Western Digital Corp (WDC) Q1 2027 earnings call transcript

Western Digital Corp (WDC) held its earnings call for the first quarter of fiscal 2027 on 22 October 2026. What follows is my machine transcription of the company's public webcast, made on 22 October 2026, and not the company's official text.

A machine mis-hears names and numbers, so where one reads oddly, the webcast is the record. This recording is not split by speaker.

Transcript

Good afternoon and thank you for standing by. Welcome to Western Digital's first quarter fiscal 2027 conference call. Presently all participants are in a listen-only mode. Later we will conduct a question and answer session. At that time if you would like to ask a question you may press star and then one on your phones. As a reminder this call is being recorded. Now I would like to turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations.

You may begin. Thank you and good afternoon everyone. Joining me today are Irving Tan, W.D.'s Chief Executive Officer and Chris Sennasal, W.D.'s Chief Financial Officer. Before we begin please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, business plans and performance, ongoing market trends and future financial results. We assume no obligation to update these statements.

Please refer to our most recent annual report on form 10K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to defer materially from expectations. Unless stated otherwise today's remarks reflect non-gapped results. The considerations to gap results are available in our press release and at investor.wdc.com. With that I will now turn the call over to Irving. Thanks Ambrish. Good afternoon everyone and thank you for joining us today.

QN marked a strong start to fiscal 2027, reflecting solid execution across the business and results ahead of our expectations. We have a new group 55% year over year for a gross and operating margins expanded meaningfully to 58% and 49% respectively. EPS grew 161% year over year and we generated 1.4 billion in free cash flow. These results reflect ongoing robust customer demand, operational discipline and successful execution of our product and technology roadmap. Demand remains strong across our customer base and end markets.

Our visibility is extending further and with it our conviction in the durability of demand for data storage on HDDs. We are increasingly seeing storage demand grow beyond our core cloud and hyperscale customers into enterprise environments and into newer end markets such as new clouds and AI frontier labs resulting in a larger and more diversified customer base. Our customers are making longer-term infrastructure investments and continue to extend their planning horizons into the next decade. As the value of data is increasing they are investing with confidence to support their growing needs for data storage with the vast majority of the data being stored on HDDs.

We see this firsthand in our customer conversations and in broader industry research. A recent IDC survey of more than 750 companies across several countries found that organizations are storing more data, retaining it for longer periods and increasingly putting archive data back to work. At the core of these trends is continued data growth fueled by the ongoing expansion of cloud environments and the increasing storage demands from AI. While much of the conversation around AI focuses on compute we believe the more enduring opportunity is in data.

AI is fundamentally a data system. Every workload creates more data and that data must be stored, managed and accessed in a scalable and economical manner. As AI adoption continues to expand across industries worldwide data creation and storage requirements are expanding with it. Infants and agent AI systems are generating significant volumes of logs, model outputs and system performance data. There must be stored and retained. Physical AI applications such as robotics, factory automation and autonomous vehicle are further accelerating this trend with AI generated content and video world rules that are creating and retaining data at scale.

Let me now turn to our industry leading technology and innovative products. We are executing well against our technology roadmap and we remain on track transitioning our customers to higher capacity drives. As we ramp reduction across our next generation EPMR and hammer platforms we expect our exabyte shipments to continue to increase through fiscal 2027 and beyond. Volume production of our latest EPMR platform delivering up to 40 terabytes of capacity is after a strong start. Customer adoption is progressing ahead of prior transitions and we expect this platform to represent close to 30 percent of our near-lying shipments by the second quarter and 50 percent by the third quarter of fiscal 2027.

On our first generation hammer product we are on track to finish qualifications with two hyper skill customers in the first quarter of calendar year 2027 and are on schedule to begin volume shipments in the first half of calendar year 2027. We also expect to begin qualifications with two additional customers during the first half of calendar year 2027. Further expanding customer validation and supporting broader adoption of our hammer products. SAI workloads scale customers not only need more capacity but also greater performance from their storage infrastructure.

We are expanding the role of HDDs within cloud and AI infrastructure to innovations such as our high bandwidth drive and dual pivot technology. By combining the economics of HDDs with significantly higher levels of performance we believe this technology can address a broader range of existing and emerging workloads. We are currently sampling a high bandwidth drive with multiple customers and the feedback has been positive with clear use cases and value creation identified. In summary WD is executing with momentum.

We are deepening customer relationships, extending visibility and broadening the customer base. While our product and technology roadmap delivers precisely what customers need. As data grows in volume and value across cloud, AI and emerging workloads we have high confidence in the durability of long-term storage demand. With that let me turn it over to Chris. Thank you Irving. Our first quarter results demonstrate ongoing strength of our business in combination with outstanding execution on all fronts. Customer demand remains healthy and our visibility is extending further out.

Our product transitions are progressing well resulting in higher capacity products, solid year-over-year growth in exabyte ship and improved pricing all driving another quarter of strong financial performance. During the first quarter of fiscal year 2027 revenue was 4.4 billion up 55 percent year-over-year driven by strong exabyte growth and a favorable pricing environment. We delivered 248 exabytes in the quarter up 22 percent year-over-year and up 8 percent sequentially. Nearline products continue to drive growth as we execute on our product transitions starting with the ramp of our latest generation EPMR drives with capacities up to 40 terabyte and followed by the introduction of our hammer technology in the first half of calendar year 2027 setting us up for stronger year-over-year growth in exabyte shipments.

Cloud revenue was 3.9 billion representing 88 percent of total revenue and increasing 54 percent year-over-year driven by durable demand for our high capacity near-line HDDs including the initial ramp of our latest EPMR platform. In addition, continued pricing strength reflects the value and TCO advantages we deliver to our customers. Client represented 7 percent of total revenue at 320 million up 119 percent year-over-year. Consumer represented 5 percent of revenue at 193 million up 19 percent year-over-year. Gross margin expanded to 58.1 percent, up 1,420 basis points year-over-year with incremental year-over-year gross margin above 80 percent.

Gross margin reflects a makeshift towards higher capacity drives, disciplined operational execution and a favorable pricing environment across our portfolio as we continue to deliver greater value to our customers. Year-over-year growth and average price per terabyte further increased to 28 percent versus the high teens we reported in the prior quarter. Operating expenses were 391 million or approximately 9 percent of revenue, a 130 basis point sequential improvement demonstrating continuing operating leverage in the model. Operating income of 2.2 billion increased 152 percent year-over-year driven by strong revenue growth, expanding gross margin and operating leverage.

Operating margin expanded to 49.1 percent in the quarter, demonstrating our ability to continue to drive sustainably higher levels of profitability in the business. Interest and other expenses were 10 million and our effective tax rate was 17 percent. Taking into account a deleted share count of 383 million shares, EPS was $4.64, an increase of 161 percent year-over-year. We generated 1.4 billion in free cash flow during the quarter and returned 1.1 billion to shareholders through share repurchases and dividends, reflecting confidence in the durability of free cash flow generation and our ability to drive long-term shareholder value.

Supported by the strength of the free cash flow generation and consistent with our capital allocation framework, the board has approved a 17 percent increase in the quarterly cash dividend from 15 cents per share to 17 and a half cents per share, which will be paid on December 17, 2026 to share holders of record on December 4, 2026. Turning to the balance sheet, during the quarter we took additional steps to simplify our capital structure by substantially reducing our remaining 2028 convertible notes.

Our balance sheet remained strong and we ended the quarter with a net cash position of half a billion. Let me now turn to the outlook for the second quarter of fiscal 2027. We continue to operate in an environment of strong demand and favorable pricing in all our end markets. For the second quarter of fiscal 2027, we expect revenue to be 5.1 billion plus minus 100 million. At the midpoint, this reflects a 69 increase year over year.

Gross margin is expected to be in the range of 60 to 61 percent as we continue to benefit from the shift to higher capacity drives along with a strong pricing environment. We anticipate operating expenses of 400 to 410 million. A sequential increase driven by the project expenses related to increased product qualification activities. Interest and other expenses are expected to be 15 million. The tax rate is expected to be 17 percent. As a result, we expect the looted earnings per share to be $5.80 plus minus 20 cents based on a non-gov diluted share count of 380 million shares.

As we look ahead, demand remains robust, customer engagements continue to deepen and broaden and our visibility continues to improve. And as we execute on our technology and product transitions, we expect to accelerate exabyte supply growth throughout fiscal year 2027 and 2028. Our strong balance sheet and free cash flow generation give us the ability to make targeted investments that strengthen our technology leadership and support our customer's growing storage needs. While we expect capital expenditures to average four to six percent of revenue over a five-year period, we anticipate that CapEx as a percentage of revenue will be modestly above that range over the next two years as we continue to invest in health and media technology and factory automation, supporting our industry leading aerial density and higher capacity drives without having to spend CapEx to add unit capacity.

In summary, accelerating exabyte growth, technology leadership, expanding margins, and disciplined capital allocation provide a solid foundation for sustainable earnings, free cash flow growth, and long-term shareholder value creation. With that, let's now begin the Q&A. Ambrish? Thank you, Chris. Operator, you can now open the line to questions, please. And to ensure that we hear from as many analysts that possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question.

Operator? We will begin that question and answer session to ask a question you may press star and then one using a touch tone telephone. If you are using a speaker phone, we do ask you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. And as mentioned, we do ask you please limit yourselves to a single question and a follow-up. At this time, we will pause momentarily to the similar roster.

Our first question today comes from Amit Dariyanani from Evercore. Please go ahead with your question. Yep. Thanks a lot. Good afternoon, everyone. I guess maybe to start with Irving, there's always a lot of focus on Hammer, and you know, you outlined sort of completing qualifications with two hyperscalers in March, Wallenship in mid-27. Can you just talk about, you know, what are the remaining milestones between those two steps from your perspective and then what determines how quickly you scale from there?

Is it more driven by customer deployment schedules or your manufacturing readiness? Just any help there? Yeah, I mean, thanks for the question. First of all, I was very pleased to the progress that we're making with Hammer as we've highlighted in the past, feedback from our customers have been very positive, particularly around the failure rates that we've seen in our dry performance vis-a-vis what they've seen with other players within the market. As a result, that we're very confident in terms of finishing qualifications with the two customers that we have, our first-generation Hammer products in Q1.

We will be starting qualification with two additional customers in the first half of calendar 27 as well. We haven't had any feedback that would give us any reason for pause in terms of us translating that call completion to volume shipments starting first half 27. Both our customer technical support teams are working very closely with customers to complete those call schedules and get them into production across our global operations teams who are working closely with our own internal manufacturing assets and vendors to get the supply chain ready to support the RAM as well.

And then starting in the second half of calendar 27, we will also start qualification of our second generation Hammer drives. And this will be at five terabytes per platter on an 11 disk platform. So overall, very pleased to the progress. I think the engineering and operations teams across the company have done a great job in really helping us accelerate development of the product, the reliability of it. And then we're focused very much on scaling it up and getting it into customer's hands.

Did you have a follow-up on it? I do. Thanks for the admiration. Maybe just to follow up on the cost per terabyte. I realize you folks in the past have talked about some of this input cost insulation headwind. But I think cost per terabyte was down like four or five percent in September quarter. That's the lowest we've seen in a while. Maybe you can just touch on what's happening there and what's the right way to think about this longer term because I do realize you're writing for some really strong growth modules in December.

So just a little bit on the cost per terabyte number would be helpful. Yeah. So as Irving just indicated, we continue to execute well when our technology roadmap and product transitions, basically moving to higher capacity drives based on a better and higher aerial density. And so we're well on track in the long run to reduce our cost per terabyte approximately 10 percent year over year. And the new term, and I've indicated this before, this is not a surprise.

We are facing some input cost increases. As most of you know, we use some DRAM and some NAND inside our hard disk drives. And the whole supply chain really operates in a very tight environment. And so we are seeing some of those input cost increases. We are addressing all of them through value engineering initiatives that we are seeing some good traction. It takes a little bit of time to implement and qualify those solutions. And so in the near term, our cost per terabyte will be less than 10 percent down year over year.

Taking us all into account, as you indicated as well, we are delivering very strong free gross margins in the September quarter, as well as a strong guide for the December quarter. Our incremental gross margins continue to be very strong, well above 80 percent. And so I think we're very well set up to continue to increase our gross margins over time. Thank you, Amit. Our next question comes from Womsey Mohan from Bank of America. Please go ahead with your question.

Yes, thank you. Irving, I was wondering if you could just address this angst around incremental capacity ads from the smallest player in the market. And there's been some chatter around potential consolidation in the industry. Just would love to get your high level take on, you know, what you think could be if there is any potential impact from that at an industry level. And is that impacting any of your price negotiations with hyperscale customers in the out of years?

Yeah, Womsey, thanks for the question. I would say at a high level, we don't see any change in terms of the long-term fundamentals of both the industry or our business specifically. Right? We continue to see demand continuing to be very strong. Oh, you know, 25 percent plus Kager as we've highlighted consistently in a very tight supply environment. And we remain committed to our strategy and our focus to meet that supply demand growth based on living aerial densities.

And that's delivered to technology, particularly through our hidden media technology, because that is the best way to deliver the best TCO to our customers and to also drive greatest profitability of our business, for our business as well. And you can see that focus in terms of the, you know, the investments we're making, both into research and development and into capital investment into our hidden media parts of the business. And I think the unique differentiation that we have with our own hidden media development, the drive integration capability that we have gives us that confidence to be able to meet that growth trajectory, true aerial density, and therefore remain committed to not investing in any incremental unit capacity.

You know, there may be some other players in the market who don't have that unique ability to build their own media, build their own hits, drive that aerial density improvement. And they have to compensate that by potentially maybe increasing the number units just to maintain their share in position in the marketplace. - Do you have a follow up onesie? - Yeah, I'm really thanks. So on the exabyte shipments, you grew 22%, and as I'm hearing you talk about sort of the trajectory here for the rest of the year, it looks like you expect that growth to improve as you execute on these product transitions and then have hammer in the mix.

Could you just give us some sense of what it is at the high level? Like is it right to think of fiscal 27 at roughly your longer term range for the year? Is that the right way to think about it? And maybe just if you think about unconstrained sort of demand, like how much higher is that relative to where your supply is? And do you see that widening because of just how strong the demand is or the next couple of years?

Thank you. - Yeah, thanks for the question, Wamsi. We sort of see the current quarter as being sort of the floor in terms of exabyte growth, and we see that accelerating through the rest of the fiscal year, and obviously as Chris highlighted in the script of '28 and beyond that as well. That's really driven by the confidence that we have in the new platforms that we'll be introducing over CVF Hammer coming out in the first half of fiscal 27.

And as I highlighted, we have our second-generation hammer drive starting qualification in second half as well. So we're very quickly at the top end going from a 32-terabyte drive to a 44-terabyte drive to a 55-terabyte drive and beyond. And that's the best way and the most economical way for both our customers and for us to be able to meet the demands that they have in terms of our products. To your question around the demand, as I said, we see that continuing to grow, we see it being very doable.

There hasn't been any diminishing in the demand, and we don't see the gap in supply or demand that exists today perishable in the near term as well. So we continue to focus on supporting our customers the best we can with the technology that we have. Thank you, Aumsey. Our next question comes from Eric Woodring from Morgan Stanley. Please go ahead with your question. Superguys, thank you so much for taking my questions and congrats on a quarter and a guide.

Erwin, can you maybe just share a bit more granular detail on your visibility comments, meaning how far out are we talking? How many customers are we talking? And for those customers that are planning that far out, just what are their exobite needs today or in the future relative to three or six months ago? Do you see that demand kind of expanding relative to again three or six months ago? Thanks. Yeah, Eric, thanks for the question. I think in terms of visibility, outlook, if you take our top seven customers as an example, we have good visibility up to 2030-2031 across all seven of them.

And that's something that we've highlighted, that we've always really much appreciated so we can make sure we both deliver both the technology and the supply to meet that growth in demand going forward. And so we have good visibility in that. In fact, we see a quarter of the quarter, the demand signal actually increasing over time. And as we move forward into the 28-2930 timeframe, we see that demand continuing to be very durable. Do you have a follow-up, Eric?

Yeah, thank you, Umbrish. And then just as a follow-up, you obviously just grew revenue 55% year-over-year. You're guiding to 69% year-over-year revenue growth at the midpoint in December. Incredibly strong, and obviously you're referencing some exabyte growth acceleration, but that also implies that you're going to be accelerating pricing in the December quarter as well. So can you maybe just help us understand, you know, what is the source of that pricing acceleration? Is that coming from a non-nearline side?

Is that the nearline side? I assume it's probably both, but just any more granular color you can provide on why we're seeing that acceleration end up in pricing in the December quarter and how sustainable that is. Thank you. Yeah, Eric, we continue to operate in a very strong favorable pricing environment. You saw our blended average selling price, but Therabyte was up 28% on a year-over-year basis, and we saw that strength across the board in nearline and non-nearline some of our consumer and client businesses as well.

Pricing environment is strong because we do execute in our technology and product roadmap, and we continue to deliver higher capacity drives to our customers that help our customers to reduce their total cost of ownership because you have better rack density, lower power consumption, and a lot of benefits for our customers. As we continue to execute, on that strategy and continue to deliver higher capacity drives, there is an opportunity to further enhance our price per Therabyte over time.

As you probably know, some of that business is under LTA's. Some of the LTA's are expiring and new agreements are being put on place, and in addition to that, of course, some of our exabytes are not under contract as well, and we do see a very strong price environment for those exabytes that are not under contract as well. Thank you, Eric. Our next question comes from CJ Muse from Cancer Fitzgerald. Please go ahead with your question.

Yeah, good afternoon. Thank you for taking the question. I guess, Irving, you started the conversation talking about results ahead of expectations, and just to follow up on the last question, for gross margins, you initially guided incremental 62%, and you reported 80%, and now guiding 75%. So really trying to drill down as to what is driving that incremental strength. Is it more bits that are not under contract? Is it contracts that are unwinding and reprising? And I guess, as we think beyond the near term, you know, actually think about the sustainability in 27 and beyond.

Yeah, I think at a high level, CJ, first of all, we think the sustainability of gross margin expansion is absolutely there. There are tree drivers of that. Obviously, you know, pricing is Chris highlighted. We have a bunch of LTA's that have contractual price increases as we move into different periods as they reach sort of their anniversary, their price adjustments as we deliver higher capacity platforms to get better TCO values. They were able to share in that and drive higher pricing for those contracts that we have customers with LTA's.

We are also able to get better spot pricing with near line customers who aren't on LTA's given the tight supply environment. And as Chris also highlighted across the board, we're seeing better pricing environment in our client and consumer segments of the business as well. So pricing is one key element. Second, we've also been mixing our customers to higher capacity drives. So as we move them up to higher capacity drives, our CDs are more profitable for us because the ASPs drive are much higher as well.

So that's a second driver of gross margin expansion that we expect to remain over a longer term time period as well. And third, obviously, we'll be shipping more Xabytes to higher a real density. And so we are able to deliver more Xabytes to higher a real density. You avoid the fixed cost of having to produce more units. And that's another driver of gross margin expansion. So you put the combination of those three factors together. We feel very optimistic about ongoing gross margin expansion expansion.

Joe, follow up, CJ? I do embrace, thank you. You talked about a broadening breadth of customers, including enterprise and NCGs. I'm curious, how is that perhaps changing the duration of LTA's pricing and deposits perhaps just would love to hear, you know, how your customer base is evolving and how that might impact kind of your contracts. Thank you. Yeah. So we definitely see a, I would say a diversification of our customer base, right? And it's something that we've communicated in the past where the sort of tree tier architecture, the critical role that HDDs play, both in terms of the scalability, reliability, and the economic value that provides the customers is truly playing out, right?

And we definitely see that demanding happening from the frontier AI labs, from the Neo Cloud players, and also hybrid cloud solution OEM providers as well. So we're factoring in the R demand signal as well as we look forward and that's translating into the expanding demand signal that we've highlighted in my response to the earlier questions. And again, we're delivering, we're building technology, we're making investments into hidden media to be able to provide the area, density, and the capacity to support all our customers in this more diversified customer environment.

Our next question comes from Asaya Merchant from City Group. Please go ahead with your question. Great. Thanks a lot. Irving, I think you talked about some of the high-bandwood drives as well. An opportunity there to grow. Maybe you could just double-click on how big is that opportunity today? How many of these are you shipping if you can elaborate on that? And how big do you think that opportunity could be for you? Thank you. Yeah, thanks for the question, Asaya.

I think the opportunity is somewhat nascent today. Our primary focus is obviously to get capacity into the hands of the customers, but as we move into latter part of calendar 27, 28, and beyond, this becomes what we feel a big differentiator for us because things like high-bandwood drives provide customers with an opportunity to use HDDs for different workloads that they may have to use alternative storage media for, which may be much more costly. For example, KV Cash workloads in AI inferencing and in video streaming as well.

So we've been actually providing samples to many of our customers in terms of this product so that they can test out different use cases. And I highlighted that been very positively received. And so we're working through the commercial structure of how we would price those high-bandwood capabilities to customers. But from a technical capability standpoint, very positive. We're working through the sort of commercial construct of how we would price that going forward. Did you have a follow-up about here?

Yeah, go ahead. Yeah, sure. If I can just ask about the physical AI as well, you know, I think you talked about that as well in your script. You know, any early indications again of how big is that opportunity today? Are you shipping towards that? Probably still in the early innings now. But how do you think about it through Calendar 27 and into Calendar 28? Thank you. Yeah, I think we're definitely seeing very promising signs from the physical AI segment of the markets.

For example, some of our customers in Asia who are in the autonomous vehicle space are definitely looking for increased demands supply from us to be able to support their physical AI initiatives. A good data point of that is, you know, NVIDIA themselves have just recently highlighted the opportunity in terms of their revenue from physical AI being in the $10 billion range. So if you see that happening in compute, there's obviously the demand for storage to support that compute as well.

So we see it very positively. Obviously, autonomous vehicles would be one. Robotics is also becoming a key area for us. A lot of it's actually happening out in Asia, but I anticipate that will happen throughout the rest of the world over the next two to three years as well. Thank you. Our next question comes from Ben Ratsis from Mollius Research. Please go ahead with your question. Yeah, hey, guys, thank you. I appreciate it. I wanted to go back to one of the earlier questions on the competitive aspect of adding capacity.

You know, I think there's just some basics that would be helpful. You know, how can somebody go from 10 to 30% capacity share? Is there enough, you know, materials to do media and heads to be able to do something like that? You know, maybe you can address the question from that. And what would be the, you know, is your view that somebody could do that? And what would be the bottlenecks in doing so? Yeah, Ben, thanks for the question.

I can comment about somebody else doing it. I can share what we are doing to enable it. So first and foremost, it all starts with technology. Our R&D teams do a great job in terms of designing. You know, head designs, media recipes to really enable high-level density products. Obviously, we combine that with our firmware capabilities and drive servo mechanics capability. So it's not only about individual components, but when you integrate all of it together, do you get the optimum aerial density per drive?

So that's really at the engineering level. And that's one of the big differentiators that we feel versus maybe one of the players in the market who is dependent on third-party supply. So they're not vertically integrated. Secondly, you know, as you've touched on a key element of it, it's not so much the unit capacity that you have. It's the availability to produce at scale the needed media and hits to support the higher aerial density in the drives as well.

And again, that's something we have been and will continue to make investments in WD, both in terms of our R&D capability, but also into our manufacturing assets, specifically to enable greater aerial density to our head and media assets to drive that. So I think that's what we're doing. And we see the results of that. Other organizations that don't have that degree of vertical integration, I would say we'll have a harder time being able to reach the same levels of growth that we are seeing.

Should we follow up then? Yeah, thanks a lot, Amber. You know, there's obviously a lot of fear out there, as you guys see and well know going into this call. I was just wondering if you could give more color around how big aerial clouds are for you now and in your forecast. And if there was a hiccup in demand there, just due to timing of capital, how we would see it and how big a concern would that be for you?

Thanks. Yeah. I think that's, well, we need to take a step back there. There are really four drivers of growth within the storage space, right? One is the ongoing secular growth of the cloud. And the cloud itself has been around for close to two decades. It's still growing at a very healthy pace. In fact, accelerating really driven by a lot more storage being driven by video content. So a lot more demands because a lot of content being stored is video and obviously a lot of the cloud-based services are becoming AI-enabled.

So that's driving greater storage requirements. So that's one key driver of growth that will continue over the foreseeable future. The second driver of growth has been model training and development. And we see that continuing to grow as new models get created, as reinforcement learning is happening. More data needs to be stored to support reinforcement learning of existing models as well. And that's where the new clouds do play a part in. But we don't see that being in any way a major hiccup if there is a bit of a slowdown in the new cloud segment.

The third is around inferencing and agentic AI. And that's where we see a lot of opportunity going forward. And we starting to see tremendous amount of growth coming from that area as customers need to store logs, checkpoints, outputs of that inferencing and sort of the agentic system decision points to support reinforcement learning as well. And then finally physical AI that we've just touched on as well. So if you add those four things together, I think the demand remains very durable.

Even if there may be a slight softness in one of the four segments, the demand will be easily picked up by any one of the other trees. So all things added together, we see very positive outlook in terms of the demand being meaning strong and being meaning durable. Durable. In terms of how we look at the new cloud segment, obviously we are very diligent in looking at the strategic new clouds that we want to engage with those that we think have a very strong balance sheet, have underpinned by a very good and customer base as well.

And so we prioritize that overaudibly as we did in the market. Thank you. Our next question comes from Tom O'Malley from Barclays. Please go ahead with your question. Hey guys, thanks for taking my question. Appreciate it. So if I look at kind of the caggler of total HEDX vitamins over the last couple of days, it's range from low 20s, kind of up to the mid 30s. And I plugged that in for your guide. It looks like your year over your pricing that's implied for the December quarter is above that 30% year of your mark.

So you guys have historically kind of said high teens is the sustainable growth rate. You are now well above that the past couple of quarters. Do you think you can give us an update about what the right way to look at that is in terms of sustainability of that pricing increases on a go forward basis? Yeah, Tom, I think the 10% or whatever number you were referencing, we are we're operating well above that, right? Just in the one quarter ago, we were already at 18% ASP increase on an ASP per terabyte basis.

And so last quarter we did 28. And as I indicated before, given the strong demand environment that we operate in, given the fact that we continue to move to higher capacity drives and continue to add more value to our customers, there is definitely further room for ASP per terabyte increases going forward over the next call it three, four quarters. I would assume eventually that is going to slow down a little bit. But for the next 24 quarters, there's definitely further room to expand our ASP per terabyte year over year growth.

You have a follow up, Tom? Just follow up on the commentary, just the cap X on average four to six percent of revs over five year period, but modestly ahead of the next two years. I think like the knee jerk reaction to that is making sure that that is just investing in heads. And this is not something about expanding capacity or feeling like you need to take advantage of a market as it's nearing a potential peak, not saying that just outlining what you could hear.

So maybe could you spend a little bit of time talking to us about why the investment is needed in heads? Is this around diversification efforts because of what we've heard immediately? Or just a desire to get your internal efforts to a better spot? Well, I'd love to hear your thoughts on that. Thank you. Tom, just to be clear in the prepared remarks, we explicitly said that the cap X is going to head in media and factory automation and not to expanding our unit capacity.

I think we summarize it really well. And obviously, as we look to transition to hammer, obviously, there are longer cycle times in terms of the steps that are involved in terms of the heads that we need, head wafers that we need to produce, and also the media products that we need to produce. So we're making the appropriate investments to support both the technology capabilities and at the same time to recognize that they are slightly longer cycle times because there are slightly more steps that are involved to produce the hidden media components that's needed for hammer.

Thank you, Tom. Our next question comes from Timothy Arshkuri from UBS. Please go ahead with your question. Thanks a lot. You guys talked about an acceleration in exabyte growth. You've been undershipping your peer by about 10 points. They're sort of your mid-20s and they're sort of mid-30s. So, so Chris, when you mentioned that, like, what is the target? Should we think that maybe over a multitude of quarters you could get to like the mid-30s is the goal to sort of close that gap?

So, yeah, we did 22% last quarter and we've talked about that. We are in between two product transitions. The last couple quarters we executed really well on our up to 32 terabyte EPMR transition. We are now starting to execute on our up to 44 terabyte EPMR transition and then we have our hammer transitions first and second generation coming up and that is going to drive meaningful increase in our aerial density and a meaningful increase to higher capacity drives and that will definitely accelerate our exabyte year-over-year supply growth over the next six, seven, eight quarters.

So, follow up, Tim? Do you think I do? I do, yeah. So, just to kind of double-click on that. So, Chris, should we think of you in six quarters shipping like 35% exabyte growth? Is that the message? So, we only guiding one quarter at a time, but you're thinking about it in the right direction. Thanks. Thank you, Tim. Our next question comes from Chris Sankar from TD Cowan. Please go ahead with your question. You had a question.

I do have them too and thanks to the teller on the pricing. I'm just curious as to your sort of hammer customers around in the first half, would there be any impact on the ASP growth mainly because you're helping your early customers around hammer or should not have any impact? No, we're not discounting our hammer products in any way versus our EPMR products. So, we price them on a dollar per terabyte basis and we have LTA's that I mentioned that have, you know, appropriate price reviews and periodically.

And so, whether we ship a hammer bit or EPR a bit, the price is the price. Sorry, sorry. And then as a quick follow-up, you know, I totally understand the argument about adding head capacity but not units. I'm just trying to play the devil's advocate by adding head capacity. You are, you know, increasing the capacity for units. So, I'm just wondering, isn't that lead to the fact that you are actually adding capacity even though if it's head not unit leading to more capacity increase versus, you know, the inertia between a unit or a head?

Yeah, I think there are two factors here. First of all, we say we are investing into head capacity. In part of it, as I mentioned, you know, for example, a hammer hit just require more cycles to produce. So, there's a bit of throughput loss. So, we need to offset. So, we do need to put in more capacity. So, that does not translate into more hits and therefore, more units. And we have also indicated that our innovation day back in February of this year, we have a roadmap to deliver drives with up to 14 platters as well.

And therefore, you will need more hits within the existing number of drives that we have as well. So, we are making the investments to support that roadmap going forward as well. And, Chris, last quarter, we shared with you the platter count growth on very minimal unit growth, right? So, that's one of the reasons we have to invest on the head site. Thank you very much. And that applies to media as well, same thing. The next goal, please.

Our next question comes from Jim Schneider from Goldman Sachs. Please go ahead with your question. Good afternoon. Thanks for taking my question. I was wondering if you could maybe just clarify which respect to your head strategy currently, whether you use external vendors for any of your products or for surge capacity, and to what extent the head investment beyond just the hammer items you mentioned before are meant to sort of eliminate the need for any potential vendors in the future and sort of take that external lines off the table completely.

Thank you. Thanks for the question. So, we do use some external hit capacity that we always have done. We do that for media as well. That is part of our sort of innovation approach where we build and buy. So, we're able to benchmark our performance of our components with our third-party suppliers as well as a great way for us to continue to drive innovation both internally and with our partners as well. Our focus on our investment is to continue to ensure that we have the latest technology internally to support our products.

Going forward, what we do buy from third parties are typically used in our lower capacity drives. So, all the high cap leading edge platforms that we introduce are all on our own internal hits. Do you have a follow-up, Jim? Thank you. Just as a follow-up, in a hypothetical situation where one of your competitors were to meaningfully expand unit capacity, what would be your response in that case? Well, again, it boils down to not just unit capacity, but what capacity point is unit shipping as well.

So, again, our focus is on delivering that capacity, that customers need to hire capacity drives to aerial density. So, our response is going to be the same as we've communicated over the last year to continue to focus on the aerial density, translate that into the highest capacity drives that we can bring into the market. That's the best issue for customers and drives the best economics for us as well. Thank you. Next comment, please. Our next question comes from Karl Ackerman from BMP Parabaugh.

Please go ahead with your question. Yeah, thanks for squeezing me in. Urban and Chris, you indicated that Hammer will ramp over the next couple of quarters, but you expect non-Hammer near-line drive capacity to also expand while Hammer ramps as well. So, we expect, obviously, we are looking to ramp Hammer in the first half of calendar 27. In parallel, we will also continue to ramp and supply our latest EPMR platform. As we highlighted, it's making a very successful transition, in fact, the fastest transition of any EPMR platform that we've seen.

In this quarter Q2, we expect 30% of all the near-lying bits to be on that up to 40 terabyte platform. By Q3 of calendar fiscal 27, we expect 50% of all the near-lying bits that we ship will be on that 40 terabyte platform as well. And then, obviously, we'll continue to scale. So, I think we have two very strong courses in the mix to deliver high-cap drives to support the demand at our customers need. Thank you, Karl.

We have time for one more caller up here to please. Our next question comes from Mark Newman from Bernstein. Please go ahead with your question. Right, thank you for squeezing me and expressing the numbers today. I wonder if I could just ask a bit more on the pricing. The pricing seems to be extremely strong, and this last quarter seems to be further accelerating. You've talked about you have demand visibility all the way to 2030, 2031. I wonder if you could update us on how far out you have for a price visibility, such as in your purchase orders already signed or long-term agreements.

How far out should we expect this price to remain continuing at this cadence or potentially could we expect it to further accelerate from here? Any comments on price visibility from here would be great. Thanks. Yeah, so the most important thing with LTA's and our customer engagements is to create that long-term visibility and making sure we are aligned from a technology and product roadmap. We're aligned on those product transitions that are being planned ahead for the next couple quarters and years, and making sure that we put in place the necessary exabyte capacity to support the demand.

That's the most important thing that we're trying to achieve here. In terms of pricing, in those LTA's we do have some pricing components. Keep in mind that there is base volume, there is upside volume, so there is definitely some flexibility. Keep in mind, of course, that not all our exabytes are covered by the LTA's. The further you go out, the less of it is covered under LTA's and for sure, under pricing component of the LTA. So we think in the current environment, that's the best way to approach it.

And again, for us, it's all about execution or the technology product roadmap, get to the higher capacity drives, deliver more value to our customers, and that's a very favorable setup for pricing and further increases in our ESP Potatabai. Thank you, Mark. Can I ask one quick follow-up on the exabyte growth, 22% year on year. I believe you guided long-term exabyte growth to nearline at 25%. I just want to clarify that if that is still intact, which also your competitor had also outlined, is that 25% of good guidance long-term to nearline exabyte growth?

Yeah, we actually said greater than 25%. And again, we've indicated that currently it's slightly below the 25% because we are in between those two product transitions, but as the product transitions are getting more traction, we will exceed that 25%. Great. Thank you very much. And at this time, we'll conclude today's question and answer session. I would like to turn the floor back over to Irving Tan for closing remarks. Thank you, operator. I would like to leave all a few for a few thoughts.

The first phase of AI investment focus on building the infrastructure to train models, even as that continues, the next phases are about deploying AI to work at scale, from inference to agents to physical AI. As that happens, data will continue to compound, driving customers to plan further ahead, adopt higher capacity products, and align their infrastructure roadmaps more closely with our technology roadmap. For WD, this creates an opportunity that extends well beyond the initial AI infrastructure build-out.

As AI scales, data creation, and associated storage requirements will accelerate and compound. As always, my thanks to our customers, partners, and the entire WD team for all of you for your interest and support of WD. Thank you. The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

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