Western Digital Corporation (WDC) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reflects strong financial performance with improved operating income and gross margins, backed by strategic product innovation and robust cash flow. The Q&A session reinforced positive sentiment with emphasis on gross margin improvements, shareholder returns, and potential revenue growth from AI deployment. While there were some declines in consumer revenue, these were not deemed significant by analysts. The company's proactive approach in technology and customer demand visibility further supports a positive outlook. Despite some lack of clarity in ASP data, the overall guidance and strategic initiatives indicate a positive stock price movement.

Key Financial Performance

Revenue $2.6 billion, up 30% year-over-year. The increase was driven by strong nearline shipments and the ramp of 26 terabytes CMR and 32-terabyte UltraSMR drives.

Non-GAAP Gross Margin 41.3%, improved by 610 basis points year-over-year. The improvement reflects a continued mix shift towards higher capacity drives and tight cost control in manufacturing and supply chain.

Non-GAAP Earnings Per Share (EPS) $1.66, up 22% sequentially. The increase was due to strong revenue performance and cost management.

Free Cash Flow $675 million. This was supported by strong operating cash flow of $746 million and capital expenditures of $71 million.

Debt Reduction $2.6 billion reduction in debt. This was achieved through cash on hand and a debt-for-equity exchange, strengthening the balance sheet and achieving a net leverage target range of 1 to 1.5x.

Cloud Revenue $2.3 billion, up 36% year-over-year. The growth was driven by strong demand for higher capacity nearline product portfolio.

Client Revenue $140 million, up 2% year-over-year. The increase was modest and not elaborated further.

Consumer Revenue $136 million, down 12% year-over-year. The decline was not elaborated further.

Operating Expenses $345 million, slightly above guidance due to higher variable compensation on stronger-than-expected results.

Operating Income $732 million, translating into an operating margin of 28.1%. This was supported by improved gross margins and revenue growth.

Interest and Other Expenses $52 million, a substantial reduction from the prior quarter due to debt repayment.

Cash and Cash Equivalents $2.1 billion at the end of the fiscal fourth quarter, contributing to total liquidity of $3.4 billion.

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Operating Highlights

ePMR and UltraSMR drives: Shipments of the latest generation ePMR drives with capacity up to 26 terabytes CMR and 32 terabyte UltraSMR more than doubled quarter-over-quarter, exceeding 1.7 million units in the June quarter. These drives had one of the shortest qualification and ramp cycles in the company's history.

HAMR drives: Progress in aero density improvement and reliability for HAMR drives is ahead of internal milestones. Transition from testing to qualification stage is planned, with a ramp expected in the first half of calendar year 2027.

Next-generation ePMR drives: Qualification is expected to complete in the first half of calendar year 2026, ensuring a smooth transition to HAMR.

AI-driven demand: AI is driving demand for storage solutions, particularly for unstructured data. The company's platform business is gaining traction with infrastructure providers and native AI companies.

Hyperscale customers: Firm purchase orders or long-term agreements are in place with all top 5 hyperscale customers for fiscal year 2026.

Financial performance: Revenue for Q4 2025 was $2.6 billion, up 30% year-over-year. Free cash flow was $675 million, and gross margin improved to 41.3%.

Debt reduction: Debt was reduced by $2.6 billion during the quarter, achieving a net leverage target range of 1 to 1.5x.

Shareholder returns: A $2 billion share repurchase program was authorized, and $150 million worth of shares were repurchased in Q4 2025. A quarterly cash dividend program was also initiated.

Focus on HDD technology: The company is strategically focused on hard disk drive technology, leveraging its leadership position to meet evolving customer needs.

AI-driven data economy: The company is positioning itself to succeed in the AI-driven data economy by addressing growing storage needs and maintaining strong customer trust.

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Risk or Challenges

Tariff-related uncertainties: The broader environment continues to be marked with uncertainty related to tariffs, which could impact the company's operations and financial performance.

Debt management: Although the company has reduced its debt significantly, the remaining gross debt of $4.7 billion could pose financial risks if market conditions worsen or if cash flow generation declines.

Supply chain and manufacturing costs: Tight cost control in manufacturing and supply chain is critical to maintaining gross margins. Any disruptions or cost increases could adversely affect profitability.

Customer concentration risk: The company has firm purchase orders or long-term agreements with its top 5 hyperscale customers, but heavy reliance on a few customers could pose risks if demand from these customers declines.

Technological transition risks: The transition from ePMR to HAMR technology involves risks related to reliability, manufacturing yield, and customer adoption, which could impact the company's strategic objectives.

Economic uncertainties: Broader economic uncertainties could affect customer demand and overall market conditions, impacting revenue and profitability.

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Guidance & Outlook

Revenue Expectations: For the fiscal first quarter of 2026, Western Digital anticipates revenue to be $2.7 billion, plus/minus $100 million, reflecting a growth of approximately 22% year-over-year.

Gross Margin Projections: Gross margin is expected to be between 41% and 42% for the fiscal first quarter of 2026.

Operating Expenses: Operating expenses are projected to increase sequentially to a range of $370 million to $380 million, including an additional week of expenses as Q1 will be a 14-week quarter.

Earnings Per Share (EPS): EPS is expected to be $1.54 plus/minus $0.15 for the fiscal first quarter of 2026.

Product Development and Launch Timelines: The next generation of ePMR drives will complete qualification in the first half of calendar year 2026, while HAMR drives are on track for a ramp in the first half of calendar year 2027.

Market Trends and Demand: Strong demand for high-capacity drives driven by AI and related tailwinds is expected to continue. The company has firm purchase orders or long-term agreements with all top 5 hyperscale customers covering the entire fiscal year 2026.

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Shareholder Return Plan

Quarterly Cash Dividend Program: The Board initiated a cash dividend of $0.10 per share resulting in $36 million of dividend payments during the quarter. The Board also declared a quarterly cash dividend of $0.10 per share of the company's common stock payable on September 18, 2025, to shareholders of record as of September 4, 2025.

Share Repurchase Program: The Board authorized a $2 billion share repurchase program. During the fiscal fourth quarter, the company repurchased approximately 2.8 million shares for a total of $149 million.

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Key Q&A

Q:Can you explain the gross margin guidance for the September quarter and the factors contributing to the sequential gross margin expansion?

A:Kris Sennesael explained that the company is making good progress with gross margins, achieving 41.3% in the last quarter. Factors contributing to the expansion include stable pricing, a favorable mix shift to higher capacity drives, and cost reductions in factories and the supply chain. The company guided Q1 fiscal '26 gross margins to 41%-42% and expects further improvements over time.

Q:How should investors think about share repurchase activity and the right level of cash on the balance sheet?

A:Kris Sennesael highlighted strong free cash flow generation and a strengthened balance sheet. The company has a dividend program and a share repurchase program, with $150 million already executed. As cash flow grows, the company plans to increase share repurchases and potentially grow the dividend over time.

Q:What is the ASP per terabyte for the most recent quarter?

A:Irving Tan stated that ASP per terabyte was down low single digits, primarily due to mix, while the price environment remained stable.

Q:Does the seasonality of the business change with 90% of revenue coming from cloud?

A:Irving Tan explained that traditional seasonality no longer applies as the business is driven by cloud CapEx spend and hyperscale customer programs. While the business is cyclical, the company has good visibility into customer demand over 12-18 months.

Q:What is driving the sequential improvement in gross margins, and where is the most opportunity for further improvement?

A:Kris Sennesael and Irving Tan emphasized that mix, particularly higher capacity drives like UltraSMR, is the most significant driver of gross margin improvement. The company is focused on technology and product roadmaps to continue this trend.

Q:What is the adoption curve and potential limitations of UltraSMR technology?

A:Irving Tan noted that UltraSMR adoption is growing, with three hyperscale customers already using it and a fourth in the qualification process. While some legacy workloads use lower capacity drives, new workloads are adopting the highest capacity points, typically on UltraSMR.

Q:How does the company balance customer demand visibility with capacity planning?

A:Irving Tan explained that the company has educated customers on long lead times and has 12-18 months of visibility into demand. Investments in capacity are focused on head and media to support aerial density improvements.

Q:Are there any updates on tariffs and their impact on enterprise demand?

A:Irving Tan stated that the company has not seen any material impact from tariffs or enterprise demand slowdown. There is no evidence of double ordering or pull-forwards related to tariffs.

Q:What were the hard drive ASPs in the June quarter?

A:The company no longer discloses ASP per unit but noted that ASP per drive continues to increase due to higher capacity drives.

Q:What is the aerial density roadmap leading to HAMR technology?

A:Irving Tan outlined the roadmap: the current ePMR product is at 26TB CMR and 32TB UltraSMR. The next generation will be 28TB CMR and 36TB UltraSMR, with HAMR starting at 38TB CMR and 44TB UltraSMR in calendar year 2027.

Q:What is the potential impact of AI deployment on exabyte growth and revenue?

A:Irving Tan stated that AI is driving exabyte growth from 15% to 23%, with ASP declines in the low single digits. This could increase revenue growth from mid-to-high single digits to mid-teens, with operating expenses at 10% of revenue.

Q:What is the company's strategy for the Platforms business and neo cloud customers?

A:Irving Tan explained that the Platforms business is focused on supporting neo cloud customers and Storage as a Service providers. The company sees long-term growth potential as these customers focus on compute capabilities and eventually storage.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about hard drive ASPs in the June quarter, stating that they no longer disclose ASP per unit and instead focus on revenue per drive. This response lacked clarity and specific data.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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