威騰電子 (WDC) 2015 Q4 法說會逐字稿

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  • Operator

  • Good afternoon and thank you for standing by.

  • Welcome to the Western Digital's fourth quarter financial results for FY15.

  • (Operator Instructions)

  • As a reminder, this call is being recorded.

  • Now I'll turn the call over to Mr. Bob Blair.

  • You may begin.

  • - VP of IR

  • Thank you.

  • As we begin, I would like to mention that we will be making forward-looking statements in our comments and in response to your questions, concerning, among others, our product and technology positioning, customer acceptance of our SaaS SSD products, our outlook for our enterprise and SSD businesses, data growth in its drivers, enterprise storage, and our ability to address this space, our non-PC businesses and the PC market, demand and our ability to respond to demand changes, China's Ministry of Commerce matters, optimizing our business, anticipated contributions from our new businesses, and our financial performance, including our financial results, expectations for the September quarter, and earnings expectations for the second half of FY16.

  • These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our quarterly report on Form 10-Q filed with the SEC on May 12, 2015.

  • We undertake no obligation to update our forward-looking statements to reflect new information or events.

  • In addition, references will be made during this call to non-GAAP financial measures.

  • Reconciliations of the differences between the non-GAAP measures we provide during this call to the comparable GAAP financial measures are included in the quarterly fact sheet that we have posted on our Investor Relations section of our website.

  • We ask that participants limit their comments to a single question and one follow-up question.

  • I also want to note that copies of remarks of today's commentary by our Chief Executive Officer and CFO will be available on the Investor section of our website immediately following the conclusion of this call.

  • I'll now turn the call over to President and Chief Executive Officer Steve Milligan.

  • - President & CEO

  • Good afternoon and thank you for joining us.

  • After my opening remarks, Olivier Leonetti will provide additional commentary on our June quarter performance and our outlook for the September quarter.

  • Demand for our fourth fiscal quarter was lower than expected, given a weak PC market.

  • In that context, I am satisfied with our performance.

  • We reported revenues of $3.2 billion, non-GAAP gross margins of 29.8%, and diluted earnings per share of $1.51.

  • Our storage shipments for the June quarter were 56 exabytes, up 2% year over year.

  • Our results reflect strong product and technology positioning, coupled with solid execution.

  • Our Enterprise SSD revenue more than doubled year over year, to $244 million, demonstrating the continued success and broadening customer acceptance of our leading SaaS SSD products.

  • We expanded our footprint in the enterprise SSD space with the initial ramp of our new UltraStar PCIe NVMe offering.

  • It has been qualified with several leading customers, and we expect revenue from this product to increase throughout FY16.

  • We saw strong demand for our high-capacity helium and 15 K rpm 2.5-inch performance hard drives.

  • Revenue from our video surveillance hard drives continued its rapid growth, as we expanded our line up of these purpose-built solutions.

  • And we continue to see positive market reaction to the value proposition of our new active archive system.

  • Our view of persistent data growth remains intact, driven by mobility and the cloud.

  • The outlook for our enterprise storage business remains healthy, and we believe we are well-positioned to address this growing market space.

  • Regarding PC market demand, we believe it is prudent to remain cautious in the near term, given the timing of the Windows 10 and Skylake launches.

  • That being said, we are seeing early signs of market stabilization, leading us to believe that PC market demand could pick up toward the end of this calendar year.

  • A more stable PC market demand environment, coupled with continued strength in our enterprise business, provides the opportunity for improving financial performance as we move through the fiscal year.

  • In the meantime, we will continue to be disciplined in the management of our business, while being ready to address unanticipated upside, if it materializes.

  • I would like to comment on the status of our discussions with China's Ministry of Commerce.

  • Since our last earnings call, we believe we have made meaningful progress.

  • We have met with MOFCOM several times to discuss their review process and a potential a timetable for them to complete their work.

  • We have submitted a comprehensive report on the current market, which we believe shows that the storage ecosystem has evolved significantly in the last three years and that lifting the hold separate restriction will enhance competition, increase innovation and benefit customers.

  • We have also met with several other stakeholders in China and shared our views on the benefits of lifting the hold separate.

  • Based on our conversations with MOFCOM, we believe that they are working steadily on several fronts and we are hopeful that they can conclude their evaluation of our application to lift the hold separate in the near future.

  • Olivier will now provide a summary of our June quarter performance and our outlook.

  • - EVP & CFO

  • Thank you, Steve.

  • Our revenue for the June quarter was $3.2 billion.

  • We shipped a total of 48.5 million hard drives at an average selling price of $60.

  • On non-GAAP gross margin was 29.8% and operating expenses totaled $560 million.

  • Tax expense for the June quarter was $27 million, or 7% of non-GAAP pretax income.

  • On a non-GAAP basis, net income was $356 million, or $1.51 per share.

  • In the June quarter, we generated $488 million in cash from operations and our free cash flow totaled $332 million.

  • Our CapEx totaled $156 million, or 5% of revenue.

  • We repurchased 2 million shares for $198 million.

  • We also declared a dividend in the amount of $0.50 per share.

  • We closed year-end with total cash and cash equivalents of $5 billion, of which approximately $700 million was held in the US.

  • I would now provide our guidance for the September quarter.

  • We expect revenue to be in the range of $3.2 billion to $3.3 billion.

  • Excluding the amortization of intangibles, we expect gross margin percentage to be roughly flat with our June quarter.

  • Operating expenses of approximately $575 million; and accordingly, we estimate non-GAAP earnings per share between $1.50 and $1.60.

  • Operator, we are now ready to open the call for questions.

  • Operator

  • Katy Huberty, Morgan Stanley.

  • - Analyst

  • Yes, thanks.

  • I believe coming into the June quarter, you had expected a fixed cost absorption hit on gross margins.

  • It doesn't look like inventory on the balance sheet came down in June.

  • So just curious if you can walk through the gross margin drivers in September, and particularly, given the high inventory, why don't we see a hit on gross margin as you go into the next quarter?

  • - EVP & CFO

  • So we had to manage in the June quarter various variables.

  • First of all, to your point, fixed cost absorption was an issue because of the lower TAM, and we were able to mitigate, more than mitigate, this negative effect through two factors.

  • First of all, mix up improvement and also management of our cost base.

  • - VP of IR

  • Katy?

  • - Analyst

  • Just a quick follow-up on OpEx, which was down $30 million again in the June quarter.

  • Where are those cost savings coming from, in light of the restrictions around MOFCOM, and do you still see the same net savings, to the extent that you get that MOFCOM approval, over the next couple of quarters?

  • Thanks.

  • - EVP & CFO

  • So two parts in your question.

  • On part number one, most of the saving in the quarter is due to lower executive compensation, or lower compensation in total, due to, obviously, the performance of the Company.

  • Vis a vis MOFCOM, the synergies we have announced are still intact.

  • As a reminder, we have indicated that synergies in OpEx will be in the range of $400 million per year and that COGS synergies will be material and on top of that number.

  • - Analyst

  • Thank you very much.

  • Operator

  • Aaron Rakers, Stifel.

  • - Analyst

  • Yes, thanks.

  • One question, one follow-up, as well.

  • Going back to Katy's question, when you look at the gross margin this quarter, which was quite impressive, considering a 120 down to a 111 million unit number for the industry, what is the impact to gross margin that you've seen, given the inability or given the deleverage from a fixed cost absorption perspective?

  • If it weren't for the lower TAM, I'm asking what kind of gross margin could you have attained in this last quarter?

  • - EVP & CFO

  • So the impact of lack of absorption is material.

  • We're not going to give any details of how much it was, but indeed, it will have been a material increase in the margin rate.

  • - President & CEO

  • The other thing, Aaron, to keep in mind, which is that obviously, the part of the business that was weaker, which is PC-related, so our client business carries a lower margin.

  • Yes, there's an absorption impact in terms of having less units, but the effect of having a lower amount of -- lower margin business naturally provides, if you want to call it, accretion from a gross margin perspective, because our software business, whether it be from a revenue or a unit or, for that matter, from an earnings perspective, was entirely driven by a slower PC market.

  • - Analyst

  • Okay.

  • And as a follow-up, when we look into the back half of the year, I think last quarter we talked about a 40-60 split in terms of enterprise demand, particularly from the hyperscale and cloud guys.

  • What's your current outlook relative to that for the second half on the enterprise side, and is that not a positive factor to consider from a mix perspective on gross margin going forward?

  • - President & CEO

  • So the 40-60 split that I believe was talked about last quarter -- I think it was on the Seagate call -- that is consistently what it's run over the last several years.

  • We would expect, generally speaking, for that pattern to hold, plus or minus a few percentage points, for this calendar year, as well.

  • And then I will ask Olivier to comment on the puts and takes, in terms of gross margin for our September quarter.

  • - EVP & CFO

  • So the statement about a 40-60 is mainly an exabyte statement.

  • So relative to our guidance, we are guiding to roughly flat, meaning it could be slightly up or slightly down.

  • Obviously, we have many put and takes which could unfold during the quarter.

  • Enterprise could be stronger, PC demand could be stronger.

  • That could be [punitive] to the margin rate.

  • And we think that roughly flat is as good as we can guide at this stage, Aaron.

  • - Analyst

  • Okay.

  • Thank you.

  • Congratulations.

  • Operator

  • Joe Wittine, Longbow Research.

  • - Analyst

  • Hello.

  • Thanks.

  • Understand the PC market is rough, but your shipments are eroding faster than the industry.

  • You're down about 30% year-over-year.

  • PC units down about low double digits.

  • So curious why you're dcelerating so much faster.

  • What chunk of it is inventories been taken down, therefore you get some sort of snapback, versus how much is just the ongoing secular decline in hard drive attach rates within PCs?

  • Any color would be helpful.

  • - President & CEO

  • So two comments on that.

  • And you've hit on them.

  • But we don't have entirely visibility to this, oh, by the way, but we believe that there has been a meaningful inventory drawdown throughout the supply chain, from a PC perspective.

  • And we certainly, from our own company perspective, have been very careful to not overdrive the market in terms of shipping too much inventory into our customers.

  • And so we've seen a sharper decline in our client business than what we've seen from a broader PC perspective, because of what we believe to be a meaningful thinning of the overall inventory supply line.

  • That's one factor.

  • To what extent that's happened, that's difficult to determine.

  • But clearly, our customers do not want to have or do not want to run the risk of having "obsolete inventory" in front of the Intel and the Microsoft transition.

  • So that's clearly caused them to draw their inventory levels down.

  • The second thing is that we naturally are going to decline faster than the broader PC market, because of the increasing attach rate of solid-state devices replacing hard drives, which is consistent, oh, by the way, with our expectation.

  • So that helps to explain at least some of the disconnect on our numbers versus the broader PC industry.

  • - Analyst

  • Okay.

  • That's helpful, Stephen.

  • And I guess the follow-on would be, what does guidance assume as far as PC inventories in the third quarter, and what's the TAM baked in that, as well?

  • - President & CEO

  • If you look at -- let me give you some data points to contemplate.

  • Obviously, we haven't seen Toshiba's numbers published yet, so we don't know where they ended up.

  • But we would expect that the TAM for last quarter to be somewhere between 110 and 112, depending upon where Toshiba lands.

  • The TAM that we are using for purposes of our guidance, or assuming for purposes of a guidance, would approximate 115 million.

  • The increase from, -- just use 110, because it's a round number -- from 110 to 115, that increase is driven by two factors, seasonal increase in gaming, seasonal increase in branded.

  • That would imply that other segments of the market are flat from a unit perspective.

  • And when you get into the PC market, we would expect that to be roughly flat, at least as it relates to hard drive shipments into the market.

  • From an enterprise perspective, we believe that units will be roughly flat.

  • Keep in mind, one of the comments that we've made is that we believe that there will be meaningful increase in terms of exabyte shipments that as we're mixing up to higher capacities and shipping six terabyte and eight terabyte, obviously the unit consumption gets affected by that such that the unit increase is more muted.

  • - Analyst

  • Thanks a lot.

  • Operator

  • Rick Kugele, Needham & Company.

  • - Analyst

  • Thank you.

  • Good afternoon.

  • Just my two questions will be first and foremost on helium.

  • Can you give us a sense on how much of your enterprise business today is based on helium?

  • And competitively, when you do come up against another offering that is more traditional based, presumably you are coming in at a premium, because of the -- can you hear me all right?

  • - VP of IR

  • You broke up for a second, Rich.

  • - Analyst

  • So competitively, when you go up against someone else with a more traditional drive, an airbase drive, with helium, can you just talk about your win rates there?

  • Just to understand the dynamic as we move to higher and higher capacities that are exclusively helium-based.

  • - President & CEO

  • Sure.

  • The first thing, Rich, is that we're not going to provide any additional color on the volume of our capacity enterprise drives, that's helium versus traditional in air drives, at this point.

  • But obviously, as we've indicated over time, we will be transitioning, particularly when we move to the 10 terabyte and things like that.

  • And the six terabyte is intended to be our last in air product.

  • So as customers mix up, a larger and larger percentage of our business is going to be helium-based.

  • Relative to head-to-head competition, a couple things to keep in mind.

  • First thing is that the customers that we are dealing with have pretty sophisticated total cost of ownership algorithms that allow them to look at more than just simply the price of the hard drive.

  • And we recognize the fact that clearly the price of the hard drive is one element, but when we factor in from a total cost of ownership perspective and we're going head to head at a similar capacity point, we actually have pretty good win rates.

  • And in some cases, obviously, if we transition to the eight terabyte right now, we've got a distinct advantage from that capacity perspective, which assists us a lot terms of winning business.

  • - Analyst

  • Okay.

  • And then in terms of the non-PC percentage of revenue, do you have a sense for what that might be exiting FY16?

  • - President & CEO

  • (Chuckles) That's a good question, Rich.

  • And I dare to speculate, to tell you the truth, because a lot of it will depend upon what happens with the PC business.

  • So I don't think I want to try to forecast a number at this point.

  • Because I would happily have it remain the same, because that would mean that the PC business was actually looking a little bit better.

  • But if we don't see the PC market pick up, then obviously our non-PC business is going to continue to increase as a percentage of the total.

  • That's a long non-answer to your question, Rich.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Ananda Baruah, Brean Capital.

  • - Analyst

  • Thanks, guys, for taking the question and congrats on a very solid executional quarter in a challenging environment.

  • One for each, Steve and Olivier.

  • Steve, following up on the last question, as you think out past this year into and even through 2016, what is a prudent way for us to think about how you guys view normalized exabyte growth?

  • And I know it might be, there's a lot of moving parts in the current environment, but I guess whatever your latest thought process there would be helpful.

  • And then I have a follow-up.

  • Thanks.

  • - EVP & CFO

  • If you look at exabyte today, we see it to be in the high single digits, with some nuances, as you go about other business.

  • Capacity enterprise was a big, obviously, focus.

  • We would expect it to grow in the 50% range, which is what we have observed on average for the last four quarters, a strong performance on that standpoint.

  • - Analyst

  • Got it.

  • Thanks.

  • And then Olivier, for you, just on the OpEx levels to expect going forward.

  • I believe last quarter, before PCs stopped to the degree that they did, that you were looking at a 590-plus or minus level, depending on where in the year we are.

  • You pulled back on costs this quarter, although it sounds like maybe this was a little on the prudent side.

  • So would love to get your take of how we should think about OpEx levels going forward.

  • - EVP & CFO

  • We guided to a lower number, $575 million for the next quarter.

  • It's probably a number we would stick to for the coming four quarters, based upon the adjustment we had to do to our cost base based upon the time lever.

  • - Analyst

  • Got it.

  • Thanks a lot.

  • Operator

  • Sherri Scribner, Deutsche Bank.

  • - Analyst

  • Hello, guys.

  • I just wanted to ask your view and what you are hearing from your cloud enterprise customers at this point, given the fact that a number of the big cloud providers, Twitter, Amazon, Facebook, are all cutting their CapEx plans.

  • You guys sound on the call to be very bullish on capacity growth, but just wanted to get your sense of what those companies' plans are, given they're cutting their CapEx?

  • Thanks.

  • - President & CEO

  • Yes, let me talk about it in general terms.

  • The first thing is, which may sound very much like an obvious statement, but we have a number of customers, and relative to any one particular period, we may see relative strength or relative weakness in particular accounts.

  • And oh, by the way, obviously, part of our job, from a management perspective, is to manage whatever either, call it, segment or customer volatility from a demand perspective that we might happen to see.

  • And so there's always going to be noise in that regard that we have to deal with.

  • In general, as an overall statement, we feel very good about our positioning from a product perspective, from a technology perspective, from a customer perspective, positioning standpoint.

  • And the numbers that we are looking at are relatively consistent with our previous expectations.

  • And we continue to expect that in the back half of the year, we're going to see pretty healthy pickup from an overall exabyte perspective.

  • And we will see how that translates from a unit perspective, as we ship higher capacity drives, but it should also drive a pretty healthy first half to back half revenue increase, in terms of its contribution to our overall business.

  • - Analyst

  • Okay.

  • That's helpful.

  • And just thinking about that exabyte growth accelerating in the back half of the year, what is driving that?

  • Is that further builds by some of your customers?

  • Is that something that you've seen seasonally?

  • I'm just trying to understand that a bit better.

  • Thanks.

  • - President & CEO

  • Let me give you a little bit of context.

  • So if you look over the last roughly three years, particularly in that space, about 40% of exabyte shipments are in the first half of the year, about 60% in the second half of the year.

  • We are expecting, roughly speaking, that kind of a split to continue.

  • And I would suggest that that's just due to normal seasonality in terms of the nature of that business.

  • It doesn't necessarily mean that there's an acceleration per se in that segment from a year-on-year perspective.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Wamsi Mohan, Bank of America.

  • - Analyst

  • Yes.

  • Thank you.

  • Headcount is down 8% year-on-year.

  • Can you talk a little bit about where those adjustments were made?

  • How much was manufacturing related versus maybe G&A that can persist into the back half?

  • And I have a follow-up.

  • - President & CEO

  • The majority of that is our manufacturing workers in Asia.

  • - Analyst

  • Okay.

  • Thanks.

  • - President & CEO

  • All of it, yes.

  • - Analyst

  • Thanks.

  • And on the MOFCOM side, you sound more optimistic today versus 90 days ago.

  • First, am I correct in assuming that?

  • Clearly, you have been meeting them throughout this process.

  • So what's giving you an increased confidence of a speedy resolution?

  • And if we don't have a resolution in six months, would you be negatively surprised?

  • - President & CEO

  • (Laughter) The comment that I made on my prepared remarks, frankly speaking, stands on its own in terms of the commentary and the reasons why we believe that, or that we're hopeful for a decision in the near term.

  • So I'd refer you back to my script for a detail in terms of that.

  • Your question with regards to would I be surprised if we didn't have a decision before the end of the year is obviously a tricky question.

  • I don't know if I would say surprised, but obviously I would be sorely disappointed if we didn't have a decision by then.

  • - Analyst

  • Thanks, Steve.

  • Operator

  • Steven Fox, Cross Research

  • - Analyst

  • Hello.

  • Good afternoon.

  • I was wondering if you could talk a little bit more about your SSD business.

  • It's had some fantastic growth over the past year.

  • What are the key drivers and how do you think your growth is comparing to the marketplace, at this point?

  • - President & CEO

  • Sure.

  • A couple of comments on that.

  • The first thing is that from an overall growth perspective, we do believe that we are gaining market share in that market.

  • And so we are exceeding industry growth averages.

  • The lion's share -- this is consistent with the past -- the lion's share of our revenue continues to be related to our SaaS-based SSD product.

  • The one really encouraging thing, from my perspective, is that we are beginning to see a much more meaningful contribution from our PCIe NVM product.

  • It's still relatively small compared to the 244.

  • But we saw a nice pickup from calendar Q1 into calendar Q2.

  • We're getting increasing momentum and we expect, as I indicated in my prepared remarks, that the revenue contribution from those products will continue to increase as we move through FY16.

  • - Analyst

  • Great.

  • And then just as a quick follow-up, given where units are right now and some of the average capacities you've talked about, what are the chances that you would consider writing down some capacity at certain parts of the production process in the near term?

  • - President & CEO

  • Yes.

  • So we are constantly evaluating that and constantly looking at that.

  • And you can see that we have taken, as the market has declined -- let's be clear, the market has declined significantly over the last two to three years -- and we have consistently evaluated our investments and our capital levels as we've seen the market come to different levels.

  • We're going to continue to do that and continue to take actions to make sure that we right size not only our manufacturing capabilities, but also our investments from an OpEx perspective, to make sure that we do our best to provide appropriate financial performance for our shareholders.

  • - Analyst

  • Thanks very much.

  • Operator

  • Christian Schwab, Craig [Holman] Capital Group.

  • - Analyst

  • Great.

  • I have a follow-up similar to that line of thinking.

  • Our non-PC revenue has been -- your revenue, I should say -- has been fairly consistent at about $2 billion to $2.2 billion a quarter for the last few years.

  • When we look at your gross profit dollars generated, I would assume that it's higher than the non-PC revenue, meaning that 70% plus of your gross profit dollars are generated in non-PC products.

  • Is that fair?

  • - President & CEO

  • Without confirming the exact number that you quoted, the non-PC areas of our business carry a higher gross profit profile than our traditional client business.

  • And so if 65% of our revenue contribution is non-PC, then obviously, the profit contribution of that is greater.

  • - Analyst

  • Right.

  • So I guess where I'm going with that is if we get MOFCOM approval and we start to write down more capacity in notebooks and PCs, we're going to print cash for as long as that non-PC revenue doesn't dissipate, right?

  • - President & CEO

  • Yes.

  • We would believe that there will be significant synergies as a result of the lifting of the whole separate, which will not only benefit in our Company our shareholders, but will also be able to benefit consumers in the form of more competitive pricing.

  • - Analyst

  • And if we look at the 76,000 people we've got left working for us, what -- can you remind us the breakout of those employees, roughly?

  • - VP of IR

  • There's nothing to remind you of, in that we've not broken that out.

  • - Analyst

  • We haven't broken that out?

  • - VP of IR

  • No.

  • - Analyst

  • Okay.

  • Great.

  • Congratulations on great execution.

  • Thanks, guys.

  • - President & CEO

  • Thank you.

  • Operator

  • Keith Bachman, Bank of Montreal.

  • - Analyst

  • Hello, two.

  • Olivier, can you help, what was the charge for, there's $104 million charge this quarter that was reversed out from GAAP to non-GAAP.

  • What was that for?

  • - EVP & CFO

  • The majority of that, all of it, quasi, was due to us resizing our business in order to cope with the current time level.

  • So all of it is the adjustment of our supply chain end to end to face the new reality.

  • - Analyst

  • So is it a permanent reduction on the fixed cost base?

  • Trying to understand, was it a one-time, truly a one-time event, or does that carry forward and reduce your fixed cost?

  • - EVP & CFO

  • So we will -- that will be one adjustment we have done, among others in the past.

  • And this one will carry its impact going forward indeed.

  • - Analyst

  • Okay.

  • Steve, one for you then.

  • In terms of MOFCOM, is it a zero sum game?

  • And what I mean by that is this has been puts and takes here, it feels like it's ebbs and flows over the last year and change.

  • What happens if the Chinese government just doesn't say anything and this goes on for perpetuity.

  • And what I mean by that, does Western Digital have plans, contingency plans, whereby they could reduce cost even without the hold separate that would at least get at some of the cost savings that you've identified?

  • Or do need to get MOFCOM to really take your cost structure meaningfully lower from this juncture?

  • - President & CEO

  • We're going to continue to evaluate all of our options.

  • But I think it's very dangerous, Keith, for me to speculate as to what we would do if we had no response from MOFCOM.

  • - Analyst

  • Okay.

  • Fair enough.

  • Nice job on the gross margin, guys.

  • - President & CEO

  • Thank you.

  • Operator

  • Monika Garg, Pacific Crest Securities.

  • - Analyst

  • Hello.

  • Thanks for taking my question.

  • Could you maybe talk about what was like-for-like pricing in the quarter and what you expect in the September quarter, as well?

  • - EVP & CFO

  • Monika, nothing out of the ordinary.

  • The market remains competitive and we would not characterize this quarter, the one we closed, very differently from the prior one.

  • And we will expect that to prevail in the September quarter.

  • - Analyst

  • Thank you.

  • Then as a follow-up, your enterprise revenue has grown significantly this year.

  • Is it fair to think FY16 that could be greater than $1 billion business?

  • - President & CEO

  • I don't know if we provided a specific estimate in terms of what our revenue level will be.

  • But we continue to expect that we're going to see nice growth in our overall enterprise business.

  • - Analyst

  • Okay.

  • Thank you.

  • That's all for me.

  • Operator

  • Bill Shope, Goldman Sachs.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Can you give us some color on how we should think about margin trends for your enterprise SSD business relative to the enterprise HDD business?

  • I know you don't give the absolute levels, but if you could just give us some color on how we should think about the trends relative, particularly now that it's becoming a much more significant part of the overall business?

  • - President & CEO

  • Well, we said in the past and continues to be true, is that the gross margin, generally speaking, for our SSD business is below the corporate average, still very good margin, but below the corporate average; but it is clearly above the corporate average from a return on invested capital, because we don't have the same form of, call it, vertical integration investments.

  • - Analyst

  • And then looking at your capital allocation, obviously you continue to give back cash to shareholders each quarter.

  • But do you foresee any incremental change to the capital allocation plans or near-term activity, even given the recent sell-off on the stock price and some of the concerns that have pressured the stock relative to the market recently?

  • - EVP & CFO

  • So we look at capital allocation regularly, but we still believe that even at this point in time, giving back 50% for our free cash flow back to shareholders in the form of dividends and buybacks is a balanced approach to reward our shareholders today, but also to keep rewarding our shareholders tomorrow to keep investing in the business.

  • And we mentioned some attractive investments, helium, enterprise SSD, and (Indiscernible) being a few examples.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Joe Yoo, Citigroup.

  • - Analyst

  • Thank you.

  • Steve, I wanted to ask a more general question about mission critical performance drives, if I could.

  • So I know you don't break out performance versus near line.

  • But if you look at the industry data, mission critical has been fairly flat, and actually it's been growing in the last couple of quarters.

  • And you're in an interesting position, where you sell both the SaaS drives and the SaaS SSDs, which are largely viewed as substitutes.

  • So can you help us understand why SaaS drives remain so resilient, despite such strong adoption from SSDs?

  • - President & CEO

  • Are you talking relative to us, or in general?

  • - Analyst

  • Either.

  • But maybe you can start with WD.

  • - President & CEO

  • Relative to us, if you remember, we had a hole in our portfolio where we did not have a competitive 2.5-inch small form factor SaaS hard drive.

  • We now have a competitive product.

  • And so in that space, which albeit a relatively small part of the performance enterprise market, we've been able to pick up some share in that space just by having a competitive product.

  • So that's helped strengthen our relative performance from a performance enterprise standpoint.

  • From a standpoint of SaaS versus -- not SaaS, enterprise SSD versus a small form factor hard drive, right now we're not seeing much cannibalization, per se.

  • We do expect that there will be cannibalization over time and it tends to be workload driven, in terms of the way the systems are configured.

  • But like I said, so hasn't been cannibalization so far, but we do expect that that will happen in the future and that there will be some crossover between 2.5-inch, 15-K drives and SSDs in the future.

  • - Analyst

  • And what is the critical factor in actually making that happen?

  • Is it pricing and the cost of NAND?

  • - President & CEO

  • It's pricing and also workload driven, in terms of how the systems are configured.

  • - Analyst

  • Great.

  • Thank you.

  • - President & CEO

  • Thank you again for joining us today.

  • In closing, I want to thank all of our employees and suppliers for their commitment and outstanding execution and our customers for their continued business.

  • Thank you so much.