Western Digital Corporation (WDC) Management on Morgan Stanley Technology, Media and Telecom Conference (Transcript)
Western Digital Corporation. (NASDAQ:WDC) Morgan Stanley Technology, Media and Telecom Conference March 2, 2021 11:45 AM ET
Company Participants
Bob Eulau - Chief Financial Officer
Siva Sivaram - President Technology & Strategy
Conference Call Participants
Joseph Moore - Morgan Stanley semiconductor Analyst
Joseph Moore
Hi, good morning, welcome back everyone. I'm Joe Moore of Morgan Stanley semiconductor analyst. I want to introduce our guests first, I do need to read it quick, Safe Harbor from Morgan Stanley’s side for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.
So I'm going to introduce Western Digital. We have today, Bob Eulau, the Chief Financial Officer and Siva Sivaram, President Technology and strategy for Western Digital. So welcome, guys. I know you have a Safe Harbor agreement to read as well. And then we'll go straight into questions.
Bob Eulau
All right. Well thanks, Joe, we really appreciate you having us today. And as you said, we got a quick Safe Harbor, we will be making forward looking statements. And I ask that you refer to our SEC filings for the risks associated with these events. We'll also be making references to non-GAAP financials and a reconciliation of our GAAP and non-GAAP results can be found on our website. So with that, I think we're ready to go.
Question-and-Answer Session
Q - Joseph Moore
Great, thanks. So maybe I can start off with some of the bigger picture things that have been going on. And maybe see if you can give some insight into this, since you've seen now a couple of transitions from SanDisk to WD to a CEO transition. But you know it we're coming up on a year now since the CEO change. And it feels to me like you've reweighted the priorities a little bit. A year ago, you were sort of a hard disk drive company that also had NAND business. Now the two businesses are kind of on a equal strategic footing, getting equal focus and a little bit of separation. Is that perception accurate? And just, maybe frame for me a little bit, the way you guys see that?
Siva Sivaram
Oh, you want to get to talk to them? And they'll continue?
Bob Eulau
Yes, sure, I can start and I've been here about two years now. So I saw about a year before the transition about a year after the transition. I mean, my take is both businesses were always extremely important to me, they are two great markets. We have both the hard drive business and the flash business growing at this point. We had previously been organized around market, end markets. And Dave and the team just really felt we had too many execs worrying about both flash and hard drives.
So what we've been able to do with this transition is really get more focused into the company. I think there's a lot more ownership and accountability. The Flash and hard drive technologies are very different and require a lot of focus. And, and so I think the product strategy is definitely getting better, the roadmaps are getting better. There's more intensity on each of those businesses. And, and so we've made good progress, I would say in the last few months in terms of establishing the two new business units.
And we have great leaders in place on both fronts. They are, they're focusing on getting the strategies right. I’m spending a lot of time in terms of getting deep on that technology and product development. They've been engaging with customers and so we're really excited about the level of traction we get in each of the areas. So I don't know too far. I guess I'll let's Siva see if he wants to add he's got a little bit longer perspective on all this.
Siva Sivaram
Bob said it right. Joe, the whole thing is about focus. And what this is alone and the two leaders, we have to focus on the respective businesses. The technologies in the company have always been strong company. The company has always been a very strong technology company, converting it into the products the right way, with the right portfolio focus, that's what the pro forma are able to do and then deliver those products to customers. And again, the synergy in the customer is very, very good. And that comes back together again.
Joseph Moore
It makes a lot of sense. And I certainly understand the rationale for the business segmentation that you guys talked about. I guess it's led to speculation about whether, the two businesses at some point separate. And it seems like you guys are pretty clearly in the camp of, the synergies that were the rationale for the acquisition in the first place, on the go-to-market side, are still the prevalent kind of way of thinking about it. But is that the right, I think way of thinking about it, it's a storage company, you see a lot of benefits to the marriage of the two businesses, but you also see the need to focus a little bit differently on the two supply chains.
Bob Eulau
Yes, I mean, there's still a lot of synergy on the go-to-market. And I think we've seen that in the past year, just like we saw it in prior years. If you think about it from a client perspective, we've been able to really manage the trend from client hard drives to client SSDs very effectively. And I think we were only able to do it that well, because we had both the hard drive and flash businesses.
From a data center perspective, we think the technologies are complimentary. So on the client side, they're really substitutes. But on the data center side, they're complementary technologies. And so as we're having success with enterprise SSDs, we think that's going to lead to more success on the capacity enterprise hard drives, and vice versa. And that's important when you're trying to get in and get qualified at various accounts. And those qualification slots are, are really important. It's also, we've done, we've done the work. I mean, we know that of our top 20 customers, all 20 of the customers actually use both technologies. Now, some are much bigger in one area versus the other. But there's a lot of synergy in terms of they go-to-market with those customers. And we have a big retail franchises as well. And we're seeing some of the large customers really getting into gaming, getting into VR headsets, wireless devices. I mean, there's a, there's a lot of synergy in terms of how we go to market. And so we did not want to lose that synergy. But we really wanted to get the focus on the product side.
Joseph Moore
Yes, that makes a lot of sense. I guess as the sort of most agnostic storage supplier between NAND and hard disk drives that sort of anyone participates in these markets. Can you talk a little bit about how you see the markets coexisting? Are they both going to grow? And what are the areas that you see one growing at the expense of the other?
Bob Eulau
Maybe I'll start and then Siva can add his thoughts. But now in part definitely part of why I came to the company as I see storage as a growth area. And I think it's going to be a growth area for many years to come. And I think we're just an inflection point on the hard drives, given capacity enterprise becoming such a high percentage of the total that we're going to see hard drives as a growth business as we go forward. On the flash side, most industry analysts expect to 30 plus percent bid growth for a number of years as we go forward. So, so this is clearly a growth market. And I think we're going to be in a we are in a really good position to benefit from that growth as we move forward. And I think the new focus we just talked about in terms of the way we've organized the company, I think it's going to help us to capture some of those opportunities. If you want to add anything there Siva?
Siva Sivaram
No, but you said it correctly, Bob. We are the only full spectrum storage company in the world. We are the largest full spectrum storage company and we do participate in a wide array of markets on both of these, whether it is in retail, whether it is in client, whether it is mobile, whether it is enterprise, whether it's an age devices, whether it's growing cloud, everywhere, there is data that is exploding, and the need for storage is growing when it is fast hot storage versus cold, archival storage, in that all entire spectrum data is growing.
And we have to have that consistent philosophy of making sure that our big cloud type customers are able to deploy the right storage technology or the right place and we are there in every one of those one of those market segments. So this is a this is a good place to be rapidly growing market. The technology and the product portfolio are well situated and we are serving the full breadth of the customer requirements
Joseph Moore
Great, thank you. I think, maybe focusing a little bit on the NAND business. And I would start with the joint venture, I noticed you guys in sort of recent presentations have been, sort of speaking positively about the JV. And I know this for 20 years, this JVs work really well. And it gives you the scale that the biggest companies have between the two companies. And so it seems really important to me, for the JV structure to work. Can you talk a little bit to that? And, how smoothly is that working? And how, is this going to continue to be a successful partnership?
Siva Sivaram
Joe, just as you said, this is a 20-year long marriage, it's been working very, very well. And between us, this is the largest, largest flash rated fab in the world. We produce close to 40% of the world's flash in these, these fabs. And the scale that each of us leverage off of each other, both in the manufacturing volume, of course, the fixed costs, and that can be deployed over the larger volumes, that that helps. But more importantly, in the development side, that we are able to pull over resources and develop the common die that needs to the technologies that developed within the die is designed and manufactured allows us to, to fully exploit the entire market space that we are serving. So we are able to each of us contribute only half of the of the development needs to get the whole full benefit of, of R&D scaling.
So that's been very, very good. Of course, as you know, we compete in the marketplace. We compete openly in the marketplace and the entire spectrum. But on the development side, we are brothers, we are comrades at arms, developing it together. And yes, we went through some difficult times earlier in the decade, but the relationship is very, very good, and continue to go strong.
Joseph Moore
Okay, great. Thank you. Could you talk a little bit about your competitive position in NAND, and maybe I want to talk about big six, which you just announced, we can talk a little bit about your big 512 layer technology, how's your relative cost structure and specs kind of versus the competition there?
Siva Sivaram
So let me let me set it up. First, as we said, talked about the JV. The JV provides the scale, scaling, manufacturing, scaling R&D. So that given that in the merchant market, meaning in the non-capital market, we have 40% of the entire flash market. We set the pace, right. What we do upfront sets the pace in where the technology is. Having said that, back to the technology details, our high volume today is in that 96 layer, one of our most successful technologies, we peaked at over 80% of our volume going out of the 96 layer technology BiCS4. We have since introduced and now ramping BiCS5 the 112 layers. When market talks about 128 layers, we are able to do in 112 layers, all of the leads that talks to the technology advantage that we have. When you add more layers, it adds more cost, you need more capital equipment, you need the latest capital equipment. We are able to accomplish this with a lower number players both in terms of the big growth and in terms of the cost with the lowest possible capital needed.
So 112 BiCS5 has been a tremendous success, the fastest yield ramp that we have seen in in our history. So we are ramping very rapidly from the 80 plus percent of BiCS4 for now by the later half of this year, we will have the majority going into the BiCS5, the 112 layer. So that gives us that extremely rapid switchover from one technology to another without the intensity of the capital needs. So we continue to be the market leaders in cost as we go forward into BiCS5 ramp later in the year where we will have products across all segments. Currently we are shipping, retail and client products on BiCS5.
By the time this is done, it would have shipped in every product category that we want to switch over to BiCS5. And then of course BiCS6 which is coming up with 162 layers. Again, you see the same trend when everybody is talking about even more higher layer, we are staying lower layers still managed to get the cost reduction and competitiveness.
Joseph Moore
And may be on BiCS6 I mean there's an interesting specs that I saw and in your release 162 layers, you mentioned, you're moving the CMOS under the array, so you get a pretty big reduction in die size. And I guess, if I think about SanDisk, as a planar company, it was always very clear that you guys had much smaller die sizes than everyone else, like, as you as you get into this kind of sixth generation of 3D, where are you going to stand versus, versus Samsung, versus Micron Intel?
Siva Sivaram
Yes, so, die size is, as you know, is an extraordinarily important metric. But you need to trade off die size and the process complexity. In order to get to that die size, then you have to do unnatural things. When we now try to develop technology, that balance will always be there, the circuit center under the array always used for one particular density, the smallest die. Only for one particular density, you’ll get the smallest die, otherwise, the array gets big or the CMOS gets big, right? We, even though we had the technology in house, I don't know if you remember Joe, we shipped circuits under the array with the original matrix technology in 2005 in volume. So we know how to do circuits under the array. But we did not introduce circuits and arrays till the big sixth generation, because that's when the array gets large enough to justify having circuits under the array.
And so we want to make sure we are trading off constantly process complexity against dice size. And when it comes to the big six generation, we see that matching and this is the whole philosophy of delivering the right technology at the right cost point and performance point for the customer.
Joseph Moore
Yes. Okay. That's helpful. So you mentioned the lower capital intensity. And I've always been impressed by the amount of technology that you guys extract from relatively low CapEx, even if JV level and then there's a, even less corporate CapEx because of the JV structure. How do you think your capital spending has been over the last 12 to 18 months? And, this the number needs to come higher as industry conditions improve? And obviously, this year, you had some supply growth from some of the negatives to supply last year, how much capital spending, do you need going forward to stay on the curve that you want to be on?
Siva Sivaram
Bob, you want to take that?
Bob Eulau
Yes, so thanks for your comments, Joe. I mean we do believe that, as Siva said, our designs have been very capital efficient for a long period of time. And, and so and BiCS5, in particular is very capital efficient node. We’ll probably have to invest a bit more in BiCS6. But that's a ways out. So I'd say to answer your question, last 12 months to 18 months, I think we've been very efficient from a CapEx standpoint, as we've talked about, our goals in terms of CapEx are to be in total around 6% to 8% or cash CapEx to be 6% to 8% of total sales. And that implies 8% to 10% on the flash side, and 4% to 6% on the HDD side. We're a little higher right now on hard drives. But that'll I think, come back in line over time. And one thing that's really important to continue to keep in mind, when we're talking about capital, is we also have about a billion dollars in depreciation in the JV that we're able to take advantage of. So within the JV, we find a billion dollars of depreciation every quarter, every year, and that is 10-years to purchase capital equipment as well.
And then to -- and then we also do a fair amount of leasing in the JV for equipment. And then if there's any, any delta between the leasing and what the depreciation funded, then we'll actually make a loan to the JV and if it's the other way around, we'll obviously get cash back from the JV. So I think we've got a very efficient CapEx structure from flash standpoint, and, and I think we've done a nice job in terms of transitioning resources over time on the hard drive side. We're kind of to the end of that, where client, there's not there aren't a lot of assets on the client side, we're going to be able to shift to capacity enterprise as we move forward. So I think that'll change over the next couple years.
Joseph Moore
Yes, and I think it's one of the elements that may be underappreciated is your cash flow on EPS are actually a lot closer to each other than they are for other memory suppliers. And maybe we talk a little bit about NAND economics. Your gross margins were up in December, which we didn't expect. You guided them to be up slightly again in March. And this is a NAND comment. And I know you've had some tailwinds from startup expenses rolling off but, do you think we're past the bottom on NAND gross margin for this particular cycle? Are you willing to kind of make that statement and then generally, there have been some positive comments from your customers about pricing that sort of stabilizing, not going crazy, nothing, nothing untoward happening, but maybe where customers that we thought there would be price declines. It looks a little bit more stable then things like that. Can you just talk a little bit to your general gross margin progression by quarter?
Bob Eulau
Sure. Yes. And I'd say, in general, I agree with your comments. I, we focus primarily one quarter at a time, as you know, and we did guide the gross margins up a bit, if you looked at our overall comments, after the last earnings call. So I'd say in terms of the second quarter, flash pricing was basically in line with what we had expected, we continue to see very good cost improvements. The start-up costs came in better than we anticipated. I think they were around 41 million, and we had expected around 50 million. So there's a little bit of a benefit there.
Fiscal Q3, which is the March quarter is usually a fairly soft quarter, because it's a weaker quarter from retail standpoint. But we're still seeing, as I mentioned, fairly good trends, good cost reductions in the third quarter. And it's we'll see how that how it plays out, as I mentioned before, on the OEM markets. And we've been seeing really since before the calendar year started, we expect calendar year to be calendar year 2021, to be a pretty positive year. And I still think it's looking, looking that way. So I always hate to call a bottom. But I guess if you look at the arithmetic, you would say that the second December quarter was probably near the bottom.
Joseph Moore
Yes. Right. That sounds good. And then just one last NAND question. I mean, we go back over, really, a generation, we've seen an oscillation of gross margins, just sort of bottoming out in the 20s. For this goes back to the SanDisk phase, NAND gross margins, bottoming out in the 20s. Sort of generally peaking in the 50s. When things when times are good. Do you think that's a general contract? I'm not asking for a prediction, but like it, is that still the right range to kind of think about where your gross margins can go over the course of a business cycle? And maybe averaging somewhere in the middle?
Bob Eulau
Yes, I guess the way we've been thinking about it and talking about it, we need to prove this theory is we think in the 3D era, because the flash is more capital intensive, that the cycles will probably be a bit more dampened. So our theory is that the lows won't be quite as low as they weren't before. And at the height, quite as high as they were in the past. So we'll have to go a few more years to prove out that theory, but that's kind of the way we're thinking about it.
So, yes, I think we're, obviously we got slowed down a little bit by the pandemic of this past year, we were starting to make progress forward prior to the pandemic. I'm hopeful that now we'll see progress as we move through this calendar year, as we talked about.
Joseph Moore
Great. All right, and then maybe shifting to drives a little bit. The transition in the nearline business, to 18 terabyte has sort of gone well from certain standpoints, that you've hit your milestones on 18. But you've seen some pressure on the 16 that have maybe pressured margins a little bit, can you just talk generally about what you've been seeing in hard disk drives, particularly on the margin side?
Bob Eulau
Yes, happy to do that. And just going back in time, and the 14 terabyte drive was a fantastic product for us, it really allowed us to get in a market leadership position, sustain it for quite a while. Unfortunately, we ended up being late on the 16 terabyte drive. So by the time we came to market, the gross margins, we're already under pressure on the 16 terabyte drive. And in the first half of this year, we were shipping more 16 terabytes than we are 18 terabytes, we are starting to ship 18 terabyte drives in the March quarter. So as we go through the year, we think margins will improve, because the structure is better on 18 terabyte drives, but the year is still going to be a mix of 14, 16 and 18. And different customers are going to adopt the 18 terabyte drives at different points in time. We do have the energy assisted drives quad at three of the top four cloud titans. So we feel good about that. And we're seeing more and more adoption with other customers as well. So I think that we'll get back into leadership position with the 18 terabyte drives. And as we do that, we're expecting to have a gross margin tailwind and we should be in a much better place than we have been in the last couple of quarters.
Joseph Moore
Yes, I mean, between the COVID cost issues and some of the things you just referenced, the drive the hard drive margins have been in the mid-20s. It's still the right model there. You think about that as a 30% plus gross margin business.
Bob Eulau
Yes, we think it needs to be north of 30%. Over time to meet the demand requirements. There's going to have to be CapEx investment in this market as well. So I think it's going to be pricing eventually will be a function of supply and demand in this market, not unlike it isn't a flash market.
Joseph Moore
Yes. Okay. And then in terms of the longer term roadmap there, can you talk about that sort of hammer versus mammer [Ph] debate? Can you talk a little bit about WDs positioning there?
Siva Sivaram
Yes. So I will take this Bob. [Indiscernible] but hammer is just one more tool in our toolbox. I just want to make sure we keep that in perspective, that we see a clear line of sight for us into the mid 20 terabytes, without having the remote hammer in our own energy enhanced roadmap that is there, there is some art to go with it. And adding a number of disks is still to go with it. We have still continued to increase the areal density with energy assisted work that we're doing.
Yes, we will get to use hammer overtime when it is the right time. And we expect that to be in the middle of the decade than in the early part of the decade. And but in the meantime, the product progression is very, very well set with the roadmap as to what's going to happen with the 18 to 20, to 22, etcetera. So that that path, we have a lot of confidence in, we will continue to be the areal density leaders because of that.
Joe, you need to think of it not just as one digital change from conventional PMR to hammer, you got to think of it as many such transitions that are all in the path, whether it is going from eight to nine to 10 disks, whether it is going from conventional to energy enhanced from CMR to SMR, and actuators going from triple stage and better, more nuanced firmware that is going to manage all of that. And of course, hammer eventually. So that's the path we see in well into the decade. So the roadmap is very, very strong through the capacity enterprise technology
Joseph Moore
Right. So there's a couple questions from the webcast that I wanted to relay. One of them says I drink too much coffee, which is I didn't know my wife was was listening, just kidding. The -- in terms of the BiCS6 transition you mentioned it being a little bit more capital intensive than BiCS5, which was really sort of good, very capital efficient technology. Yes, how much do you think that changes the capital spending profile?
Siva Sivaram
Well, I'll start out and then Bob, you can continue on. The way you modulated along with the increased capital spending also comes higher than growth. So in the same way for BiCS6 has the highest bid growth than this BiCS5, because of the circuits in the very small size. So for a given big growth rate, we modulate CapEx accordingly kept expanding accordingly, even though per lot on per unit, you need to spend more forgetting the mid growth that we need, we can modulate the capital spending.
Joseph Moore
Great. And then another question in terms of pricing being a little bit better, at least than I had anticipated. I'm not trying to put words in your mouth. But you know, with NAND pricing being a little bit better than what industry pundits had sort of thought. Do you think that's demand factor? Do you think that there's supply issues? I mean, it seems like capital spending has been high for the last few months. Do you think -- just you see, you see that and you've been describing better pricing, really going back a few months starting in the consumer business? Do you see that as a demand versus a supply issue?
Bob Eulau
Well, I mean, our view is the demand has been there. We've been expecting 21 to be a very good demand here for quite a while. And I think that that's going to play out the way we anticipated. From a supply standpoint, we've set for quite a while we think most of the industry participants behave pretty rationally and in the 3D era, it's very, very capital intensive. And so I don't think there's a big surprise here. I think most of us are trying to preserve our market share, and it's a fast growing market.
Joseph Moore
Yes. Okay. And then another question from the web site, which I probably don't completely understand. But you guys will see Pete outlined a new storage as a service product to enable and process all data created. Is WD looking at doing anything like that? And what's your perspective on that market?
Siva Sivaram
We always had a platform business within the company and that continues to do well. But we have a diverse product portfolio, we will service all market segments as needed. We are not coming in and making a separate big focus the way you heard from our company that we are not trying to do something that we I'm not planning on competing with our customers.
Joseph Moore
Okay, thank you. So maybe two minutes left, I'll finish with just a financial question. Bob, in terms of the cash flow and the dividend, I feel like you guys still get a lot of flack for, having suspended the dividend, which seemed to me like the right thing to do we actually had previewed in that quarter, we thought you should do that. So I feel a little bit responsible that, people are negative, but it seemed like it was the right decision to make. Can you just talk a little bit about where you are with the deleveraging process? And where, where you might see those cash flows starting to get return to shareholders? What are the metrics you're looking for to get to that point?
Bob Eulau
Yes. So thanks for your comments, Joe. It wasn't a decision we took lightly and we deliberated on a long time. And I think now as we look back, it was clearly the right answer, given everything that transpired in the pandemic. Our priority is to reinvest in the business, and we've got two growth businesses, they both require capital, and we've got to make sure that we fund them for leadership before we do anything else.
And then our next priority is to delever the company. I think we've been really clear on our goals to get down to $6 billion in gross debt and, and $3 billion in net debt. That implies gross leverage that we think is very reasonable through a cycle. So we modeled the best EBITDA the four for best EBITDA quarters, which turned out to be fFY'18. And then we modeled the four worst EBITDA quarters and the last trough and you look at that you look at our debt goals, you'll end up with gross leverage anywhere between one and three and a half as we move through a cycle. And we think that's very healthy. So we'll, we'll make as much progress as we can as fast as we can. Nobody's more motivated than us to get in that range.
Joseph Moore
Yes. Okay, good. Well, we'll wrap it up there. Thank you very much, guys for your time, and we'll talk to you soon. Thanks, everyone.
Bob Eulau
Thank you all.
Joseph Moore
Thanks.
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