威騰電子 (WDC) 2016 Q1 法說會逐字稿

Good afternoon and thank you for standing by.

Welcome to Western Digital's financial results for the first-quarter FY16.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Thank you.

You may begin.

Thank you.

This conference call contains forward-looking statements within the meaning of the Federal Securities Laws.

Such forward-looking statements are based upon Management's current expectations and include known and unknown risks, uncertainties and other factors, many of which Western Digital is unable to predict or control that may cause Western Digital's actual results, performance or plans to differ materially from those expressed or implied by such forward-looking statements.

The call does not constitute an offer to purchase or the solicitation of an offer to sell any securities or a solicitation of any vote or approval in connection with the pending merger with SanDisk.

Western Digital will file a form S-4 registration statement that includes proxy statements of SanDisk and Western Digital and a prospectus of Western Digital regarding the merger.

Western Digital and SanDisk will mail the definitive joint proxy statement prospectus to their respective stockholders.

Investors and shareholders should read the joint proxy statement prospectus carefully when it becomes available because it contains important information about the merger.

In addition, Western Digital, SanDisk and their respective Directors, Executive Officers and certain other members of Management and employees may be soliciting proxies from their respective stockholders in favor of the proposed transaction.

You can find information about Western Digital Directors and Executive Officers on Western Digital's most recent proxy statement and about SanDisk Directors and Executive Officer in SanDisk's most recent proxy statement.

You may also obtain a copy of these documents through the SEC's website or the Western Digital and SanDisk websites.

Further, references will be made during this call to non-GAAP financial measures.

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

The non-GAAP forward-looking guidance we provide during this call includes amortization of intangibles, integration and acquisition related costs.

Because we currently cannot fully quantify future amounts for these excluded items, we are unable to provide guidance for or a reconciliation to the most directly comparable GAAP financial measures.

The impact of these exclusion items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures.

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

I also want to note that copies of remarks from today's call will be available on the Investors section of Western Digital's website following the conclusion of this call.

And with that, I turn the call over to Western Digital Chief Executive Officer, Steve Milligan.

Good afternoon and thank you for joining us.

With me today are Mike Cordano, our President and Chief Operating Officer and Olivier Leonetti, our Chief Financial Officer.

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

This is an important time for Western Digital.

We have announced several transformational developments over the last few weeks, including the planned investment in our Company by Unisplendour, the decision by MOFCOM and the planned acquisition of SanDisk.

Coupled with our continued strong execution in the business, I am very excited about the Company's future and our ability to create long-term value for our customers, shareholders and employees.

We're proceeding with our integration into a single company as outlined in the MOFCOM decision, and we're submitting our applications for the regulatory reviews associated with the SanDisk acquisition and Unisplendour investment.

We look forward to keeping you informed of our progress.

Turning to the September quarter, industry demand for hard drives was moderately higher than expected, driven primarily by strength and demand for 2.5-inch devices for game consoles and notebook PCs.

We reported revenues of $3.4 billion, non-GAAP gross margins of 28.9% and diluted earnings per share of $1.56.

Our storage shipments for the September quarter grew to 64 exabytes from 56 exabytes in the June quarter.

These results reflect continued strong product and technology positioning coupled with solid execution.

Our enterprise SSD revenue grew significantly to $233 million, reflecting the continued success of our SaaS SSD products in an increasingly competitive environment.

Additionally, we continue to ramp our new Ultrastar PCI-E NVMe offering.

Revenue from our video surveillance hard drives also continued its rapid growth as customers embraced our expanding lineup of these multipurpose or purpose built solutions.

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

We anticipate this new systems business will generate meaningful revenue next fiscal year.

We saw a good demand for our enterprise hard drives, especially our high-capacity helium drives, with more than 1 million units shipped in the quarter.

We are volume shipping our 8 terabyte helium drive and we'll be ramping our 10 terabyte helium drive in the year ahead.

Overall, demand in the high-capacity space was somewhat softer than anticipated.

This was due to absorption of previously deployed storage assets purchased earlier in the calendar year by some of our large customers.

Notwithstanding cyclicality within a given period, growth in the capacity enterprise sector will continue with a 35% CAGR and exabytes anticipated on an annualized basis through 2020.

This is underpinned by the ongoing growth in data being created and stored.

Looking to the PC market, we are continuing to see some signs of stabilization in demand driven by innovation, refresh cycles and normalization of PC inventories.

We believe we have the opportunity to improve our financial performance due to the integration synergies associated with the recent MOFCOM decision, coupled with our continued favorable mix of business.

Longer-term, the acquisition of SanDisk and the investment by Unisplendour will help transform our Company into a storage technology leader with a broader set of products, deeper technology base and an expanded addressable market.

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

Thank you, Steve.

Our revenue for the September quarter was $3.4 billion.

We shipped a total of 51.7 million hard disk drives at an average selling price of $60.

Our non-GAAP gross margin was 28.9% and operating expenses totaled $567 million.

Tax expense for the September quarter was $31 million or 8% of non-GAAP pretax income.

On a non-GAAP basis, net income was $366 million or $1.56 per share.

In the September quarter, we generated $545 million in cash from operations and our free cash flow totaled $394 million.

Our CapEx totaled $151 million, or 4% of revenue.

We repurchased 700,000 shares for $60 million.

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

We closed the quarter with total cash and cash equivalents of $5.1 billion, of which approximately $60 million was held in the US.

I will now provide -- let me go back to the comment.

Cash and cash equivalents of $5.1 billion of which approximately $600 million was held in the US.

I will now provide our guidance for the December quarter.

We expect revenue to be in the range of $3.3 billion to $3.4 billion.

On a non-GAAP basis, we expect gross margin percentage to be slightly up from the September quarter.

Operating expenses of approximately $585 million, and accordingly, we estimate non-GAAP earnings per share between $1.50 and $1.60.

Operator, we're now ready to open the call for questions.

(Operator Instructions)

Amit Daryanani with RBC Capital Markets.

Thanks.

Good afternoon, guys.

I have a question and then a follow-up.

I guess to start with, could you just talk about the benefit the MOFCOM approval will have on your cash generation ability as you go forward?

And how do you think the timing of those benefits would flow and would it be in sync with your P&L?

And does MOFCOM will help you get within the target of your cash conversion cycle of 48 days?

I will take that and then Olivier can add a little bit of color.

If you -- and this is Steve.

If you look at the benefits that we expect from the revised MOFCOM ruling, is that first thing is is that we expect to realize $400 million of annual operating expense savings.

And then we have also commented that we will have material cost synergies.

We have not quantified what material means in terms of cost synergies.

Generally speaking, the $400 million of operating expense savings would be roughly equivalent to cash savings as our OpEx.

The cost savings that we would realize which have not been quantified, would be a mixture of cash and depreciation, that sort of thing.

It would be a mixture.

Let me add two comments.

First of all, most of the cash will be generated offshore.

We have commented on that.

90% of the benefit will be generated outside the US.

And from a cash conversion cycle, we believe we are going to have some improvements but I wouldn't bank on many days.

I can comment on that because there's a little bit of perspective.

The four to eight days was -- we announced that I think it was back in September of 2002 or 2003.

2012, sorry, lose track of time.

But shortly after the acquisition.

The composition of our business has changed dramatically since then.

Particularly, a lower percentage from a PC business which tended to have a higher cash conversion to more of an enterprise mix which has a slower cash conversion.

So we are going to need to reset at some point what that cash conversion cycle from the business -- from a business perspective should be for our Company.

Got it.

That's really helpful and just as a follow-up, could you talk about the gross margin dynamic in the September quarter?

It was I think off 60 basis points of your plan.

Mix looks like maybe a part of it but was there anything else, especially from a pricing perspective, that impeded your gross margins?

All of it was actually mix.

A higher mix of gaming and a higher mix of notebook and branded products.

Perfect, thank you.

Aaron Rakers with Stifel Nicolaus.

Yes, thanks for taking the question.

One question and one follow-up as well.

Olivier, I think you had made a comment that your operating expense in the current quarter is expected to be $585 million.

I just want to clarify that and if that's true, just curious of what is the upward driver here in this current quarter?

And again, going back to Amit's question, when can we start to actually see that OpEx come down as a relates to that MOFCOM?

Is that over the next two or three quarters or is it further out?

I think last week you had suggested that you should be through a lot of that by the time you get to that SanDisk closure.

So the current guidance for OpEx is a bit higher than our run rate due to incentive compensation.

Following the December quarter, we would expect run rate effects to be in the range of $575 million, give or take.

$570 million.

$575 million give or take before MOFCOM synergies.

Now in term of MOFCOM synergies as indicated, we would expect them to materialize between the next 12 and 24 months and we'll provide you an update on a regular basis.

The run rate OpEx pre-MOFCOM synergies is $570 million.

But just to be fair, you are looking to drive that OpEx down and that's not going to happen.

That should -- should some of that start to happen before we even get to the 12 months is what I'm asking?

The short answer is yes, Aaron.

What we haven't done which -- let's keep in mind that prior to the revised ruling from MOFCOM, we were precluded from doing any integration planning.

And so we have begun detailed integration planning and all of that.

And so we are not prepared at this point to indicate specifically the phasing or the timing of those OpEx synergies other than to indicate they will take place over the course of the next 12 to 24 months.

Clearly, we are going to be looking at how we can bring those in as much as possible from a financial perspective while minimizing impact to our business.

Okay and then as a follow-up, I'm just curious on the capacity shipment trends, you talked a little bit about -- it looks like you were down about 2% year over year in terms of total capacity ship.

Can you help us bridge what that capacity ship looks like between the PC business relative to your enterprise business and what that has trended like?

I'm not sure I follow that question, Aaron.

I guess relative to the 35% compound annual growth rate that you referenced on the enterprise side going forward, just curious of how that growth has looked like here over the past few quarters within the total capacity ship number that you report?

I got it.

Mike is going to take that question.

Hi, Aaron.

So I think the way to think about it, we still think the calendar year is tracking to the 35% number, maybe slightly higher.

We saw a little bit of front loading in the calendar year of that and so that's being absorbed in the comments that Steve made earlier as we get into the second half.

I think that trend, we are confident in that and that is specifically around the capacity Enterprise segment.

Thank you.

Rich Kugele from Needham.

Thank you, good afternoon.

A couple questions.

First, on the capacity enterprise side, obviously that spans more than just cloud service providers.

Can you just talk about the capacity enterprise cloud service provider part of your exabyte shipments and how you would expect that to trend over the next, I don't know, 6 to 12 months as you move especially to 10 terabyte?

Rich, I will take that question.

As you know, we try to stay away from talking about specific, either customers or types of customers.

Obviously, cloud service providers are a meaningful part of exabytes shipped on our part.

But the absorption that I alluded to in my prepared remarks was a mixture of both traditional enterprise customers if you want to call it that, as well as cloud service providers.

Okay.

Interesting.

And then post SanDisk now, is there anything that you were contemplating on the Hitachi integration that now needs to be altered because of the SanDisk integration?

And were there facilities that perhaps now you need to keep?

Does it change what could have happened in any way?

I think the first thing to keep in mind, Rich, is that given the complementary nature of the SanDisk and Western Digital transaction, we are -- it is a different kind of an integration in that regard.

One, I think that's an important thing to contemplate.

Simplistically, the answer to your question is no, it doesn't really alter anything.

There are some additional things that we will have to think about that add a bit more complexity.

For example, systems integrations and things like that.

So we will have to look at not only the pre-existing WD and HGST systems but also what platform is SanDisk on and how do we manage that process?

But other than a few items like that, we intend to more or less proceed full steam in terms of the integration of on the WD/HGST side.

Great.

Thank you.

Wamsi Mohan with Bank of America.

Yes, thank you.

Steve, on your comments about absorption on the capacity site, can you help us think through either how much do you think incremental demand half or half migrated into the first half versus second half of the calendar year because of those purchases?

Or alternatively, how much of the absorption do you think we are through and what innings are we in, in that?

And I have a follow-up.

Let me comment on it in this way.

One of the things that we talked about in our last earnings call and also, I believe, our largest competitor also commented on, it is typically the -- I will call it the mix of exabytes that gets shipped.

You have about 40% that typically gets shipped in the first half of the year and 60% in the back half of the year and if you look that up -- and that is calendar year.

Right?

Not our fiscal year.

And that percentage is held pretty consistent over a number of years.

This year roughly speaking, we're looking at something that is more like 45% and 55%.

That will help dimension a bit, that.

And we would expect that there would continue -- that that absorption of capacity or exabytes shipped, that absorption will continue through the balance of this calendar year and begin to, if you want to call it, abate as we begin next calendar year.

Okay, thanks Steve.

And then on the near line side, clearly you took some share over there.

As you had some customers migrate to the 8 terabyte drives, can you talk about what happened with the pricing on a like for like basis for the 4 and 6 terabyte and did that influence margins?

Thanks.

The short answer is that is not something that we have called out as a particular driver of our margin performance.

Olivier commented on the decline that we saw in our gross margin was driven entirely by mix and that being a stronger mix of lower margin products, mainly drives that go into gaming consoles as well as 2.5-inch drives that go into notebooks which consistently have been below the quarter average.

And so, whether or not -- that's what impacted our margin.

And whether or not other things impacted, we are not calling anything out specifically.

All right, thank you.

Rod Hall with JPMorgan.

Good morning, guys.

Thanks for the question.

I wanted to ask about the regional trends, particularly Europe, but maybe also the US.

The European year-over-year growth deteriorating quite a bit in the quarter to minus 15% from minus 8% last quarter.

I wonder if you guys could give us a little color on what is going on there?

Is that just consumer demand deteriorating or are there other things happening?

And then same for the North American region down 6% after being up 16.5%.

Is that just data center cloud oriented stuff or can you give us a little bit of color on those regional trends?

Thanks.

I don't know if there's anything particularly to call out.

Other than -- Europe has been weak from, call it, a broader macroeconomic perspective.

It's always difficult to draw conclusions from our geographic data.

Because so much of our product is manufactured in Asia or it's passed onto customers that manufacturer in Asia.

So it doesn't really speak to the end market.

But we have seen some.

As you know, in the macroeconomic situation in Europe has impacted some of our more retail-oriented business but I'm not sure I would call out anything specific beyond that.

And the European drives are more Europe linked, is that correct?

Where as elsewhere, you get more -- especially in Asia, it leaks out into other regions or is that the wrong way to see things?

Probably in Europe you are right because there isn't a lot of manufacturing done in Europe.

North America, you get a little bit of a mix because there are some manufacturing our systems that may go elsewhere and certainly in Asia but Europe is a little more of a true number.

But Europe has been, from a broader perspective, weak for a while.

You are not the only ones.

Okay.

Thanks a lot.

Appreciate it.

Sure.

Steven Fox with Cross Research.

Hi, can you hear me okay?

Sure.

Just one question on, just switching gears.

Can you talk about your solid state drive business a little bit?

I think you mentioned a little bit of capacity issues or rather competitive issues are increasing during the quarter.

And then relative to average capacities and some of the trends you mentioned in the enterprise, how do those relate to what is going on in SSD to the end of the rest of the calendar year?

And that is all I had.

Thanks.

So we have enjoyed through strong product execution, et cetera, a pretty strong market share position in that enterprise SSD business.

It's a very competitive market as I alluded to in my comments and quite simply, not for any one particular issue or another other than just increased competition we gave back a little bit of that share in this past quarter.

And just in terms of average capacities or how the business trends through the rest of the year?

Overall or enterprise SSD?

Just enterprise SSD.

Nothing surprising.

We continue to see as product generations gets announced, we continue to see an upward trend in average capacity shipment.

Okay, thank you.

Sure.

James Kisner with Jefferies.

Thank you.

So my question is just regarding seasonality.

I believe on the June quarter call you guys talked about seasonality being abnormal because of the depressed nature of, I think, client demand primarily.

But I'm just wondering if you could update your thoughts?

I would like you to comment ideally ex-MOFCOM, seasonality of earnings in this fiscal year after having a couple more quarters under -- or at least another quarter under your belt.

I don't know if I would call out -- if you look at seasonality, if you look at the client business, client plus gaming which really drove most of the increase in TAM from calendar Q2 to calendar Q3.

The seasonal uptick in that regard was pretty consistent with what we normally see.

It is normally up anywhere from 6%, 7%, 8%, something in that range and that is kind of what we saw in those segments of the market.

The other thing that has happened is that while we used to see further increase in volumes in calendar Q4, that has dissipated or gone away as our customers generally build earlier in the year and then they will put those on boats or longer transport things to save transportation costs.

So the seasonality from calendar Q3 to Q4, which has been going on for awhile, is much more muted.

Hence, our view of a flattish TAM going into calendar Q4.

I'm still wondering here.

You are obviously, massively under shipping end market demand.

I think units here down 30% on the client side.

I'm just wondering if there's any hope at all here to see a more recovery to closer to end market demand?

We will have to see.

We have said this before.

We -- although we have seen some signs of stabilization on the PC market, I would not necessarily characterize us as being particularly bullish on that segment.

And we have seen -- there was some inventory draw down through the whole supply chain.

That has impacted our business a little bit in terms of where we may be out of sync a bit in terms of what you're seeing from an overall PC unit perspective.

And then additionally, we continue to see penetration of client SSDs in those systems.

Consistent with our expectations though, by the way, that that further disconnects us from the overall unit numbers that you might see from a PC perspective.

Thank you.

Keith Bachman with BMO.

Hi, guys.

It is Keith here.

Sorry if there is any background noise.

My questions I want to focus back on the SanDisk deal because I didn't have the opportunity to ask a question.

And more specifically, I'm still struggling to see how the SanDisk deal is creating shareholder value when one of the 10 multiple companies is buying a 30 multiple company.

And Steve, the question I wanted to pose to you if I could, I want to understand what your fundamental assumption is about the SanDisk.

Will it grow revenues as you look out over the next two to three years?

And how do you reach that conclusion particularly with some thoughts surrounding what I think as the retail business or the replacement card business?

And then I have a follow-up also related to SanDisk.

So the short answer to your question Keith, is do we expect the SanDisk business to grow over time?

The answer to that is, yes.

And we see growth opportunities, one, in helping to expand our broader footprint in terms of the enterprise SSD area where we think that not only is that an area that is outpacing overall market growth, but also a higher value opportunity for us.

We also think that there is growth opportunities in terms of client SSD as well.

Certainly as it relates to our base business.

And additionally, we think that there is growth opportunity in terms of embedded solutions, that sort of thing.

So you've got tablets, cell phones, et cetera.

And we think there's a good opportunity.

Yes, related to the removables or the retail segment.

That's a great business but it is not a growing business.

So we fully understand and acknowledge that.

Okay and maybe if I could ask my follow-up then on the cost side.

During the conference call last week, I think you had articulated broader synergies, call it $500 million.

And if I look at the cost structure of SanDisk alone, I would've thought there would've been more on OpEx.

But maybe I didn't understand the characterization because you're combining companies.

Maybe I didn't understand the characterization of the $500 million opportunity.

But I would have thought combining the companies would be frankly, more opportunities to reduce cost over the next couple years beyond $500 million.

But if you could just flesh that out a little bit and then I'll cede the floor.

Sure, so a couple of comments on that.

So when we talked about $500 million of synergies related to the SanDisk acquisition.

We were specifically talking about, that was 18 months, within 18 months of the close of the transaction.

We did not indicate that that was the total synergies.

In other words, we do think that those -- there are additional opportunities.

We have not quantified those or publicly talked about those at this point.

The additional thing is that regarding that $500 million of synergies, the lion's share of that is related to the advantage that we would get by being vertically integrated as it relates principally to our enterprise SSD business.

And there are some OpEx synergies that we have not quantified that breakout specifically.

Fair enough.

I will cede the floor.

Many thanks.

Sherri Scribner with Deutsche Bank.

Thank you.

Steve, I think you said you thought that the TAM in the fourth calendar quarter would be roughly flat.

I was hoping you could provide some detail on the different markets you mentioned that the PC market appears to be stabilizing.

Can you give us some sort of directional commentary on the different end markets for each of these?

Yes, I will give a little bit of color on that.

So we would expect -- and these are pretty small changes by the way.

We would expect that we will see some softening in terms of gaming demand as well as in notebook demand offset by a little bit better enterprise demand.

And that, again, these are subtle changes.

That drives some of our margin improvement because we'll get a little bit -- if things play out the way we expect, we will get a little bit of mix benefit as a consequence of that.

Thank you.

That is helpful.

And then, I think you also mentioned in your commentary that the active archive system is expected to drive meaningful revenues next year.

Can you help us understand what type of TAM you think that product has with the revenue opportunity for that product?

Thank you.

As we define the active archive TAM, we see that as a multi-billion dollar total addressable market for that solution.

There is both a currently defined version of that as well as, we think, some new Greenfield opportunities to create market with that solution given its value proposition.

So I would look at it as a multi-billion dollar market and growing at a fairly fast clip.

Monika Garg, Pacific Crest Securities.

Hello.

Sorry about that.

I was on mute.

Steve, a question on that SanDisk acquisition.

Running a drive business is quite different than running a leading edge memory technology business.

Could you talk about the plan to retain SanDisk's [scalelined] R&D team and any execution risk in the [negotiation] you see?

Monika, SanDisk has got some great people.

We look forward to welcoming them to the team.

We certainly intend to retain the talent that exists there and certainly that talent that relates to those parts of the business that we don't necessarily have the same experience in and that's certainly the semiconductor business.

So we look forward to bringing them on board.

Do you see any execution risk in the negotiation?

Well, there is execution risk in everything to be perfectly honest.

And the thing that I always focus the most on and investors will ask me often, what are you worried about?

I want to make sure that we, everyday as a Company, dot i's and cross t's.

And that's what we do better than any Company on the planet.

That's what we intend to do as we look to not only execute the WD HDST trend integration, but also as it relates to future integration of SanDisk.

And so, absolutely, are there risks and we are going to manage that carefully and I'm going to keep our team intensely focused on that.

And then given that Eunice has interest and 15% stake in that moving, do think it could add any regulatory risk for getting approval for the SanDisk acquisition?

We're proceeding with our application.

In fact, our application regarding Pacifia's process, that is in and has been accepted.

We were very careful as to how we structured that transaction and Eunice's representation on our Board.

And we feel pretty good about that and we're proceeding with the regulatory review at this point.

And we will keep you posted as things progress.

Thank you so much.

Katy Huberty with Morgan Stanley.

Yes, thank you.

How big do you think your lead is in the 8 terabyte capacity drive space and then how would you expect that to change, if at all, as the industry moves to 10 terabytes?

It is difficult to dimension how far ahead we are because we don't have perfect visibility into where our competition is.

Let me make this comment.

Our 10 terabyte drive, which we haven't announced exactly when that'll be available, this PMR-based solution, and that is our, depending upon how you count it, our third or fourth generation helium drive.

There have been a lot of learnings along the way and that we have developed.

And so, when you've got a three or four generation lead on your competition, that is a fairly material lead.

That being said, we respect our competition and we are not going to rest on our laurels and we are going to keep marching forward.

Okay, a question on inventory.

You commented on PC channel inventory coming down.

Obviously, we can see your balance sheet inventory that came down but where do think the industry is in terms of those channel inventory which has historically been quite low in recent quarters and also OEM inventory at their manufacturing hubs?

Thanks.

The inventory is still within our range in the lower end of the range, nevertheless.

Do you have any visibility into the OEM inventory at their hubs?

We think that those are within comfortable ranges but we don't have any specific visibility as to any issues.

Okay, thank you.

Mehdi Hosseini.

Thanks for taking my question.

Going back to your commentary regarding some share shift in the SSD.

How do see this evolving into next year?

And I have a follow-up.

That's a difficult question to answer.

How do we see share evolving into next year?

Obviously, what we're going to continue to do is execute on our product plan and continue to delight our customers and share will turn out where it will turn out.

And so, we're going to try to earn our business everyday.

Let me rephrase it is a follow-up.

Do you see new technologies like 3D NAND, to become a catalyst looking to next year while your competitor is just eating the margin and selling at a lower price.

As a follow-up to that, do you see a change in your driver strategy, especially SanDisk, selling more of a hybrid product as a way to scale a rather niche segment of the market?

Let me comment on that.

I think we see 3D as the next generation underlying media.

We have plans to address products that are built on that in the future.

So that will be part of our competitive profile.

And there are both economic benefits of that but there are also product performance benefits in that architecture.

So I think we'll see the market go through a transition and we have our own internal plans in which to undertake that.

Is your competition just basically selling at a depressed price?

Is that what the competition has done?

We see continued competition around that market as it progresses.

Nothing that's outside of our general expectations.

Quickly, on the hybrid drive, is your strategy changing here especially with SanDisk included part of your portfolio?

At this point, we don't have any specific changes we would articulate.

Got it.

Thank you.

Ananda Baruah with Brean Capital.

Thanks guys for taking the question.

Two, if I could?

The first is, with regards to TAM.

TAM and exabyte grow down, does TAM stabilize?

Do you guys expect it to remain inside any particular range?

And then in that context, what is the overall exabyte growth market profile you guys are looking for over the next handful of years?

And then I have a follow-up.

Thanks.

In TAM, Ananda, overall exabyte growth for the market, we're predicting a 15% growth as a CAGR.

And particularly as it comes to capacity enterprise, we have commented on that earlier, we see a 35% growth in CAGR.

That's very useful.

And then anything on the TAM range?

Longer-term, we would expect the TAM to be flat to maybe down low single-digits.

Got it, thanks.

And then just as a follow-up.

Our work really since late summer, has pointed to PCS as depricing including some OEM grade stock becoming a little but more aggressive than it typically has been.

It most recently has been.

Just interested in getting your view on if you have seen this yet?

If it has impacted unit placement in any way and if you expect it to potentially have an impact going forward?

And that is it.

Thanks.

You are referring to PC OEM pricing?

Yes.

On the SSD side.

PC related.

I would just comment that I don't think we have seen anything notable from our perspective.

Got it.

Thanks a lot.

Christian Schwab with Craig-Hallum Capital.

Great.

Thanks for taking my question.

Steve, I'm just wondering if you -- just back to SanDisk, just if you can explain the big question we get is whether this is defensive strategy or an offensive strategy?

In other words, is buying SanDisk your absolute best strategy for you to take on given your declining industry?

Or is it more of an offensive strategy in the fact that you believe exabyte growth is going to continue to grow and HDDs and solid state drives will coexist for an extended period of time and therefore you are best suited to serve a customer base that is also consolidating?

One comment and not to take offense to the way that the question is phrased, but I don't know if I necessarily like the characterizing it as either offensive or defensive.

This is a strategy that we have thought about quite a bit.

We think it is going to be good for our shareholders, good for our customers and it is going to allow our Company and our business to grow.

So if you want to characterize that as offense then feel free to do so.

Okay.

That is fair.

And then, as you look at the disk drive business Steve, as my follow-up question.

As we look out at a TAM that follows a flat to low single-digits given the mix in complexity of enterprise drives, as well as bigger capacity branded drives being shipped, we have made great progress on non-PC revenue as a mix of our business.

And actually, over the last four years has modestly grown.

What three, four years from now, do you believe that is the lion's share of the percentage of revenue?

Yes.

What percentage we will have to see and we certainly haven't called anything out publicly.

But clearly the mix of our business and the traditional hard drive space is improving.

And as it improves, and as the PC related part becomes a frankly, smaller and smaller part of our business, sooner or later there's going to be an inflection point we'll begin to show improvement in revenues in terms of the overall hard drive market as well as a better margin posture as it relates to that underlying business.

And so the hard drive business remains a great business.

It is just the mix is shifting.

Right?

In a favorable way.

Right.

I think some investors may be missing that.

I appreciate you answering that.

Thanks, Steve.

No other questions.

Mark Delaney with Goldman Sachs.

Yes, good afternoon and thanks very much for taking the questions.

First question was on the strategy of the Company in China going forward.

Post the Eunice deal that you've announced, should we expect any changes in how WD plans to do business or any other types of partnerships you may be looking to form, especially given that same law has been making other investments in US in cooperation with US tech companies?

Nothing to talk about at this point.

Obviously, we're going to continue to evaluate and think through our go to market strategy in China.

China as a market, first off, it's a huge market.

It's a growing market.

It's evolving market.

As you see some of the hyperscale guys there grow or telecom companies, et cetera, we're going to have to look at ways that we evolve our go to market capabilities in that market.

Nothing specifically to talk about now.

A question on the gross margin.

Certainly, when some of the preliminaries all started to come out from the HDD companies with lower margins.

There's a lot of concern in the market that there was an increase in pricing pressure.

And I know you already commented that the decline at WD was due to mix.

I was actually hoping if you could just talk about pricing trends within some of the segments?

It seems like on a quarter-to-quarter basis, there might have even been some pricing increases on some of the categories.

And then you talked about the clients being able to sell products, especially helium products on a TCO basis.

So any color you could provide on pricing with segments would be helpful.

Relative to what we saw, again, our margin decline on a quarter-on-quarter basis was purely driven in -- was mix related and I don't think there's anything unusual from our perspective to call out on the pricing front.

Thank you very much.

Nehal Chokshi with Maxim Group.

Thank you.

Just a minor question.

Days inventory, that's been elevated for three quarters now on a year-over-year basis.

Are we expecting that to continue to be the case?

Yes, we're managing our cash flow tightly and we would expect the flow not to have been achieved.

We think we can improve further on these metrics.

Okay, great.

This has been addressed to a certain extent but I'd like to try to tease it out a little but more.

The $500 million of OpEx synergies with SanDisk, from my understanding there is three main buckets -- I'm sorry, not OpEx synergies, overall synergies.

There are three main buckets from where this is going to come from; PC express cells overlap, branded distribution and interface engineering.

And if there's anything else I'm missing, please let me know.

But can you rank order what you believe each of these are going to be in terms of magnitude?

Well, the first thing is just to clarify, we haven't called any of that out in terms of what you are talking about.

I'm not going to comment specifically on that.

What we have said is that the lion's share of that $500 million will be the benefit that we will get by being vertically integrated in our SSD business, our existing SSD business.

And there will be some OpEx synergies but we have not quantified that.

By the way, the other thing is, is that we've indicated the $500 million will be 18 months after the close of the transaction which basically means that there will be further synergies beyond that 18-month period that we have yet to quantify publicly.

Thank you.

Joe Wittine with Longbow Research.

I want to go up on that same topic.

The $500 million in synergies, it seems like you are describing it, Steve, as these are benefits from owning the raw material in house.

So, is that really a synergy, I guess, or is that just kind of recapturing the profit that SanDisk would have brought on otherwise?

My question is, when you add one plus one does it equal two plus $500 million?

If you could just clarify that one more time, I think it would help.

Well, it's exclusive of the benefits that we will get from the existing SanDisk business.

So it is additive to whatever you might happen to estimate that the existing SanDisk business would be able to generate.

It is additive.

And then just to be crystal clear, this includes no OpEx at all?

No elimination of public Company expenses, that sort of thing?

It's a very conservative number?

I don't know if I used the word conservative.

But it does include an estimate of some OpEx synergies.

But we haven't quantified specifically what the OpEx versus the vertical integration benefits, we haven't quantified that difference.

But we've also indicated that we would expect that number to increase over time beyond that 18-month period.

Okay that is helpful.

Thank you.

At this time, we no longer have questions on queue.

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.

Thank you, sir.

That concludes today's conference call.

Thank you all for participating.

You may now disconnect.