Western Digital (WDC) Q3 2026 Earnings Transcript

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Date

Thursday, Apr. 30, 2026 at 4:30 p.m. ET

Call participants

• Chief Executive Officer — Irving Tan
• Chief Financial Officer — Kris Sennesael
• Vice President, Investor Relations — Ambrish Srivastava

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Takeaways

• Revenue -- $3.3 billion, representing 45% year-over-year growth, driven by strong demand and favorable pricing.
• Earnings per share -- $2.72, up 97% year over year, with figures above the high end of the guidance range.
• Gross margin -- 50.5% for the quarter, an improvement of 1,040 basis points year over year and 440 basis points sequentially.
• Operating income -- $1.3 billion, up 106% year over year, yielding an operating margin of 38.6% (up 1,260 basis points).
• Cloud revenue -- $3.0 billion, comprising 89% of total revenue, rising 48% year over year, with higher-capacity nearline products cited as key drivers.
• Consumer revenue -- $186 million, contributing 6% of total revenue, with 24% year-over-year growth.
• Client revenue -- $179 million, representing 5% of total revenue, up 31% year over year.
• Unit shipments -- 222 exabytes delivered, up 34% year over year, including 4.1 million EPMR drives (118 exabytes) with capacity points up to 32 terabytes.
• Cost per exabyte -- Down 10% year over year, with ongoing focus on areal density and UltraSMR adoption noted as main drivers.
• SanDisk monetization -- Sale of 5.8 million shares produced a $3.1 billion reduction in debt, leaving 1.7 million SanDisk shares owned and resulting in a net positive cash position of $450 million.
• Free cash flow -- $978 million generated in the quarter, corresponding to a free cash flow margin of 29%.
• Capital returns -- $43 million in dividends paid and $752 million of share repurchases executed (2.9 million shares), with $2.2 billion returned to shareholders since fiscal 2025 launch of the capital return program.
• Dividend increase -- Quarterly dividend raised 20% to $0.15 per share, payable June 17, 2026, for holders as of June 5, 2026.
• Q4 revenue guidance -- Anticipated at $3.65 billion, plus or minus $100 million, reflecting 40% expected year-over-year growth at midpoint.
• Q4 gross margin guidance -- Expected between 51% and 52%.
• Q4 EPS guidance -- Projected non-GAAP diluted earnings per share of $3.25, plus or minus $0.15, based on 385 million shares.
• Product roadmap -- 44-terabyte HAMR and 40-terabyte EPMR drives in customer qualification; plan extends beyond 100 terabytes.
• HAMR qualification -- "we are now in qualification with four customers." for HAMR, and 40-terabyte EPMR in qualification with three customers.
• UltraSMR adoption -- Three largest customers have adopted UltraSMR; two are meeting nearly all exabyte needs with it, and all major customers are targeted for qualification by end of 2027.

Summary

Western Digital Corp. (NASDAQ:WDC) delivered record results, with accelerated expansion in both revenue and profitability led by cloud segment demand, improved pricing, and favorable product mix. Management introduced detailed visibility into multi-year agreements, confirming contract durations with key customers that now extend into 2028 and 2029. The company executed on debt reduction through SanDisk share monetization and concluded the quarter with a net positive cash position, supporting an increased capital return framework. Production qualification milestones for 40-terabyte EPMR and HAMR drives were disclosed, with customer trials expanding to multiple hyperscale customers. Management stated that free cash flow remains prioritized for shareholder returns while guidance for Q4 projects ongoing double-digit top- and bottom-line growth supported by sustained pricing power.

• Irving Tan said, "we expect agentic AI to drive a step-function increase in capacity-oriented storage demand, particularly in cloud and enterprise environments. Beyond agentic."
• Kris Sennesael confirmed, "Gross margin improved 1,040 basis points year over year and 440 basis points sequentially," underscoring sequential pricing and mix improvement as core contributors.
• Pricing per terabyte rose 9% year over year, attributed directly to long-term agreements and new product introductions.
• The company is targeting UltraSMR to represent approximately 60% of exabytes shipped by fiscal year 2027, enabled by broader market adoption and customer platforming.
• HDD product yields remain "in the 90% range" for current and next-generation EPMR, with no changes to reliability or production quality reported.

Industry glossary

• HAMR (Heat-Assisted Magnetic Recording): Advanced hard disk drive recording technology that uses localized heating to enable higher areal density and greater storage capacity per disk.
• EPMR (Energy-Assisted Perpendicular Magnetic Recording): Storage technology allowing increased areal density on HDDs by enhancing the write process with energy assistance, supporting higher capacity drives.
• UltraSMR (Ultra-Shingled Magnetic Recording): A proprietary Western Digital Corporation HDD technology using overlapping data tracks to achieve significant capacity gains without proportional cost increases.
• Exabyte: Unit of data storage equal to one billion gigabytes, used for tracking large-scale enterprise and hyperscale storage deployments.
• LTA (Long-Term Agreement): Multi-year contractual agreement that defines exabyte volumes and pricing terms with strategic customers, often providing improved visibility into future demand.
• JBOD (Just a Bunch of Disks): Storage architecture composed of multiple individual disk drives, typically used to scale storage capacity in enterprise and cloud environments without data striping or redundancy.

Full Conference Call Transcript

Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital Corporation’s Third Quarter Fiscal 2026 Conference Call. Presently, all participants are in listen-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 1 on your phone. As a reminder, this call is being recorded. Now I will turn the call over to Ambrish Srivastava, Vice President, Investor Relations. You may begin. Thank you, and good afternoon, everyone.

Ambrish Srivastava: Joining me today are Irving Tan, Western Digital Corporation’s chief executive officer, and Kris Sennesael, Western Digital Corporation’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 have been 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, are, or similar terms, we are referring only to Western Digital Corporation as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving?

Irving Tan: Thanks, Ambrish, and good afternoon, everyone. Thank you for joining us today. Western Digital Corporation started calendar year 2026 with great execution, driving strong sequential and year-over-year revenue growth in our cloud, consumer, and client businesses while expanding gross and operating margins. Gross margin exceeded 50% driven by our continued innovation and focus on improving total cost of ownership for our customers through higher capacity drives and increased adoption of our UltraSMR products. With strong operating leverage, lower interest expense, and an efficient tax structure, these efforts resulted in nearly a doubling of our EPS compared to last year. These results underscore our commitment to leading-edge innovation and strong execution.

This is an exciting time to be part of Western Digital Corporation, a focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy. We are well positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand. Looking at the bigger picture, it is clear that data and data storage are becoming more critical and valuable. As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly two thirds of all AI compute. This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage.

The scale of what is happening is also considerable. One leading hyperscaler’s LLM processes over 16 billion tokens per minute via direct API used by their customers, while another AI company processes over 2.5 billion prompts every single day from 900 million active users. While the resources that are used to create tokens are recycled, the data that is being created must be stored. Every token, every prompt, and every query answered and checkpoints saved create data that require persistent, scalable, and cost-efficient storage, and the majority of this data is stored on hard disk drives. As we look ahead, we see the rise of agentic AI, the next wave and arguably the biggest yet.

What we are seeing with agentic AI frameworks represents a structural shift from AI that answers questions to AI that continuously executes workflows. That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored. As a result, we expect agentic AI to drive a step-function increase in capacity-oriented storage demand, particularly in cloud and enterprise environments. Beyond agentic AI, two more waves are building simultaneously. Synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world inputs that seed it.

Across industries, physical AI data factory frameworks are being designed to transform limited training data into larger synthetic datasets. At scale, robotics, autonomous vehicles, and vision AI—and physical AI itself—robots, industrial systems, autonomous fleets—generate continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops. These forces are not additive; they are a compounding loop. Inference creates data; agents consume and generate more data. Physical AI creates data and trains synthetic models that create more data, and ultimately, the loop accelerates. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high-capacity, reliable, high-performance storage on HDDs.

This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. Western Digital Corporation’s technology and product roadmap is purpose-built to meet this growing demand. As we shared on our innovation day in February, we continue to innovate to meet our customers’ needs through a combination of capacity leadership and performance innovation. Our high-capacity drive roadmap now extends from our 44-terabyte HAMR and 40-terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes. On HAMR, we are accelerating our development, and we are now in qualification with four customers.

We are qualifying our 40-terabyte EPMR drives with three customers and are on track to start volume production in the second half of calendar year 2026. Our UltraSMR technology, which works across both EPMR and HAMR, is expanding our customer base significantly. Three of our largest customers have now adopted the technology; two are already meeting nearly all of their exabyte demand with UltraSMR, while the third is rapidly ramping in that direction. We plan to have all of our major customers qualified on UltraSMR by the end of calendar year 2027. We are delivering on major areal density improvements along with a focus on performance innovation with our high-bandwidth drives. Customer response to our innovation has been very positive.

Our high-bandwidth drives are currently sampling with two hyperscale customers, with an additional customer scheduled to start this quarter. Our dual-pivot technology is being built specifically for new AI workloads and an open API approach aimed at simplifying deployment at scale. Based on our industry-leading technology and product roadmap, we are well positioned to support growing customer capacity demand and address their AI workload needs. Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029. We continue to see strong demand from across our client, consumer, and OEM enterprise customers as well.

In summary, the tailwinds shaping our industry today are both exciting and dynamic, and at Western Digital Corporation, we remain focused on meeting our customers’ needs while enhancing the value proposition and delivering long-term shareholder value to our investors. With that, let me now hand it over to Kris to share our Q3 results and outlook for Q4.

Kris Sennesael: Thank you, Irving. Good afternoon, everyone. The Western Digital Corporation team delivered strong results, making solid progress against our strategic priorities with continued focus on innovation and disciplined execution while advancing key initiatives and remaining tightly aligned with our customers’ growing exabyte demand. As we move forward, we are encouraged by our momentum and remain confident in our ability to deliver sustainable revenue growth, expand gross and operating margins, and create long-term value for our shareholders. During fiscal Q3 2026, revenue was $3.3 billion, up 45% year over year, driven by strong demand across all our end markets and an improved pricing environment. Earnings per share was $2.72, almost double compared to a year ago.

Revenue, gross margin, and earnings per share were all above the high end of the guidance range. We delivered 222 exabytes to our customers, up 34% year over year. This includes over 4.1 million drives or 118 exabytes of our latest-generation EPMR with capacity points up to 32 terabytes, demonstrating our ability to quickly ramp new technologies and products in support of strong customer demand growth. Cloud represented 89% of total revenue at $3.0 billion, up 48% year over year, driven by strong demand for our higher-capacity nearline product portfolio and a stronger pricing environment. Consumer represented 6% of revenue at $186 million, up 24% year over year.

Client represented 5% of total revenue at $179 million, up 31% year over year. Both client and consumer segments saw strong year-over-year exabyte growth and improved pricing. Gross margin for the fiscal third quarter expanded to 50.5%. Gross margin improved 1,040 basis points year over year and 440 basis points sequentially. The drivers of strong gross margin performance include continued mix shift towards higher-capacity drives, along with ongoing execution of our pricing strategy and tight cost control. Operating expenses were $397 million, or 11.9% of revenue, a 40 basis point sequential improvement, demonstrating further operating leverage in the model.

The sequential increase of operating expenses was driven by the acceleration of R&D project expenses as we continue to expand our HAMR qualifications with more customers. Strong top-line growth, expanding gross margin, and leverage in the model drove operating income to $1.3 billion, up 106% year over year, translating into a strong operating margin of 38.6%, up 1,260 basis points year over year. Interest and other expenses were $24 million, and our effective tax rate for the fiscal third quarter was 16%. Taking into account the diluted share count of 385 million shares, earnings per share was $2.72, an increase of 97% year over year.

During the third fiscal quarter, we significantly strengthened our balance sheet by monetizing 5.8 million shares of SanDisk, which led to a $3.1 billion reduction in our debt. As a result, only $1.6 billion of convertible debt remains outstanding, and with $2.0 billion in cash and cash equivalents, we ended the quarter in a net positive cash position of $450 million. At quarter end, we still owned 1.7 million shares of SanDisk. Additionally, during the quarter, we received an upgrade from Standard & Poor’s and Fitch to investment-grade level.

Operating cash flow for the third fiscal quarter was $1.1 billion and, in combination with a disciplined approach to capital expenditures—CapEx of $145 million—this resulted in strong free cash flow generation of $978 million for the quarter and a free cash flow margin of 29%. During the quarter, we made $43 million of dividend payments and increased our share repurchases to $752 million, repurchasing 2.9 million shares of common stock. Since the launch of our capital return program in fiscal 2025, we have returned $2.2 billion to our shareholders by way of share repurchases and dividend payments.

Also, given the board and management confidence in the business, the board has approved a 20% increase of the cash dividend from $0.125 per share of the company’s common stock to $0.15 per share, payable on 06/17/2026 to shareholders of record as of 06/05/2026. I will now turn to the outlook for fiscal Q4 2026. As we continue to operate in a strong demand and pricing environment, with longer-term visibility across our cloud, consumer, and client businesses, we anticipate revenue to be $3.65 billion, plus or minus $100 million. At midpoint, this reflects growth of 40% year over year. Gross margin is expected to be in the range of 51% to 52%.

We expect operating expenses in the range of $385 million to $395 million. Interest and other expenses are anticipated to be $10 million. The tax rate is expected to be 16%. As a result, we expect diluted earnings per share to be $3.25, plus or minus $0.15, based on a non-GAAP diluted share count of 385 million shares. In summary, this quarter’s results and outlook highlight our commitment to disciplined execution, focus on innovation, and deep customer engagements. Our strengthened balance sheet and robust free cash flow empower us to invest with confidence in the business.

With strong momentum and a clear capital allocation framework, we are well positioned to drive durable earnings and free cash flow growth and create long-term shareholder value. With that, let us now begin the Q&A. Ambrish?

Ambrish Srivastava: Thank you, Kris. Operator, you can now open the line to questions, please. And 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?

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today’s call. If you have a question, please press 1 on your phone. If you would like to withdraw your question, please press 2. And today’s first question comes from Erik Woodring at Morgan Stanley. Please go ahead.

Erik Woodring: Great, guys. Thank you so much for taking my question. Irving, congrats on the really nice results. I would love if you could maybe go into a bit more detail on the specific tailwinds that HDDs and Western Digital Corporation are seeing from agentic AI—meaning exactly what parts of the workflow in agentic are ripe for HDDs—and again, just tying that back to your comment on greater than 25% long-term exabyte growth, where does that go as a result of agentic AI? Thank you so much.

Irving Tan: Thanks, Erik, for the question. We really see three core drivers of HDD growth going forward. One that we have seen for quite a while is the ongoing storage requirements associated to training. That is not going to end. Training will continue—relearning, reinforcement learning is going to happen—and what we are seeing from our customers is as they retrain and reinforce learning with these models, the quality of the model results improves. They continue to store all the data they are generating to enable improved quality of the model. So that is one continued driver that we see. The second driver is the rise of agentic AI and inferencing.

With every inference that happens, new data is generated, and what is happening is that all that new data is getting stored as well to both feed back into training models and be stored to support future inferences. So that is the second key driver in terms of agentic AI and inferencing. The third driver for data storage for HDDs is physical AI. As we have highlighted before, physical AI with the limited datasets that it has—whether it is autonomous vehicles or robotics—is using AI to generate a lot of synthetic data to further train and enable physical AI as well.

Any data that is generated out of it gets stored and feeds that whole training and synthetic data development loop. So those are the three big drivers of growth that we see going forward, Erik. That is why we have the confidence to see exabyte growth going beyond 25% CAGR.

Ambrish Srivastava: Thank you, Erik. And did you have a follow-up?

Erik Woodring: Yeah, just a quick one for Kris. Over the last four quarters, you have really shown a lot of gross margin expansion. I think it is 260 basis points on average over the last four quarters, and you just did 4.5 points of gross margin expansion. For June, guidance implies about 100 basis points of gross margin expansion. Is there conservatism baked into that forecast, or are there any emerging headwinds we need to consider given you should be accelerating cost downs and you are seeing really nice pricing growth? Some context around the June gross margin would be helpful. Thanks so much.

Kris Sennesael: Yes, Erik. First of all, I am really pleased that we delivered strong gross margin in the third quarter and broke into the 50% gross margin range with 50.5%. For Q4, we are guiding to 51% to 52%, so some further good improvement in gross margins. If you look at the incremental gross margins on a year-over-year or quarter-over-quarter basis, for three quarters in a row now—and including the fourth quarter that we guided—you see very strong incremental gross margins in the plus-70% to plus-75% range on a year-over-year and quarter-over-quarter basis. We believe that we will be able to continue to further improve gross margins.

Obviously, we are only guiding one quarter at a time, but based on the strong pricing environment that we operate in—which is based on more and more value that we provide to our customers—as well as a better mix as we move to higher-capacity drives with EPMR and later on moving to HAMR, and more and more driving adoption of UltraSMR, we expect further gross margin uplift. Then, of course, we continue to execute well from an operations point of view. When you put it all together, we are very pleased with the gross margin and the gross margin trends going forward.

Ambrish Srivastava: Operator, next question, please.

Operator: Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani: Thanks for taking my question, and congrats on a nice set of numbers here. My first question is on the pricing side. On a per-terabyte basis, pricing was up high single digits in March. It is a big step up from the flattish trends we have seen in the last few quarters. Could you help us understand what is enabling this step up? Is it reflective of some of these LTA contracts that you have engaged in? Irving, is this the new normal on pricing as we go forward?

Irving Tan: Thanks, Amit. Pricing was up 9% year over year. It reflects a couple of things: the ongoing value that we are creating for our customers, better TCO value—as we said, our whole pricing philosophy is to enable better TCO value for our customers and to be able to share in that value creation through pricing. As we highlighted at innovation day, and as Kris highlighted also, we said that as we move forward towards the latter part of calendar year 2026, we would see pricing increase more towards the high single-digit range. That is what you are seeing from us.

That is reflective of the timing of new LTAs coming on board as we move forward to new periods of LTAs. We are about to deliver our next generation of EPMR in the second half of this calendar year. That will be a step up in capacity point that will deliver more TCO value; therefore, we are able to share in better pricing as a result of that as well.

Ambrish Srivastava: Do you have a follow-up, Amit?

Amit Daryanani: I do. Thank you, Ambrish. On the other side of this, cost per exabyte was down again roughly 10% in the quarter. What is the right framework for us to think about cost-per-exabyte declines? Should we expect a bigger step down as you transition towards the higher-density next-gen EPMR into this year? Thank you.

Irving Tan: If you look at the cost down, we delivered 10% year over year, and that is probably the right way to look at it going forward. We continue to be focused on delivering higher areal density—that is a big cost driver. As I mentioned, we will be introducing and ramping up our next-gen EPMR in the second half of the year. We also have an increasing uptake of customers on UltraSMR, which is a good cost driver for us as well. We get 20% uplift on capacity without the associated cost. By the end of fiscal year 2027, close to about 60% of all the exabytes that we ship will be on UltraSMR.

Our teams continue to work on platforming the products to drive further cost downs and ongoing value engineering to reduce high-cost elements of our bill of materials, and we continue to drive supply chain efficiency across procurement and manufacturing operations. Putting that all together, we feel confident that we can continue to deliver the trend that we have mentioned.

Ambrish Srivastava: Thank you, Amit. We can go to the next question, please.

Operator: Absolutely. Our next question today comes from Aaron Rakers at Wells Fargo. Please go ahead.

Aaron Rakers: Congrats on the results. I want to go back to the 25% growth rate and think about as you see agentic AI drive incremental structural demand, how you are thinking about the capacity to fulfill that demand. Is it a continued ability to just mix higher, or is there a point in time where some capacity investment might have to play itself out?

Irving Tan: Thanks for the question, Aaron. At this juncture, we still do not see any need to increase unit capacity, so we have no plans for that. Our focus is to continue to improve areal density. As we introduce our next-gen EPMR—which is a 40-terabyte drive—that will be a 25% step up from our current drives at the 32-terabyte capacity range. There is also the opportunity to further mix up with our customers. We have seen an acceleration of mix up, and as we introduce the high-capacity drives in the next two quarters, we will see an acceleration of that going forward as well.

Ambrish Srivastava: Follow-up, Aaron?

Aaron Rakers: Yeah, I do. Thanks, Ambrish. Maybe on the capital structure now with the debt-for-equity transfer behind you. You have still got 1.7 million shares of SanDisk, and I know that you increased your dividend—20%. Kris, any updated thoughts on how you are thinking about capital return—building cash on the balance sheet versus returning what appears to be very strong free cash flow generation going forward? Thank you.

Kris Sennesael: Yes, Aaron. I agree with you; we have very strong free cash flow and free cash flow margin. The free cash flow margin last quarter was 29%, and so we are approaching our above-30% free cash flow margin. In terms of capital allocation and capital return to our shareholders, we are not changing our policy or framework. We are returning all excess free cash flow back to shareholders through a combination of our dividend program and share buyback program. As you have seen last quarter, we will continue to do so going forward. We are increasing the dividend with a 20% increase to $0.15 per quarter, and we will continue to execute on our share buyback program.

Ambrish Srivastava: Thank you, Aaron.

Operator: Our next question today comes from Thomas O’Malley at Barclays. Please go ahead.

Thomas O’Malley: Congrats on the good results. I am looking at peers’ results, which were out tonight too, and I am seeing over 100% sequential pricing increases. I know you guys got asked about pricing already, but from a 30,000-foot view, with the gap kind of exploding between NAND and some of the hard disk drive players, how much appetite do customers have to keep on taking pricing increases, and what is your strategy there about how much you could push given the gap is moving higher? Secondarily, you are hearing about some of the industry potentially doing long-term agreements where you have prepay fronts.

Could you talk about your appetite to do that and what that would mean for the industry if you saw some of that? Thank you.

Irving Tan: Thanks, Thomas, for the question. In terms of pricing, our philosophy is to provide predictable pricing to our customers. The one thing they appreciate and want to avoid is volatility in pricing. Our focus is to provide predictable pricing. As we deliver more value and better TCO through higher-capacity drives and performance innovation—whether it is throughput or bandwidth enhancements, as we laid out at innovation day—that gives us the opportunity to create more value for our customers and to share in that through better pricing. Our philosophy is to ensure we do that in a very predictable way. Predictable pricing enables our customers to make long-term architectural decisions.

That is our focus and gives us the confidence behind our roadmap and our investments. We are not looking to be opportunistic from a pricing standpoint, but rather provide predictability so customers can make long-term architectural decisions that support the structural change in the hard drive industry. On LTAs, we continue to make progress and now have LTAs that extend into calendar year 2029. As we have shared in the past, those LTAs are exabyte-based with a degree of pricing associated with them.

The LTA volume we put together for our customers does not meet their full requirement, and anything we deliver above and beyond the base volume requirement we have agreed is subject to a different pricing regime that gives us an opportunity to drive some incremental upside.

Ambrish Srivastava: Alright. No follow-up for Mr. O’Malley. We will go to the next caller, please, operator. Thank you.

Operator: Absolutely. Our next question today comes from Asiya Merchant with Citi. Please go ahead.

Michael Cadiz: Hi. Good afternoon. This is Michael Cadiz for Asiya Merchant at Citi. Congratulations on the quarter. My first question: would you be able to provide any additional color on yields and reliability, and as a result, are there any implications to the cost-per-bit decline that we should think of?

Kris Sennesael: Sure.

Irving Tan: If you look at EPMR products that we are shipping today and what we are anticipating as we go into volume ramp in the second half of the year for next-generation EPMR, they continue to be in the 90% range for yields. Quality, which has been one of our key considerations, remains very high. This is the hallmark of who we are as a company—high yields and known quality products—and that is something we will continue to focus on, both in our EPMR products and in our HAMR products, where our focus right now is to ensure we have the right reliability, the right quality, and the right manufacturing yields as well.

In terms of current yields and quality, we do not see any changes.

Michael Cadiz: Thanks. Given the price differential currently between hard disk drive and flash, would you attribute the strength in HDD demand because of that? Are you seeing any architectures changing? I think you said at this point it is not.

Irving Tan: Look—flash is a great technology. It has a specific role in the storage stack. We both play in slightly different spaces. If you look at large-scale object storage, which requires long-term retention, that is where HDD really comes to the fore—that is 80% of all data stored within hyperscale data centers. If you look at workloads that require high IOPS and high throughput, that is where flash comes to the fore. Even in inferencing, we see a symbiotic relationship: the new data created from inferencing typically will get stored on HDDs, while the vectoring data required for inferencing is stored on flash.

Some of the new innovation we are delivering—our high-bandwidth drives, for example, and dual-pivot technology—will improve throughput and bandwidth and continue to improve the performance of our HDDs, delivering more value to our customers. We do not see any major structural changes to architecture at this point, but that is why we want to ensure predictability in pricing so customers can make architectural decisions not one year out, but two, three, five years out as well. Thank you, Michael.

Operator: Thanks. Next question today comes from JPMorgan. Please go ahead.

Analyst: Hi. Thanks for taking my question. Maybe for the first one, on the quarter—you had a strong set of numbers including both revenue and gross margins coming in above the high end of your guide. The outperformance in gross margin was a lot more relative to the outperformance on revenue. Is there something more specific going on with gross margins—maybe in terms of cost reduction? What really outperformed relative to your expectations is what I am trying to get to in terms of the magnitude of the outperformance on those two metrics. Thank you.

Kris Sennesael: On gross margins, there are three major drivers. The first is pricing and the pricing environment, which continues to be very strong and was a little bit better during the quarter than we expected when we provided guidance. As we have indicated, not all pricing going into the quarter is locked, and so we do have some opportunities—not only in our cloud business, but also in our client and consumer businesses—where we see further opportunities in terms of pricing. Secondly, mix: we are making good progress driving to higher-capacity drives and more adoption of UltraSMR, and that is playing out really well.

Third, the teams continue to execute really well on driving down cost across the board throughout the supply chain. There was great execution during the quarter, and I expect similar levels of execution going forward.

Ambrish Srivastava: Do you have a follow-up?

Analyst: Yes, please. Looking at the cost per exabyte and as a follow-up to Amit’s question earlier, you are doing roughly a 10% decline in cost per exabyte right now. As you start shipping the 40-terabyte EPMR and then eventually the HAMR drive, why should we not expect that cost-per-exabyte decline to accelerate? I am thinking about trajectory as you ship those lower-cost overall profiles—why not accelerate from where it is today? Thank you.

Kris Sennesael: We are only guiding one quarter at a time, but I have confidence that the teams will continue to execute on the three levers I discussed a moment ago. We are ramping the next-generation EPMR in the second half of calendar year 2026—that is not far out. As Irving already talked about, we are feeling good about that ramp, the manufacturability, and the yields. For the HAMR ramp, we are making really good progress on the qualifications—now with four customers, getting really good feedback. We expect to ramp that in 2027. There is still a little bit of work to be done in terms of yield, reliability, and quality, but good progress is being made by the operations teams.

There is going to be an adoption curve; we are not switching overnight to those new products. The improvements will be phased in over the ramp period.

Operator: And our next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Aisling Grueninger: Hi. This is Aisling Grueninger on for Wamsi. Congrats on the results. You mentioned the UltraSMR JBOD platform as a way to broaden beyond your current target base. Does that primarily expand your reach into tier-two CSP customers or enterprise customers, and how material could this opportunity become over the next one to two years? Thanks.

Irving Tan: We definitely see it as an opportunity to expand our reach into tier-two CSPs, including in the Asia region as well. That is one of the enablers behind our forecast that by the end of calendar 2027, the vast majority of our key customers will be on UltraSMR—either fully adopted or materially underway in qualification. That also gives us the confidence that by the end of fiscal 2027, close to 60% of the exabytes that we ship will be on UltraSMR.

Ambrish Srivastava: Thank you, Aisling.

Operator: Thank you. And our next question today comes from C.J. Muse at Cantor Fitzgerald. Please go ahead.

C.J. Muse: Good afternoon. Thank you for taking the question. Curious on the agreements, particularly as they extend out into 2027, 2028, and beyond—how should we think about pricing and what is embedded inside there? Is there a fixed-versus-variable construct or different percentages?

Irving Tan: Thanks for the question, C.J. The construct of the LTAs broadly includes an exabyte volume tied to it and pricing tied to it. Depending on the duration, there may be periods of pricing adjustment as we introduce new capacity points and new capabilities. That gives us the opportunity to adjust pricing going forward.

Ambrish Srivastava: The follow-up, C.J.?

C.J. Muse: Curious on the remaining SanDisk position now that it is beyond 12 months. Is that now taxable? Any implications beyond that window, and how are you thinking about the time frame for monetization?

Kris Sennesael: Yeah. So we still have 1.7 million SanDisk shares after we did the debt-for-equity monetization in 2026. It is our intention to monetize the remaining 1.7 million shares in an equity-for-equity transaction. We have indicated it is our intention to do that before the end of calendar year 2026, and this will be in a tax-free manner.

Ambrish Srivastava: Thank you, C.J.

Operator: Thank you. And our next question today comes from Karl Ackerman at BNP Paribas. Please go ahead.

Karl Ackerman: Thank you. I have one for Irving and one for Kris, if I may. Irving, when would Western Digital Corporation consider adding internal heads or media capacity to support these multiyear commitments from customers? For example, have you had discussions regarding prepayments for future capacity adds?

Irving Tan: We are definitely looking ahead in media investments. As we said in the past, we are not making any investments in adding unit capacity. When we talk about areal density improvements or increasing the capacity per drive, that does involve technology investments to support new media recipes, new media substrates, new head designs, as well as the potential to increase disk count over time—as we highlighted on our innovation day—where we are able to get to 14 disks over time. Our number one focus is to increase terabytes per disk to make sure we are very competitive within the industry, and beyond that, we can add more platters to the drive as well.

That is the most cost-effective way to deliver incremental capacity to our customers. We will definitely look at heads and media capacity investments if it makes economic sense, but not unit capacity investments.

Ambrish Srivastava: Karl, do you have a follow-up for Kris?

Karl Ackerman: Yes. Kris, when you note that you have agreements extending into 2028 and 2029 with your major customers, could you delineate that with respect to build-to-order and LTAs? Do you have build-to-order contracts addressing much of your nearline capacity this year, or does it extend into 2027 as well? Thank you.

Kris Sennesael: Manufacturing lead times are now about a year, and so most of the purchase orders are being placed a year in advance. Beyond the first year, we move into those LTA frameworks as explained by Irving. There is still a little bit more variability beyond the first year.

Ambrish Srivastava: Thank you. We will go to the next question, please.

Operator: Absolutely. Our next question today comes from TD Cowen. Please go ahead.

Analyst: Hey, guys. This is Eddie for Krish. Irving, when you look across your four largest hyperscale customers, are you seeing demand patterns that are broadly similar, or is there a meaningful divergence in how aggressively different customers are scaling based on their AI roadmaps? Anything specific outside overall CapEx growing that is driving demand for HDDs?

Irving Tan: In general, the profile is quite similar. As I have highlighted, the demand for storage is increasing because storage is persistent. In inferencing, the resources used—compute and memory—can get recycled, but the data generated is not recycled. All that data is getting stored, and that stored data is persistent. That is consistent with what we see with all our top four customers, whether their business model is in search, advertising, or enterprise software. It is really the ongoing data storage requirements to support training, improvements in training, to support the demands of inference, and to support synthetic data being driven by physical AI. Thank you, Eddie. Operator, we will go to our last caller, please.

Operator: Absolutely. Our last question for today comes from Goldman Sachs. Please go ahead.

Analyst: Good afternoon. Thanks for taking my question. Could you talk about, at some point in time in the future—say, at the end of calendar 2027—what level of coverage you would expect to be shipping in terms of HAMR on an exabyte basis?

Irving Tan: We do not have a number that we are putting out there right now. Our focus—as we have stated repeatedly—is to ensure we de-risk the transition for customers to HAMR. We have taken a dual-track process: we continue to deliver areal density improvement and high-capacity EPMR drives even as we introduce HAMR. That gives customers confidence in the transition while allowing them to enjoy better TCO through higher areal density. When we get to the right reliability and yields, we will make that transition accordingly to HAMR to make it the main share of exabytes that we ship.

Kris Sennesael: Just to add, we indicated we have now four customers in qualification with HAMR. We are somewhat ahead of schedule compared to our initial plan. The feedback we are getting from all our customers is very positive, and our HAMR development is going really well.

Ambrish Srivastava: Thank you.

Operator: Thank you. That concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tan for any closing remarks.

Irving Tan: Thank you. As we shared today, we are really excited about the opportunity ahead of us, and the roadmap that we put forward in Western Digital Corporation positions us well to address our customers’ needs and the demands that they have going forward. I want to take this moment to thank all of Western Digital Corporation’s employees and business partners for their commitment to our customers and all that they do for Western Digital Corporation. Thank you again for joining us today, and hope all of you have a great rest of the day.

Operator: Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.

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