Western Digital: Fiscal 1Q18 Financial Results

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September quarter revenue, $5.2 million, was better than expected, $5.1 million, rising 7% sequentially and 10% yearly, with better profitability, up 143% Q/Q at $681 million, even if HDD shipments decline by 11% Y/Y.

Sales in data center devices and solutions were $1.4 billion, client devices $2.7 billion and client solutions $1.1 billion.

Client devices
Client devices revenue for the September quarter increased 13% Y/Y, primarily driven by growth in mobility and client SSDs. Embedded flash products, such as iNAND, gained further adoption within the mobile OEM ecosytem and the design win pipeline for these solutions deepened further for both current and emerging growth applications. Demand for client SSDs grew due to increased adoption within OEM's product portfolios, coinciding with the expansion of company's product offering. WD began ramping 64-layer based client SSDs for OEMs in the September and December quarter and expects to launch 64-layer eMMC solutions for the mobile and compute markets.

Client solutions
Revenue grew strongly from the prior year driven by the diversity of firm's portfolio of HDD and flash-based products. Sales for the September quarter increased 16% Y/Y mostly as a result of the strength of global retail brands in removable and other flash-based products.

Data center devices and solutions
September quarter revenue was similar to the year-ago quarter, as combined revenue growth in enterprise SSDs and capacity enterprise HDDs was offset by the expected secular decline in performance enterprise disk drives. In capacity enterprise, demand continues to be muted due to the ongoing industry-wide shortage of key components, principally DRAM, resulting in slower industry petabyte growth in calendar 2017. For calendar 2018, which is increasingly informed by joint planning with hyperscale customers, the company expects that petabyte growth will re-accelerate to the 40% annual rate. This will be driven by planned market migration to higher capacities such 12TB offering to handle the growth of varied workloads and as the component shortages ease.

In the September quarter, WD saw a continued shift in capacity enterprise to 10TB drives, gaining further traction with third generation helium offering. Customer qualification activities on fourth generation helium offering, 12TB, remained on track and the firm expects its commercial ramp will accelerate in the December quarter. The company has shipped more than 20 million helium drives since the introduction of this platform in 2012.

In its flash joint ventures during the September quarter, it achieved bit output crossover for 3D NAND versus 2D NAND. Manufacturing yields of BiCS3, 64-layer 3D NAND. Entire retail portfolio has been enabled on BiCS3 already and the firm is underway in expanding the use of this technology into OEM offerings.

From a flash industry standpoint, WD's estimate for bit growth for calendar 2017 remains at the low end of its long-term industry outlook of 35% to 45%. For calendar 2018 it expects overall industry bit growth to continue to be in that long-term range. Given that the secular growth drivers for flash remain strong, it continues to believe that the favorable industry conditions will persist through the first-half of calendar 2018.  

WD expects next quarter's revenue to be between $5.2 billion and $5.3 billion or an increase of 0.3% to 2%. Analysts on average are expecting $5.33 billion.

While the storage manufacturer expects to see normal seasonal decline in the second half of fiscal 2018, it sees the opportunity to achieve revenue growth at the high end of its long-term model of 4% to 8% for FY18.

Here are comments of CEO Steve Milligan on complicated relation with Toshiba:

"There has been significant media coverage around this situation, and a lot of it is speculative. So as a starting point, I want to emphasize that the JVs continue to operate efficiently and productively, which we intend to maintain. The JVs benefit from the best talent in the industry and we are deeply appreciative of the professionalism, focus and dedication exhibited by the teams from Toshiba and SanDisk.

"From the beginning, our number one priority has been ensuring the longevity and continued success of the JVs. That is why we have invested so much time and energy into finding a resolution - one that respects our partnership, and resolves this matter so we can move forward in the spirit of collaboration and innovation that has been the hallmark of this 17-year relationship.

"Throughout the course of the negotiations, we made numerous allowances to meet the needs of Toshiba and other stakeholders such as lenders, customers, suppliers and government agencies. Most notably, we withdrew from the INCJ-KKR consortium. This eliminated our participation in TMC equity ownership, thus minimizing regulatory risk and directly addressing key concerns of TMC's management. It also would have meant that TMC would remain under full control of Japanese stakeholders.

"While we believe we provided the best potential solution to Toshiba and their stakeholders, Toshiba announced a transaction with a consortium led by SK Hynix and Bain Capital. We have made our concerns regarding their consortium clear. It continues to be our position that the transaction is not permitted without our consent.

"That leads to where we are today. There are two potential paths for resolution: the stakeholders will either engage in constructive dialogue in the near future, or this matter will be resolved through the objective arbitration process. With respect to arbitration, we are moving forward with strong momentum following our successful track record in the California courts.

"On October 5th, the International Court of Arbitration confirmed the three-member arbitration panel. Shortly thereafter, we informed the panel of our intention to seek injunctive relief to prevent Toshiba from transferring its JV interests to the SK Hynix-Bain consortium without SanDisk's consent. The panel will set a hearing schedule soon, at which point we will officially file our motion. SanDisk's consent rights are clear and explicit, and we therefore feel confident in our request for injunctive relief. We expect a ruling in the first part of 2018, in advance of Toshiba's announced timeframe to close the proposed transaction. Just to be clear, we do not undertake litigation lightly. We are not litigious and it should only be a last resort, especially in the context of this joint venture relationship.

"With respect to Fab 6, you may recall that over the summer, during negotiations for the first investment tranche, Toshiba announced that it would unilaterally invest in Fab 6. This was a surprise to us. In fact, when Toshiba made its announcement, we had more meetings scheduled to further discuss our joint investment. This was the first time that SanDisk was prevented from participating in a new fab investment. To remind you, Toshiba's actions associated with the first tranche are already the subject of arbitration. The negotiations regarding the second investment tranche for Fab 6 are ongoing.

"Just as we did during the negotiations for the first investment tranche, we intend to jointly participate in the investment and we are agreeing to all good-faith, commercially reasonable terms proposed by Toshiba. However, we will not agree to terms such as SanDisk unilaterally waiving or negating its consent rights as a condition to participate which is what Toshiba has proposed. Consequently, at this time, we are not confident that an agreement will be reached on this next investment tranche either.

"As we have noted, Toshiba's planned initial investment in Fab 6 is solely for its directly owned capacity that is outside of the JVs. If Toshiba proceeds unilaterally with this second investment tranche it would also be for Toshiba's directly owned capacity, not joint venture capacity.

"It is also important to remember that the JVs are obligated to provide us our entitled share of flash supply through 2029. Based on the JV agreements, we remain confident in our planned supply bit growth rate of 35-45% for calendar 2018 and calendar 2019, irrespective of these initial investments in Fab 6.

"In closing, I want to emphasize the following:

• • First, our board and management are focused on resolving our differences with Toshiba, whether that is through a negotiated agreement or the arbitration process.
• • Second, we are steadfast in our commitment to protect our interests and those of Western Digital's stakeholders. We are confident in our fact-based legal positions and our right to injunctive relief.
• • Third, as I mentioned earlier, there has been a great deal of mis-information provided into the marketplace through various channels. We expect this activity to persist contributing to potential confusion about this situation and our legal rights. Western Digital will continue to communicate consistently and transparently - as we did with the recently filed FAQ and through public forums like this call.
• • And finally, I want to reiterate that our number one priority has been to ensure the longevity and continued success of the joint ventures. From day one, we have not changed this priority or our commitment to acting in the best interests of our stakeholders."

To read the earnings call transcript

Volume and HDD Share

Seagate vs. WD for 1FQ18
(revenue and net income in $ million, units in million)