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Edited Transcript of WDC earnings conference call or presentation 27-Apr-17 9:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Western Digital Corp Earnings Call

LAKE FOREST May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Western Digital Corp earnings conference call or presentation Thursday, April 27, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark P. Long

Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance

* Michael D. Cordano

Western Digital Corporation - President and COO

* Robert Blair

Western Digital Corporation - VP of IR

* Stephen D. Milligan

Western Digital Corporation - CEO and Director

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Conference Call Participants

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* Aaron Christopher Rakers

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Amit Daryanani

RBC Capital Markets, LLC, Research Division - Analyst

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - VP

* Mark S. Miller

The Benchmark Company, LLC, Research Division - Research Analyst

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Richard Kugele

Needham & Company, LLC, Research Division - Senior Analyst

* Roderick B. Hall

JP Morgan Chase & Co, Research Division - VP and Senior Analyst

* Vijay Raghavan Rakesh

Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon, and thank you for standing by. Welcome to Western Digital's Third Quarter Fiscal 2017 Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

Now I will turn the call over to Mr. Bob Blair. You may begin.

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Robert Blair, Western Digital Corporation - VP of IR [2]

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Good afternoon, everyone. This call will contain forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected future financial performance; our market positioning; expectations regarding growth opportunities; our financial and business strategies and execution; integration activities and achievement of synergy goals; demand and market trends; our product portfolio, product features, development efforts and expansion into new data storage markets; and our joint venture partnership and business ventures with Toshiba.

These forward-looking statements are based on management's current expectations and are subject to risk and uncertainties that could cause actual results to differ materially, including those listed in our quarterly report on Form 10-Q, filed with the SEC on February 7, 2017. We undertake no obligation to update our forward-looking statements to reflect new information or events.

Further, references will be made during this call to non-GAAP financial measures. Reconciliations of the differences between the non-GAAP measures we provide during this call to the comparable GAAP financial measures will be posted in the Investor Relations section of our website.

We have not fully reconciled our non-GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted. Accordingly, a full reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.

In the question and answer session part of today's call we ask that you limit yourselves to one question to allow as many callers as possible to ask their question.

Thank you in advance for that. And I now turn the call over to Chief Executive Officer, Steve Milligan.

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [3]

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Good afternoon, and thank you for joining us. With me today are Mike Cordano, President and Chief Operating Officer; and Mark Long, Chief Financial Officer.

After my opening remarks, Mike will provide a summary of recent business highlights, and Mark will cover the fiscal third quarter financials and wrap up with our guidance for the fiscal fourth quarter.

We reported strong financial performance in the March quarter, enabled by excellent operational execution by our team and favorable trends across all of our end markets. We reported revenue of $4.6 billion, non-GAAP gross margin of 39% and non-GAAP earnings per share of $2.39.

With 3 consecutive quarters of strong financial results following the completion of the SanDisk acquisition, we are seeing continued validation of our growth strategy and our ongoing transformation into a comprehensive provider of diversified storage products and technologies.

We have constructed a powerful platform with the broadest set of products enabling us to be a leader in the storage industry.

Our transformation over the last several years provides us with the opportunity to not only compete in today's marketplace, but to be strongly positioned to grow and thrive into the future.

And, I would remind you that the results we are achieving today do not yet reflect the full impact of our targeted synergies from our HGST and SanDisk integrations.

The healthy current demand environment underscores the unabated growth in data and its increasing value in our professional and personal lives.

As the new Western Digital, we are enjoying increasingly strategic relationships with our customers as they contemplate pivotal technology and architectural transitions, strengthening our ability to play a leading role in the storage industry.

Our team continues to execute very well on 2 key strategic priorities: the integration of HGST, SanDisk and WD; and the ramp of our 3D NAND technology, each of which Mark and Mike will elaborate on.

I want to share some thoughts on Toshiba's efforts to divest their memory business. Since 2000, Western Digital has been a partner with Toshiba, driving flash memory innovation and contributing significant value to our respective stakeholders through our joint venture in Japan.

Our goals throughout the current process have remained consistent and resolute. First, to protect and preserve the health of the JV, which we believe is one of the most successful in the technology industry and in which we have invested more than $13 billion over a 17-year duration.

Second, to protect our interest with respect to any transaction involving the JV, interest or assets, none of which could be completed without our consent.

And finally, to explore potential long-term value creation opportunities for both Western Digital's and Toshiba's stakeholders.

We are committed to continuing this storied partnership in Japan. As we have communicated directly to Toshiba, we believe Western Digital is best positioned to lead and implement a transaction that will achieve the goals of all of Toshiba's stakeholders and we are working with them to develop a win-win solution.

We have been communicating with key stakeholders and partners to evaluate a full range of potential alternatives to this challenging situation.

I will now turn the call over to Mike to provide business highlights in the March quarter.

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Michael D. Cordano, Western Digital Corporation - President and COO [4]

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Thank you, Steve, and good afternoon, everyone. Our March quarter results reflect continued strong demand for our products and focused operational execution.

Industry-wide demand for NAND flash remained very strong and the industry-wide hard drive demand was stable, together contributing to a favorable environment for our overall business.

Demand was healthy across all of our end markets and this helped mitigate typical seasonality.

We made further progress in our ongoing conversion to the 3D NAND technology and our helium hard drives achieved new milestones as well.

In Client Devices, we saw strength for embedded products and for hard drives in surveillance applications, while traditional compute demand was softer as expected.

Demand for our solid state drives for client applications increased sequentially, reflecting expansion of attached rates of SSDs to PCs and the ongoing adoption of our client SSDs enabling us to expand our market presence.

We commenced shipments of our 64-layer 3D NAND and client SSD form factor, and we expect to further expand the usage of this industry-leading technology across our product portfolio during the remainder of calendar 2017.

In the mobile embedded category, we further deepened our OEM customer engagement through increased acceptance of our eMMC solutions, including our 3-bit per cell X3 offerings.

Our design win pipeline expanded within the traditional mobile categories, as well as in emerging growth areas such as auto, connected home and the Internet of Things.

Turning to Client Solutions. Our comprehensive portfolio of flash and HDD products performed strongly and it significantly mitigated typical seasonal revenue decline.

The strong market appeal of our WD, SanDisk and G-Technology brands continues, demonstrated by ongoing consumer preference for our products on a global basis.

In Data Center Devices & Solutions, we saw a sustained strength for enterprise class SSDs and a growing requirement from hyperscale customers for our 10-terabyte helium capacity hard drive.

We completed several additional key qualifications for the 10-terabyte drive with these customers during the March quarter.

Yesterday, we announced that we have begun customer shipments of our 12-terabyte drive, our fourth generation helium product underscoring our generational lead in this category.

I am pleased to note that we have now shipped approximately 15 million helium hard drives cumulatively since the platform's launch 4 years ago.

From a memory technology and operations perspective, we are ahead of our previously-communicated expectations.

First, we have already achieved cost crossover for our 64-layer 3D NAND versus our 15-nanometer X3 node.

Second, we now plan to produce more than 75% of our total 3D NAND bit output based on the 64-layer architecture in calendar 2017.

These achievements are particularly noteworthy, indicating that our joint venture remains focused on executing our technology, manufacturing and operational strategies.

Looking forward, our estimates for NAND industry bit growth rates for calendar 2017 are at the low end of our long-term industry outlook of 35% to 45%; and for calendar 2018, somewhat higher than in 2017.

When combined with the secular growth drivers for NAND flash, we believe that the NAND industry supply-demand environment will likely remain favorable through at least the first half of calendar 2018.

With that, I will turn the call over to Mark for the financial overview.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [5]

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Thank you, Mike. I'm pleased with our financial performance in the March quarter.

Our team executed well in a healthy market environment as we capitalized on our diversified product offerings, achieved cost targets, and improved our liquidity position with continued strong cash flow generation.

Our revenue for the March quarter was $4.6 billion, driven by strong performance in each of our end markets.

Revenue in Data Center Devices and Solutions was $1.3 billion. Client Devices was $2.3 billion; and Client Solutions was $1 billion.

Our revenue was only down 5% from our December quarter versus the typical decline of approximately 15% on a pro forma basis, which underscores our strong performance.

Our Data Center business continues to be fueled largely by cloud-related storage demand.

Our March quarter revenue for Data Center Devices & Solutions declined 2% year-over-year on a pro forma basis.

We saw a sustained strength in capacity enterprise hard drives and sequential growth for our enterprise SSDs, offset by a decline in performance enterprise hard drives.

Client Devices revenue for the March quarter increased 23% year-over-year on a pro forma basis, primarily driven by significant strength in embedded flash, surveillance HDD and client SSD.

Client Solutions revenue for the March quarter increased 6% year-over-year on a pro forma basis due to strong demand for removable and other flash-based products.

Our non-GAAP gross margin was 39.3%, up 260 basis points quarter-over-quarter and up 650 basis points year-over-year on a pro forma basis.

This gross margin expansion resulted from a favorable supply-demand environment, product cost improvements, and a higher mix of flash-based revenue.

Turning to operating expenses. Our non-GAAP OpEx totaled $811 million.

We were slightly above guidance due to higher performance-based compensation driven by our better-than-expected financial results.

We continue to make progress towards our integration synergy targets while also making ongoing investments in product development, go-to-market capabilities, and IT projects, as part of our transformation to enable future growth.

Our non-GAAP interest and other expense for the March quarter was $206 million, inclusive of $205 million of interest expense.

In our March quarter, we successfully repriced both our euro-denominated Term Loan B and our U.S. dollar Term Loan B.

The aggregate annual savings from these 2 repricings will result in approximately $42 million of annual interest savings, starting in our June quarter.

Our non-GAAP effective tax rate for the March quarter was approximately 11%.

On a non-GAAP basis, net income in the March quarter was $716 million or $2.39 per share.

On a GAAP basis, we had net income of $248 million or $0.83 per share.

The GAAP income for the period includes intangible amortization, charges associated with our acquisitions, and stock-based compensation. Therefore, the net difference between our GAAP and non-GAAP net income is primarily a result of noncash charges.

In the March quarter, we generated $1 billion in operating cash flow, with $257 million spent on capital investments, resulting in free cash flow of $741 million.

We also had strong working capital performance contributing to our significant operating cash flows in the quarter.

We paid the previously declared cash dividend totaling $144 million during the quarter, and also declared a dividend in the amount of $0.50 per share.

We closed the quarter with cash, cash equivalents and available-for-sale securities totaling $5.8 billion, resulting in approximately $6.8 billion of liquidity available to us, including our $1 billion undrawn revolver capacity.

Our net debt outstanding has decreased approximately $1.5 billion since the beginning of the fiscal year, mostly driven by strong cash flow generated by the business.

We remain committed to our long-term deleveraging plans while also assessing value-creating strategic investment opportunities as they arise.

As Steve indicated, we have continued to make very good progress with respect to our integration activities.

We remain on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar 2017.

As of the end of our fiscal third quarter this year, we achieved approximately $300 million of cost of revenue synergies and approximately $325 million of operating expense synergies, each on an annual run-rate basis.

With respect to the SanDisk integration, as of the end of our fiscal third quarter, we have realized synergies of approximately $150 million on an annual run-rate basis, toward our 18-month target of achieving $500 million of total run rate synergies on an annualized basis.

I will now provide our guidance for the June quarter on a non-GAAP basis.

We expect revenue for our June quarter to be approximately $4.8 billion, which would represent double-digit, year-over-year growth, on a pro forma basis.

As a result, for fiscal 2017, we expect to generate pro forma revenue growth that will be in line with our long-term financial model of 4% to 8%.

We expect gross margin to be approximately 40%.

Turning to operating expenses. We expect those to be similar to our March quarter results.

Interest and other expense is expected to be approximately $200 million.

We expect an effective tax rate in the 10% to 13% range.

As a result, we expect earnings per share between $2.55 and $2.65, with an estimated share count of 302 million diluted shares.

As we described in detail during our last Investor Day, we believe our integrated product and technology platform will enable strong, long-term growth and profitability.

Based on our current business outlook and capital structure, we see an opportunity to achieve non-GAAP earnings per share of approximately $12 for the full calendar year 2017.

I will now turn the call over to the operator to begin the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rod Hall with JPMorgan.

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Roderick B. Hall, JP Morgan Chase & Co, Research Division - VP and Senior Analyst [2]

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So I wanted to focus in on the NAND business a little bit and just see if you could talk to us about the ASP trajectory in the quarter. And how we should be thinking about ASPs as we look forward and compare back to the spot market relative to what you guys are recognizing? Any comment on your thoughts on bit growth would also be interesting given Samsung continues to say 30%, so you guys are a little higher than them.

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Michael D. Cordano, Western Digital Corporation - President and COO [3]

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This is Mike. Let me give you comments on both. First, on ASP. As you know, most of our bits are sold in products not in the open market or at the component level. So we have realized pricing gains, and we expect that favorable trend to continue through the back half of the year. But I would not take us directly to the spot market price because of the way we go to market. Secondly, I think I noted the low end of the range, obviously, low end of the range being around 35%. I think we remain comfortable that the industry will be in that neighborhood.

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Operator [4]

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Our next question comes from Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [5]

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We learned this today that former CEO of SanDisk and Chairman just joined Micron. And, Mike, I want to better understand, what are the things you have put in place to safeguard from any potential recruiting of key asset, especially on the SanDisk side? And I have a follow-up.

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [6]

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Well, part of it -- this is Steve, Mehdi. Part of our job is no matter who shows up at what places, that our most important asset is our people. And part of the things that we try to do on a routine basis is make sure that not only do they remain with our company, but that they're motivated and giving a 110%, if you want to call it that, to the performance of the company and we're going to continue to do that going forward, frankly, no matter who shows up at which one of the companies that may have an interest in recruiting our people.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [7]

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Great. And then as a follow-up, going back to your helium-based product. How should we think about the mix between 10 and 12 terabyte? And do you have any assessment of your market share as Helium-based products are further penetrating the install base?

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Michael D. Cordano, Western Digital Corporation - President and COO [8]

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Yes, let me comment. I think as the year progresses, we would see the increasing deployment as a percentage of the total of 10-terabyte, which we feel very comfortable with our current product capability as well as our design win outlook across the major consumers of that product. Later in the year, we may see some 12-terabyte begin to happen at greater scale, so that transition has begun. We also see ourselves in a good position from an exabyte share perspective, and we would think those trends will continue in a positive manner throughout the year.

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Operator [9]

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Our next question comes from Amit Daryanani with RBC Capital Markets.

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Amit Daryanani, RBC Capital Markets, LLC, Research Division - Analyst [10]

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I guess, first off, just on the 40% gross margin guide that you guys have for June quarter, could you just tell us, what's driving the upside versus your longer-term model? And is it reasonable to think that both the NAND and HDD segments at this point are probably tracking well ahead of your long-term targets for each of those segments?

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [11]

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Well, I think right now we're seeing a combination of stable HDD market and a strong flash market. So it's that combination that's resulting in the 40% gross margin.

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [12]

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And strong execution, both from just operational perspective and from a cost perspective, which obviously, that part of it is something that we'll be doing in effect independent of the demand or pricing environment.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [13]

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Exactly. And I do think on a go-forward basis, over the long term, we do have more opportunities to enhance the efficiency of our cost structure, both through our transformation, that is ongoing, as we said, and through the deployment of our new technologies as they ramp. So I think we feel very good about the gross margin performance and the long-term, as we said, earnings power of this platform.

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Amit Daryanani, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Got it. And if I could just follow-up. Steve, you talked about working with Toshiba to come up with a win-win solution with what's going on. Does that suggest you're actually having more exclusive discussion with them at this point. And what do you think is the time line to get a resolution on this process from your perspective?

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [15]

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Well, the reality is we talk to Toshiba all the time. I mean, they're our partner. And so we have ongoing engagements with them, or discussions with them at various different levels. The question with regards to timing, that I can't speculate on. And so I'm going to have to punt on the answer or -- speculating on that question.

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Operator [16]

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Our next question comes from Aaron Rakers with Stifel.

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Aaron Christopher Rakers, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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I wanted to talk a little bit about the operating expense line. Mark, I think a quarter or 2 ago, you had talked about getting to a normalized operating expense level in the $770 million range for this March quarter. I know that you're guiding flat in the current quarter, but I'm curious of how you would currently characterize your normalized operating expense level as we start to look into the realization of the full synergies? And I have a real quick follow-up as well.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [18]

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Sure. And I think the most important thing to keep in mind, from an OpEx standpoint, is we have sort of these 2 factors. One is, we have the higher incentive base comp that flows through when we significantly exceed our expectations. So that's one part of it. But the second and the more important part is, we are making ongoing investments that will enable future growth, as we see the opportunity to accelerate a number of our R&D projects. So we're doing that. As I also said, we're making continued investments in other areas of, sort of IT systems, to make sure that we have the right platform for this sustainable growth.

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Aaron Christopher Rakers, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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Okay. And then as a quick follow-up. I'm curious, based on maybe my math, it looks like you saw a healthy maybe uptick in the average capacity per hard disk drive. And I'm wondering if you could talk about what you've seen there? And how we should think about that trajectory going forward?

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Michael D. Cordano, Western Digital Corporation - President and COO [20]

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Well, I think 2 dimensions. One is, there's the normal seasonality, some of the lower-capacity segments of the market were running at a lower rate in the period just closed. So you get the mix-up effect that happens there. But the other one that's maybe more important and secular is, as we transition to 10 and 12-terabyte in capacity enterprise and as that segment takes on a disproportionately important role for us, that will continue to drive capacity per unit up. And as I commented earlier, we expect that to continue through, well, through the balance of this year and beyond.

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Operator [21]

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Our next question comes from Rich Kugele with Needham & Co.

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Richard Kugele, Needham & Company, LLC, Research Division - Senior Analyst [22]

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Two questions. First on the -- Mark, on the inventory side. Days inventory increased, is that just linearity in the quarter? Were you careful with shipping towards the end on any pricing issues? And then I have a follow-up.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [23]

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Sure. Rich, it was actually simpler than that. We had inventory build that was a function of a buffer for our ongoing transformation. And then we did have some inventory builds based on anticipated demand. So...

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [24]

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It was primarily long lead time kind of stuff, right, with the fairly strong demand we're seeing in capacity enterprise.

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Michael D. Cordano, Western Digital Corporation - President and COO [25]

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That's right.

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Richard Kugele, Needham & Company, LLC, Research Division - Senior Analyst [26]

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Okay. And then, secondly, when it comes to the industry -- the NAND side returning to more normal environment, I mean, how should we think about that, Mike, is that something that's going to happen all at once or you think it will be a gradual thing in '18?

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Michael D. Cordano, Western Digital Corporation - President and COO [27]

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Sort of hard to be specific. I think what we -- sort of the new news from us on this call and we've been talking about through the end of the calendar year now, our visibility would tell us we think it's going to remain in a constrained environment, sort of through the first half of '18. How that evolves ultimately, hard to tell, Rich.

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Operator [28]

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Our next question comes from Wamsi Mohan with Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [29]

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Steve, you said regarding Toshiba that WD should lead and help implement this transaction that would be good for all stakeholders. I was wondering, what sort of ownership changes are you philosophically opposed to and why, maybe without going into specifics of companies. But what sort of things are concerning to you regarding some of the options that were out there? Was it IP risk? Was it operational risk? What sort of things, if you could handicap that? And I have a follow-up.

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [30]

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Yes, I'm not going to get into the details of that on this call. One, a lot of this has been speculation in the press, in terms of other bidders. And so I'd rather not get into the details of, one, our review on the situation, nor speculate on what's happening with some of these other supposed bidders.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [31]

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Okay. As my follow-up, it sounds like your view on the tightness of the NAND environment, I think you guys just commented that's pushed out to first half of '18. If you were to say, is this more a function of higher demand from newer applications or lower yields in NAND causing supply shortages, how would you probably rank order of those?

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [32]

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This is Steve. I think it's a little bit of -- kind of all of the above so to speak. But one of the things that we need to understand is that this conversion, and it is a conversion as opposed to new capacity, this conversion to 3D NAND is difficult. It's difficult for all of us. We believe that we're executing in a very solid and sound fashion, and demonstrated by the fact that we now achieved cost crossover with our 1Z platform. But this is tough stuff. And so it may be is taking a little bit longer, from a conversion standpoint and from a yield perspective, than what people estimated. And so therefore, the bit growth rate is a little bit lower than all of us expected and demand continues to be strong, driving a tight environment.

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Operator [33]

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Our question comes from Karl Ackerman with Cowen & Co.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - VP [34]

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You're clearly operating toward the high end of your long-term gross margin model that you just laid out 4 months ago, with what looks like legacy SanDisk operating with a 5 handle[ph]in front of it. NAND ASPs are clearly helping you and you're still in the process of your 64-layer ramp, but I was hoping if you could touch on the opportunities to further expand your margins within the hard drive business, and specifically enterprise, as your overall margins were a record this quarter despite what looks like softer enterprise units this quarter. And I have a follow-up, please.

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Michael D. Cordano, Western Digital Corporation - President and COO [35]

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Yes, I think there's 2 areas and Mark will add some details. So one is, as we continue to progress forward into the 10 and 12-terabyte in capacity enterprise, that's obviously helpful to our hard drive margins. The other thing is, which was also referenced, we are not through the transformation restructuring and integration, which will help us optimize our cost basis. So both of those things are ongoing and continue through this year and into next year.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [36]

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I was just going to say, a key part of the model is that, given the diversified product portfolio, we have a number of operating levers that we can use to manage and optimize good environments and manage volatility in more challenging environments. So we feel very good about how that platform is evolving.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - VP [37]

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Great. And just for my follow-up. You have begun to make meaningful progress on integrating Intel. But relative to your SanDisk integration efforts, there's still a lot of runway left. And I was hoping you could just indicate where you are in the process of qualifying legacy SanDisk NAND in your own enterprise SSD business.

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Michael D. Cordano, Western Digital Corporation - President and COO [38]

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Yes. So I think as we've discussed before, we are actually qualifying our own NAND into products as they are developing and they enter the market. We remain quite happy with our relationship with Intel. And if you think about it that way, it's actually incremental bits that we are providing to the market. So it's a net accretive or positive thing. So at this point, we are going to continue on through a generation or 2, more products with our relationship with Intel. And we'll really up our participation of our own NAND in the enterprise through development and launch of new products within our portfolio.

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Mark P. Long, Western Digital Corporation - CFO, Chief Strategy Officer and EVP of Finance [39]

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And that vertical integration, that you're talking about, really was not contemplated in that initial $500 million of total synergies for the 18-month window. The lion's share of that will be reflected in the 2020 target of $1.1 billion of synergies.

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Operator [40]

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Our next question comes from Mark Miller with Benchmark Co.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Research Analyst [41]

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There's been leadership in the helium drives you've exercised for 4 years. Seagate has, I think, led in the shingled media area, but both firms are making progress in the areas that they were not originally leading. And I'm just wondering, do you see both firms coming to parity in each of those areas next year, in terms of introduction of products and the quality of their products in shingled and helium-filled drives?

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [42]

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I'm not going to speculate on that, Mark. I mean, we don't know where Seagate is and what progress they're making. I can tell you that our focus is on executing on our plans. And so in that regard, we will not be striving for parity.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Research Analyst [43]

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So what about the shingled media drives? Any estimates on what percentage of drives will be shingled media or you're going to just...

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [44]

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We haven't really provided that information. I mean, shingled's been a little bit more limited in terms of the applications because of some of the performance implications of that and that sort of thing. But we feel comfortable with where we're at in terms of SMR transition and the applicability in the drives that we're providing to our customers.

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Operator [45]

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Our next question comes from Vijay Rakesh from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [46]

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I had a question. So just looking at the Toshiba side, obviously, you guys are having a lot of negotiations there. Is that -- do you guys have a right of first refusal? I know you have consent rights, but is there a right of first refusal? And is there a time line to that process?

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [47]

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We have consent provisions, is what we have, regarding any transfer of assets and JV provisions, as I've mentioned earlier.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [48]

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Got it. But is there a time line to that process at all?

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [49]

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Well, similarly, the answer to the question, I'm not going to speculate on time lines.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [50]

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Got it. And the second question there. On the NAND side, as you look at the 48 and 64 ramp, what's the mix in the back half? And what's the -- how do the gross margins look?

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Michael D. Cordano, Western Digital Corporation - President and COO [51]

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Well, we talked about our mix in the back half, to be, 75% of our 3D bit output will be 64-layer exiting the calendar year.

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Stephen D. Milligan, Western Digital Corporation - CEO and Director [52]

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No, that's for the full calendar year, which means that by the time you get to the back half, the lion's share of our output, in terms of 3D, is going to be 64-layer. We were already transitioning out of 48 into 64. 48-layer was more of a learning platform for us, if you want to call it that, as opposed to something that we intended to extensively productize and ship. It was really for our learnings.

So I want to thank everybody for joining us today, and we look forward to speaking with you going forward. Have a great rest of the afternoon.

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Operator [53]

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This concludes today's conference call. Thank you for joining. You may all disconnect and have a wonderful day.