Western Digital Corporation Q1 FY2026 earnings call

AI Impact

• AI is driving demand for data infrastructure, with HDDs crucial for storing AI-generated data. Western Digital uses AI internally for productivity and innovation, e.g., in engineering to modernize firmware and in factories for productivity gains.

Product Deliveries

• Shipped over 2.2 million units of latest ePMR products (up to 26 TB CMR and 32-TB UltraSMR) in the September quarter, with shipments expected to exceed 3 million units this quarter. Inaugurated a 25,600 square foot state-of-the-art system integration and test lab in Rochester, Minnesota.

Customer Commitments

• Top 7 customers have purchase orders extending into 2026, with 5 covering all of 2026 and 1 covering all of 2027. Progress on HAMR development with qualification starting for 1 hyperscale customer in H1 2026 and expanding to up to 3 by end of 2026. Next-generation ePMR drives to start qualification in Q1 2026.

Financials

• First quarter revenue $2.8B, non-GAAP gross margin 43.9%, EPS $1.78, free cash flow $599M. Increased share repurchases and announced a 25% increase in dividend per share to $0.125 per share.

For the fiscal first quarter, Western Digital delivered revenue of $2.8 billion. Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year. Client represented 5% of total revenue at $146 million, up 5% year-over-year. Consumer represented 6% of revenue at $162 million, down 1% year-over-year. Non-GAAP gross margin was 43.9%, non-GAAP earnings per share was $1.78, and free cash flow for the quarter was $599 million.

Fiscal Q2 2026

• Expect revenue to be $2.9 billion, plus/minus $100 million (midpoint reflects ~20% year-over-year growth).
• Gross margin expected to be between 44% and 45%.
• Operating expenses expected to be in the range of $365 million to $375 million.
• Diluted earnings per share expected to be $1.88 plus/minus $0.15.

Long-term

• Confident in the long-term strength of the business driven by AI demand for higher capacity drives.

• Macro-economic uncertainties that could impact business performance.
• Supply chain and manufacturing challenges associated with producing higher capacity drives.
• Competition and potential shift towards SSDs affecting HDD demand.

Q: Storage demand is off the charts. How do you plan to meet rising customer demand while keeping supply/demand in balance?

A: C.J., thank you for the question. Our focus is really to -- on a couple of things. One, ensuring that we continue to quickly and reliably deliver increasing higher capacity drives. A good example is the current PMR product that we have that's -- where we shipped over 2.2 million units last quarter that equates to roughly about 70 exabytes of data in total. And that product is expected to ship well north of 3 million units this quarter. So it's a real demonstration of our ability to deliver exabytes to customers at scale. The second thing is that, as we've highlighted in the past, our unique innovation around UltraSMR. This quarter, our UltraSMR and CMR mix is roughly 50-50. As you recall, UltraSMR gives us a 20% capacity uplift over CMR and a 10% capacity uplift over standard SMR. Those capabilities, plus the fact that we'll be launching our next-generation ePMR drive very soon. It starts qualification in Q1 of calendar '26, and we anticipate it will go into ramp in the second half of calendar year '26, will give customers an ability to take advantage of higher capacity drives. Second, we've been working very closely with customers to mix them up in terms of capacity points as well. So if you go back a year, the average capacity for our top 7 hyperscale customers has increased 21% year-on-year. So that's a very strong testimony to how capacity points in our drives have scaled up. We also continue to invest into areal density technology improvements and capacity as well as we stated from the very onset of us spinning out as the stand-alone hard drive company. Those investments will continue to be able to deliver greater areal density improvements without the need for any additional unit capacity. We're also looking at increasing our manufacturing throughput by leveraging more automation, AI tools that we highlighted in the script and also enhancing our test capabilities. This increase in productivity of our existing footprint will enable us to deliver more exabytes to our customers as well. And last but not least, as we highlighted in the script as well, the investments that we've made into our [ test ] labs to accelerate qualification is a key part of our ability to bring higher capacity drives faster to customers and therefore, fulfill the need for exabytes as well. And maybe just let me end my comments by being very clear about one statement, we are not adding any unit capacity to our portfolio right now.

Q: On gross margins, great, 660 bps uplift year-on-year. But obviously, we're always looking forward. So how should we think about incremental gross margins from here? Is there a framework that we should use?

A: Yes, C.J. So I'm really pleased with the gross margin in Q1, delivering 43.9% gross margin, which, as you pointed out, was up 660 basis points year-over-year and 260 basis points on a sequential basis. Even when you look at the incremental gross margin in the quarter on a sequential basis was approximately 75%. As you've seen in the prepared remarks, we've also guided for Q2 fiscal '26 with further gross margin improvement in the range of 44% to 45%. So that gives you to 44.5% at the midpoint, which gives you on or about 65% of incremental gross margin on a sequential basis. Looking forward, obviously, as a company, we're going to continue to focus on further gross margin improvements. And I'm comfortable to have incremental gross margins on a sequential basis of approximately 50%, and that will drive some further gross margin improvement.