Western Digital Corporation Q2 FY2026 earnings call

• AI is driving strong demand for storage as it fuels the entire AI process from training to inference. Western Digital is focusing on increasing areal density, accelerating HAMR and ePMR roadmaps, and upshifting customers to higher capacity drives. - Shipped over 3.5 million units of latest ePMR products with capacities up to 32 TB. - Started qualification of HAMR and next-gen ePMR products with hyperscale customers. - Acquired IP assets and talent for internal laser capabilities. - Announced strategic investment in Qolab to advance quantum hardware design. - Hosting Innovation Day on Feb 3 to share roadmaps for HAMR, ePMR, and financial model.

In the second quarter of fiscal 2026, Western Digital's revenue was $3 billion, up 25% year-over-year. Cloud segment contributed $2.7 billion, representing 89% of total revenue, up 28% YOY. Client segment was $176 million, 6% of total, up 26% YOY. Consumer segment was $168 million, 5% of revenue, down 3% YOY. Gross margin was 46.1%, improving 770 basis points YOY and 220 basis points sequentially. Operating income was slightly above $1 billion with an operating margin of 33.8%. Cash and cash equivalents were $2 billion, total liquidity $3.2 billion, net debt $2.7 billion, operating cash flow $745 million, capital expenditures $92 million, free cash flow $653 million.

• Anticipates Q3 2026 revenue of $3.2 billion ±$100M, midpoint up ~40% YOY. - Gross margin expected 47%-48%. - Operating expenses expected $380M-$390M. - Interest and other expenses ~$50M. - Tax rate ~16%. - Diluted EPS expected $2.30 ±$0.15 based on ~385M diluted shares.

Q: On the gross margin line, the guidance for 47% to 48%, how do you think about the durability of that incremental margin?

A: Kris Sennesael states gross margin improved 220 basis points QOQ and 770 basis points YOY, guiding to 47%-48%, incremental gross margin is high, pricing is stable with slight price per terabyte increase, cost control is strong with upshifting to higher capacity drives and cost reduction in manufacturing and supply chain driving further gross margin expansion.

Q: Given the tightness of the HDD market and NAND inflation, talk about patience in signing purchase orders further into calendar '27 and economics?

A: Irving Tan says they have firm POs with top seven customers through 2026, LTAs with two customers through 2027 and one through 2028, pricing reflects value delivered to customers with structural shift in value due to AI inference impact on total cost of ownership.

Q: Could you speak to how customer engagement and contracts are evolving?

A: Irving Tan mentions pivoted to customer-centric approach with dedicated teams for big hyperscale customers, deepened relationships, longer-term LTAs, and will share innovations at Innovation Day for AI needs.

Q: Thoughts on the mix of UltraSMR, how is the trend and role in gross margins?

A: Tiang Yew Tan says last quarter nearline portfolio had 50% UltraSMR mix, increasing, top three customers fully on board, UltraSMR gives capacity uplift and is software-based, beneficial for customer demand and gross margins.

Q: Color on yields and reliability, progress from Rochester test and integration site?

A: Tiang Yew Tan says ePMR yields in low 90s, good feedback from customers, started HAMR and next-gen ePMR qualification, Rochester SIT Lab helps with smooth qualification, more details at Innovation Day on Feb 3.

Q: Notable investments related to HAMR flowing through COGS or operating expenses, expectation of costs rolling off?

A: Kris Sennesael says working on HAMR for 10 years, engineering progress continues, investments will continue, HAMR ramp will be neutral to accretive to gross margins. Tiang Yew Tan adds CapEx as % of revenue will be 4%-6% on run rate.

Q: Agentic AI demand enabling exabyte growth CAGR of low 20s?

A: Tiang Yew Tan says AI inference drives more data creation and storage, HDDs well suited for economics, positive for HDDs going forward.

Q: Detail on IP acquisition for laser side, progress on customer transitions?

A: Tiang Yew Tan says acquired IP on laser side, confidential terms, helps with manufacturability and energy reduction, will share more at Innovation Day; Tiang Yew Tan also mentions working on innovations to improve bandwidth and throughput of drives.

Q: HAMR road map timeline, progress on qualification?

A: Tiang Yew Tan says qualified HAMR and next-gen ePMR drives earlier than planned, started qualification with one customer this month, will start with another soon.

Q: Revenue per exabyte change quarter-over-quarter and year-over-year related to mix?

A: Tiang Yew Tan says cloud segment is big driver, pricing stable, up single digit last quarter and YOY, strong demand from hyperscale customers driving revenue per exabyte.

Q: Commentary on cost down, HAMR impact on cost down?

A: Kris Sennesael says currently cost per terabyte/exabyte down ~10% YOY, will continue to innovate, upshift to higher capacity drives including UltraSMR, leading to further cost reductions.

Q: LTAs for 2027 and 2028, reason contracts not locked in price?

A: Tiang Yew Tan clarifies LTAs have both price and volume conditions.