Western Digital Corp. 2027 Q1 Earnings Call

You may begin. Thank you, and good afternoon, everyone.

Joining me today are Irving Tan, WD's Chief Executive Officer, and Kris Sennesael, 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, business plans and performance, ongoing market trends, and future financial results. We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. Unless stated otherwise, today's remarks reflect non-GAAP results. Reconciliations to GAAP results are available in our press release and at investor.wdc.com. With that, I will now turn the call over to Irving.

Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Q1 marked a strong start to fiscal 2027, reflecting solid execution across the business and results ahead of our expectations. Revenue grew 55% year-over-year, while gross and operating margins expanded meaningfully to 58% and 49%, respectively. EPS grew 161% year-over-year, and we generated $1.4 billion in free cash flow. These results reflect ongoing robust customer demand, operational discipline, and successful execution of our product and technology roadmap. Demand remains strong across our customer base and end markets. Our visibility is extending further, and with it, our conviction in the durability of demand for data storage on HDDs.

We are increasingly seeing storage demand grow beyond our core cloud and hyperscale customers into enterprise environments and into newer end markets, such as NeoCloud and AI Frontier labs, resulting in a larger and more diversified customer base. Our customers are making longer-term infrastructure investments and continue to extend their planning horizons into the next decade. As the value of data is increasing, they are investing with confidence to support their growing needs for data storage, with the vast majority of the data being stored on HDDs. We see this firsthand in our customer conversations and in broader industry research. A recent IDC survey of more than 750 companies across several countries found that organizations are storing more data, retaining it for longer periods, and increasingly putting archive data back to work.

At the core of these trends is continued data growth, fueled by the ongoing expansion of cloud environments and the increasing storage demands from AI. While much of the conversation around AI focuses on compute, we believe the more enduring opportunity is in data. AI is fundamentally a data system. Every workload creates more data, and that data must be stored, managed, and accessed in a scalable and economical manner. As AI adoption continues to expand across industries worldwide, data creation and storage requirements are expanding with it. Inference and agentic AI systems are generating significant volumes of logs, model outputs, and system performance data that must be stored and retained. Physical AI applications such as robotics, factory automation, and autonomous vehicles are further accelerating this trend with AI-generated content and video workloads that are creating and retaining data at scale.

Let me now turn to our industry-leading technology and innovative products. We are executing well against our technology roadmap and remain on track transitioning our customers to higher capacity drives. As we ramp production across our next generation ePMR and HAMR platforms, we expect our exabyte shipments to continue to increase through fiscal 2027 and beyond. Volume production of our latest ePMR platform, delivering up to 40 terabytes of capacity, is off to a strong start. Customer adoption is progressing ahead of prior transitions, and we expect this platform to represent close to 30% of our nearline shipments by the second quarter and 50% by the third quarter of fiscal 2027.

On our first generation HAMR product, we are on track to finish qualifications with two hyperscale customers in the first quarter of calendar year 2027 and are on schedule to begin volume shipments in the first half of calendar year 2027. We also expect to begin qualifications with two additional customers during the first half of calendar year 2027, further expanding customer validation and supporting broader adoption of our HAMR product. As AI workloads scale, customers not only need more capacity but also greater performance from their storage infrastructure. We are expanding the role of HDDs within cloud and AI infrastructure through innovations such as our high-bandwidth drive and dual pivot technology. By combining the economics of HDDs with significantly higher levels of performance, we believe this technology can address a broader range of existing and emerging workloads.

We are currently sampling our high-bandwidth drives with multiple customers, and the feedback has been positive, with clear use cases and value creation identified. In summary, WD is executing with momentum. We are deepening customer relationships, extending visibility, and broadening the customer base, while our product and technology roadmap delivers precisely what customers need. As data grows in volume and value across cloud, AI, and emerging workloads, we have high confidence in the durability of long-term storage demand. With that, let me turn it over to Kris.

Thank you, Irving. Our first quarter results demonstrate ongoing strength of our business in combination with outstanding execution on all fronts. Customer demand remains healthy, and our visibility is extending further out. Our product transitions are progressing well, resulting in higher capacity products, solid year-over-year growth in exabyte shipped, and improved pricing, all driving another quarter of strong financial performance. During the first quarter of fiscal year 2027, revenue was $4.4 billion, up 55% year-over-year, driven by strong exabyte growth and a favorable pricing environment. We delivered 248 exabytes in the quarter, up 22% year-over-year and up 8% sequentially.

Nearline products continue to drive growth as we execute on our product transitions, starting with the ramp of our latest generation ePMR drives with capacities up to 40 terabytes, and followed by the introduction of our HAMR technology in the first half of calendar year 2027, setting us up for stronger year-over-year growth in exabyte shipments. Cloud revenue was $3.9 billion, representing 88% of total revenue and increasing 54% year-over-year, driven by durable demand for our high-capacity Nearline HDDs, including the initial ramp of our latest ePMR platform. In addition, continued pricing strength reflects the value and TCO advantages we deliver to our customers. Client represented 7% of total revenue at $320 million, up 119% year-over-year. Consumer represented 5% of revenue at $193 million, up 19% year-over-year.

Gross margin expanded to 58.1%, up 1,420 basis points year-over-year, with incremental year-over-year gross margin above 80%. Gross margin reflects a mix shift towards higher capacity drives, disciplined operational execution, and a favorable pricing environment across our portfolio, as we continue to deliver greater value to our customers. Year-over-year growth and average price per terabyte further increased to 28% versus the high teens we reported in the prior quarter. Operating expenses were $391 million, or approximately 9% of revenue, a 130 basis point sequential improvement, demonstrating continuing operating leverage in the model. Operating income of $2.2 billion increased 152% year-over-year, driven by strong revenue growth, expanding gross margin, and operating leverage. Operating margin expanded to 49.1% in the quarter, demonstrating our ability to continue to drive sustainably higher levels of profitability in the business.

Interest and other expenses were $10 million, and our effective tax rate was 17%. Taking into account a diluted share count of 383 million shares, EPS was $4.64, an increase of 161% year-over-year. We generated $1.4 billion in free cash flow during the quarter and returned $1.1 billion to shareholders through share repurchases and dividends, reflecting confidence in the durability of free cash flow generation and our ability to drive long-term shareholder value. Supported by the strength of the free cash flow generation and consistent with our capital allocation framework, the board has approved a 17% increase in the quarterly cash dividend from $0.15 per share to $0.175 per share, which will be paid on December 17, 2026, to shareholders of record on December 4, 2026.

Turning to the balance sheet, during the quarter, we took additional steps to simplify our capital structure by substantially reducing our remaining 2028 convertible notes. Our balance sheet remains strong, and we ended the quarter with a net cash position of half a billion. Let me now turn to the outlook for the second quarter of fiscal 2027. We continue to operate in an environment of strong demand and favorable pricing in all our end markets. For the second quarter of fiscal 2027, we expect revenue to be $5.1 billion ± $100 million. At the midpoint, this reflects a 69% increase year-over-year. Gross margin is expected to be in the range of 60%-61% as we continue to benefit from the shift to higher capacity drives, along with a strong pricing environment.