictable and sustainable pricing strategy as we deliver greater value to our customers. Operating expenses were $382 million or approximately 10% of revenue, a 170 basis point sequential improvement, demonstrating further operating leverage in the model. Strong top-line growth, expanding gross margins, and leverage in the model drove operating income to $1.66 billion, up 126% year-over-year, translating into a durable operating margin of 44.2%, up 1,610 basis points year-over-year.