威騰電子 (WDC) 2017 Q2 法說會逐字稿

Good afternoon and thank you for standing by.

Welcome to Western Digital's second quarter FY17 conference call.

Presently all participants are in a listen only mode.

Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this call is being recorded.

Now I will turn the call over to Mr. Bob Blair.

You may begin.

Good afternoon, everyone.

This call will contain forward-looking statements within the meaning of the Federal Securities laws, including statements concerning our expected financial performance for our third fiscal quarter ending March 31, 2017; our market positioning, expectations regarding growth opportunities, our financial and business strategies and execution, integration activities and achievement of synergy goals, demand and market trends, our product portfolio, product features, development efforts, and expansion into new data storage markets, and our joint venture partnership with Toshiba.

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 November 8, 2016.

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

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

Reconciliations of the differences between non-GAAP measures we provide during this call to the comparable GAAP financial measures will be posted in the Investor Relations section of our website.

We have not fully reconciled our non-GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted.

Accordingly, a full reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

In the question-answer part of today's call we ask that you limit yourselves to one question to allow as many callers as possible to ask their questions.

I thank you in advance for your cooperation and I now turn the call over to Chief Executive Officer, Steve Milligan.

Good afternoon, and thank you for joining us.

With me today are Mike Cordano, President and Chief Operating Officer and Mark Long, Chief Financial Officer.

After my opening remarks, Mike will provide a summary of recent business highlights and Mark will cover the fiscal second quarter financials and wrap up with our guidance for the fiscal third quarter.

At our Investor Day in December, we took the opportunity to present our differentiated platform, strategy and business model and to describe the significant growth opportunities for our Company.

With a growing storage industry and evolving data driven requirements, we are uniquely positioned to help define and drive the storage architectures of the future.

We are pleased with the increasingly strategic interactions we are having with customers, validating our approach to value creation.

We reported strong financial performance in the December quarter enabled by excellent operational execution by our team.

The favorable trends across all of our end markets that began earlier in 2016 continued.

This included healthy demand for capacity enterprise hard drives, all NAND-based products, and hard drives in client applications helped by stronger than expected PC demand.

We reported revenue of $4.9 billion, non-GAAP gross margin of 37%, and non-GAAP earnings per share of $2.30, outperforming the revised guidance provided at our Investor Day.

We continue to execute well on two key strategic priorities, the integration of HGST, SanDisk and WD, and the ramp of our 3D NAND technology.

The transition to 3D NAND technology continues as planned with the ramp of our 64 layer architecture.

We commenced retail shipments and OEM sampling of our 64 layer products in the December quarter.

As we demonstrated at Investor Day, we are executing methodically and thoughtfully on our technology strategy and we fully expect our leadership in 2D NAND to extent into 3D NAND.

In 2017 and beyond, you will see the deployment of our 64 layer 3D NAND across our product portfolio, spanning removable, embedded, client SSD and enterprise SSD offerings.

As we all know from recent disclosures by Toshiba and news reports, our flash joint venture partner is facing challenges.

We have been in regular communication with them over the last several weeks.

We are confident that their semiconductor memory business remains healthy and strategically viable.

Under any circumstance we will act to protect Western Digital's interest and work to ensure that we maintain the leadership position of our joint venture.

In closing, I want to express my gratitude to our Chief Technology Officer, Steve Campbell, who is leaving the Company after 20 years of distinguished service to Western Digital.

I also want to welcome Martin Fink on Board as our new CTO.

Martin brings deep storage systems and memory driven computing expertise that will help us accelerate our ongoing transformation.

I am sure Martin is known to many of you from his years at HP, where he most recently served as CTO and Director of HP Labs at HP enterprise.

I am delighted to have him on the senior team at Western Digital.

I will now turn the call over to Mike to provide business highlights in the December quarter.

Thank you Steve and good afternoon, everyone.

Our December quarter results reflect strong execution across our portfolio amidst a favorable industry environment in both flash and hard disk drive markets.

Demand remained robust throughout the quarter and we launched several new products, further expanding the breadth of our offering.

We made additional gains in the ongoing conversion of 3D NAND technology and the commercial ramp of our 64 layer technology is accelerating.

We are building stronger and deeper partnerships with our customers as our platforms increasingly align with our customers' strategic directions.

Overall, we had a strong finish to calendar 2016, providing business momentum as we entered 2017.

In client devices, our participation with OEM customers has meaningfully increased as our broadening portfolio of hard drives and flash based solutions addressed a PC market that is healthier than expected.

Our revenue from client devices increased sequentially, primarily driven by client SSDs and embedded products; as revenue synergies from the SanDisk acquisition benefited us further in a seasonally strong quarter.

Increasing storage capacities in mobile phones and market preference for client SSDs are long term tailwinds for this portion of our business.

Switching to client solutions, we experienced robust holiday seasonal demand and achieved sequential revenue growth, driven by key NAND-based products.

We are pleased to note that the combined revenue contribution from new products such as I-expand and dual USB drives also grew, underscoring continued consumer enthusiasm for our retail branded solutions.

We announced new retail products including the 4 terabyte My Passport, the 8 terabyte My Book hard drive for the PC and a new 4 terabyte hard drive for the Mac.

Shipments of our 64 layer 3D NAND based retail products began in the December quarter and we expect an increase in use of this underlying technology in our portfolio in 2017 and beyond.

In the data center category, demand for high capacity storage devices remain very strong.

Year-over-year petabyte growth for capacity optimized hard drives met our upwardly revised expectation, which we had estimated at 40% growth.

We are pleased with the mainstream adoption of our 10 terabyte third generation helium drive.

We have revised our planning to anticipate petabyte year-over-year demand growth for capacity optimized hard drives to continue at approximately the same 40% rate, compared to our prior forecast of about 35%.

At our Investor Day, we announced a 12 terabyte capacity helium drive, as well as a derivative SMR-based 14 terabyte drive, marking the start of our fourth generation helium product line.

The traction we have achieved on our helium drive offerings, which were launched four years ago, demonstrates true cost of ownership value for our customers and we look forward to providing them with ongoing innovation around this platform.

Notably, the December quarter marked a cumulative shipment milestone of more than 12 million helium drives, reflecting our leadership in this category.

From an enterprise SSD standpoint, we experienced strong demand across our products at both hyper scale and OEM accounts, driving sequential revenue growth.

In the December quarter, we announced our latest NVMe PCIe enterprise class SSD with leading performance and a high capacity SaaS enterprise SSD, contributing to a further expansion of our portfolio.

In our data center solutions category, our disc and flash storage platform business achieved several new design wins at leading system OEM customers for their cloud scale storage systems.

We are achieving new customer wins and solid repeat business from existing customers in key verticals around the world.

This nascent business continues to represent a strong growth opportunity for the Company.

Turning to silicon operations, we are very pleased with the progress we are making commercializing our 3D NAND technology.

As I indicated earlier, we have already begun retail product shipments containing 64 layer BiCS3 and we also expect to launch client SSDs and embedded mobile offerings with this technology throughout the year.

Additionally, we are on track to begin sampling enterprise SSD products utilizing 64 layer BiCS3 this calendar year.

We expect our broad implementation of BiCS3 across our portfolio will result in Western Digital having the industries richest mix of 64 layer 3D NAND based products in calendar 2017, underscoring our growing confidence in our ability to successfully commercialize this technology.

In the March quarter, we expect to break ground for the construction of FAB6, along with our joint venture partner Toshiba.

FAB6 will provide new clean room space to support the continued conversion of our existing 2D NAND capacity to 3D NAND.

We expect operations in FAB6 to commence in calendar 2018.

In closing, our December quarter results reflect the positive impact of the Western Digital platform, deepening customer relationships helped by our portfolio and technology expertise, along with our global go to market capabilities further strengthen us as a leading storage solutions provider.

I will now turn the call over to Mark for the financial discussion.

Thank you, Mike.

I am pleased with our financial performance this quarter.

Our team executed well in a healthy market environment, as we capitalized on our strong product offerings, achieved targeted costs and efficiency improvements, and improved our liquidity position with continued strong cash flow performance.

We exceeded the revised guidance from our Investor Day on December 6 across our key financial metrics.

Our revenue for the December quarter was $4.9 billion, driven by strong performance in each of our end markets.

Revenue in data center devices and solutions was $1.4 billion.

Client devices was $2.4 billion and client solutions was $1.1 billion.

In each end market, our revenue was flat to up from the September quarter, which underscores our strong performance, as the September quarter is typically our strongest period.

Our data center revenue growth continues to be fueled largely by cloud-related storage demand.

As a result, this quarter we saw continued strength in capacity enterprise hard drives, sequential growth for performance enterprise hard drives, as well as increased demand for enterprise SSDs.

Client devices, which include both hard drives and flash-based products, benefited from a healthier PC market, as well as traditional seasonal trends.

Embedded solutions experienced strong growth, primarily from increases in storage capacity in mobile phones.

In client solutions, our revenue grew as a result of strong demand for removable and other flash-based products during the holiday season.

Our non GAAP gross margin grew to 36.7%, up 280 basis points versus the September quarter.

We achieved this expansion through continued product cost improvement and healthy pricing for our products.

Our product cost improvements resulted from consistent execution and ongoing progress with our integration activities.

Turning to operating expenses, our non GAAP OpEx totaled $797 million, down $66 million from the September quarter.

We continue to make progress towards our integration synergy targets, while making ongoing investments in product development, go to market capabilities, and IT projects as part of our transformation to enable future growth.

Our non GAAP interest in other expense for the quarter was $221 million.

Our non GAAP interest expense was $205 million, a reduction of $31 million from the September quarter driven by the debt repricings and reductions.

Our non GAAP other expenses, net of interest income, were $16 million for the December quarter.

These expenses were primarily a result of foreign exchange revaluations that had no economic or cash impact.

While it was an expense in the second quarter, it will result in lower expenses in future periods.

Our non GAAP effective tax rate for the December quarter was approximately 13%.

On a non GAAP basis, net income in the December quarter was $675 million, or $2.30 per share.

On a GAAP basis, we had net income of $235 million, or $0.80 per share.

The GAAP income for the period includes intangible amortization, and charges associated with our acquisitions and stock based compensation.

Therefore, the net difference between our GAAP and non GAAP net income is primarily a result of non cash charges.

In the December quarter we generated $1.1 billion in cash from operations with $189 million spent on capital investments, resulting in free cash flow of $871 million.

We also had strong working capital performance contributing to our significant operating cash flows in the quarter.

We paid the previously declared cash dividend totaling $142 million during the quarter and also declared a dividend in the amount of $0.50 per share.

We closed the quarter with cash, cash equivalents and available for sale securities totaling $5.2 billion.

We have approximately $6.2 billion of liquidity available to us, including our $1 billion in undrawn revolver capacity.

Our net debt position has decreased approximately $800 million from the September quarter, driven by higher cash balances.

We remain committed to our long term deleveraging plans while also evaluating strategic investment opportunities as they arise.

As Steve indicated, we have continued to make very good progress with respect to our integration.

We remain on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar 2017.

As of the end of our fiscal second quarter this year, we achieved approximately $175 million of cost of revenue synergies and approximately $300 million of operating expense synergies, each on an annualized basis.

With respect to the SanDisk integration, as of the end of our fiscal second quarter, we have realized synergies of approximately $135 million on an annual run rate basis, toward our 18 month target of achieving $500 million total run rate synergies on an annualized basis.

To build on what Steve said about our flash joint ventures, it is important to note that the operations and financial position of flash ventures are healthy and investments are on track with a significant ramp of our 64 layer BiCS3 technology throughout calendar 2017.

As a reminder, the joint ventures generate positive cash flow that is used to finance a significant portion of the capital requirements for both partners.

I'll now provide our guidance for the March quarter on a non-GAAP basis.

As I've previously indicated, we generate slightly more revenue in the second half of the calendar year than in the first half.

In that context, we expect revenue for our March quarter to be approximately $4.55 billion, which represents significant year-over-year growth on a pro forma basis.

As a result, for FY17, we currently expect to generate pro forma revenue growth that is consistent with our long term financial model.

We expect non GAAP gross margin to increase to approximately 38%, primarily driven by continued favorable pricing and product mix across our Business.

Turning to non GAAP operating expense, we expect those to total approximately $800 million, consistent with our December quarter.

We continue to make progress with reductions in our cost and at the same time, support our integration and growth with certain incremental investments.

Additionally, we expect OpEx to be essentially flat in the fourth fiscal quarter, consistent with second and Third quarter levels.

Interest and other expense is expected to be approximately $205 million.

We expect an effective non GAAP tax rate in the 12-14% range.

As a result we expect non GAAP earnings per share between $2 and $2.10, with an estimated share count of 298 million diluted shares.

I will now turn the call over to the Operator to begin the Q & A session.

Operator?

(Operator Instructions)

We'll be taking our first question from the day from the line of Aaron Rakers from Stifel Nicolaus.

Yes, thanks for taking the question and congrats on the quarter.

I guess one of the things that stands out is that the near line business, or I should say the total enterprise business, your capacity shift was down about 8%, your units were down about 1%, I think Seagate was down 14% sequentially on capacity ship.

But the data points that we've seen throughout the quarter seem to be fairly healthy, even Nidec reporting pretty healthy growth in their spindle motors and enterprise.

So I'm curious, are you seeding share to Toshiba, what the dynamics look like specifically in the enterprise market and whether or not you were kind of capacity constrained and that was a variable to consider?

Well first of all, I think the year-over-year growth, I talked about in my comments Aaron, so we saw it come in kind of as expected around 40%.

The other thing I would say is some of this is timing of when this revenue shows up.

So from our standpoint we're seeing consistent demand and continued strength in demand there, so I don't think anything we would say was outside of our planning expectation.

And let me just add to your comment on share, we don't believe we seeded any share in the period.

And were you at all capacity constrained?

We are, this is Steve, Aaron.

We are tight on capacity as it relates to capacity enterprise.

The amount that we shipped was not meaningfully impacted in terms of capacity constraints but, and we talked about this last quarter, by the way, given there's a large component count, if we saw demand spike in any regard we would struggle to meet some of that demand.

But right now we're comfortable with where we're at from an overall capacity perspective, but we are running pretty hot in terms of our capacity enterprise in both component count as well as hard drive capacity.

Thank you.

Thank you.

Our next question comes from the line of Rich Kugele from Needham.

Thank you, good afternoon and congratulations as well.

A couple questions I guess first, when it comes to the cloud service provider landscape, your percentage of the business, if we include NAND going into that segment, obviously the high capacity enterprise is a big factor there, but are you supplying a large amount of the SSD side as well?

And then I have a follow-up.

Well certainly hyper scale is generally a growing segment for us, Rich, and as you know that today is principally database interfaced, so yes we see that as a growing market opportunity and participation for us.

And then Mark, if you needed to access quite a bit of capital for an investment in, let's say, in the Toshiba business further, how much capacity do you have on the balance sheet for leverage or asked maybe another way, what's the minimum amount of cash you need to run the business?

Well Rich, let me just say this.

First with respect to running the business, we have more than adequate liquidity and we feel very good about both our cash balances and the location of our cash, so that's something we're in very good shape on.

With respect to strategic opportunities and accessing additional cash, I would just say we don't comment on anything in particular and with respect to accessing additional liquidity, we recognize there are a variety of ways we can do it.

We feel like we have good alternatives with respect to additional capital, if we find an opportunity that warrants accessing more capital, but at this point, we just feel very good about our liquidity, feel very good about the way the business is operating.

And one of the things we should also highlight is all this is within the context of our long term commitment to deleveraging, so we really feel like we're in a good position from a balance sheet standpoint.

Excellent, thank you very much.

Thank you.

Our next question comes from the line of Mehdi Hosseini from Susquehanna.

Yes, thanks for taking my question.

I have two follow-ups.

The mission critical seemed to be pretty strong in the December quarter and I wanted to understand what is driving that.

Obviously with NAND and SSD prices going up, that may have shifted demand to more hard disk drive and also traditional enterprises have a year-end budget flush, so if you could elaborate on those two drivers and my follow-up question has to do with the free cash flow margin that came in around 18%.

How should we think about sustainability of that free cash flow margin into 2017?

Thank you.

Let me comment first on performance enter prize.

I think it's largely the seasonality and the year-end purchase cycle that drove it, so we don't see any change in sort our long range plans relative to SSD as a substitute for performance enterprise, so we see that as more a temporary effect.

I will comment generally speaking on the constraints around NAND, whether it be this category or the client category, the tight supply situation is creating a modest bleeding effect for hard drive demand.

With respect to our cash flow generation, two things.

One, at Investor Day we talked about long term range between 37 and 42 days for our cash conversion cycle and we did come in below that range due to strong linearity and very good execution by our teams.

So we would expect that in the near term, we maybe at the lower end of that range or slightly below it, but over the long term, as we talked about at Investor Day, as flash becomes a larger part of our revenue, we may operate closer to the middle or the high end of that range, but it's really a long term state.

Got it, thank you.

Thank you, our next question comes from the line of Sherri Scribner from Deutsche Bank.

Hi, thank you gentlemen.

Just looking at the gross margin this quarter at the high end of your updated range and the guidance for the March quarter suggests you're going to be at the high end of the range for your gross margin, so the question is how long are the high gross margin rates sustainable?

I know the NAND market is very tight.

It seems like there's some decent demand for the higher capacity hard drive, but how long should we expect you to stay in this high end of your range and should we expect you to revert back to more of the middle of the range at some point?

Thanks.

Sherri, this is Steve.

I'd add a few comments, as we talked about before and will reiterate on this call, we are dealing with a tight NAND situation, we expect that situation to persist from a supply perspective through the balance of calendar 2017, so that obviously has a positive impact on our gross margins.

As well, as Mike indicated, we are seeing good mix in term of our products, particularly in terms of capacity enterprise, that's helping us.

And it's also important to note that the margin model that we've talked about, one, is a long term gross margin model, that doesn't mean to say that, first off, that we're not going to stop at 38%.

If we can improve our margins beyond that, we are going to do that.

And there also may be some times where we actually exceed that.

But right now in terms of the current quarter that we've now begun, we expect to operate at the high end for some of the factors that I just mentioned.

Thanks.

Thank you.

Our next question comes from the line of Stanley Kovler from Citi.

Thank you very much.

I just wanted to ask about the exabyte growth within the quarter and the outlook between the NAND and the HDD business for the following quarter.

If we take out capacity optimize, if you strip out that segment, what were the trends between the NAND and the HDD side of the business as far as capacity goes, as we think about that coming down a little bit sequentially.

And then as we look at the March quarter, what kind of seasonality do you expect from a unit perspective on the NAND an HDD businesses as well and then I have a follow-up.

Thank you.

So in terms of the first part and breaking down the exabyte growth between hard drives and flash, we don't provide that break down.

Though we would also refer you to the investor material that we -- we have the Investor Day in terms of exabyte growth and revenue growth and that sort of thing.

There's a lot of good detail in terms of that by, if you want to call it segment of the business or market.

And generally speaking, if you look at this last quarter, both our growth, revenue growth, exabyte growth was generally in line with our previous expectations, except for two things.

Capacity enterprise continues to push up to that 40% exabyte growth that Mike talked about.

And then also we saw a bit better of a PC market which helped us both in terms of our client SSD business as well as our hard drive business.

And so really, other than kind of a general rising of tides across-the-board, those were the only two segments that maybe were a little bit better than what we expected.

And then I don't know if you can repeat your second question.

I don't remember what that was.

Sorry.

No problem.

The second part of the question was, as we think about Q1, I wanted to ask about the unit seasonality that we should think about for the NAND business and the HDD business, because seems like you're expecting better seasonality at least from an enterprise perspective and PC perspective, but units on the NAND side typically fall in Q1.

So just trying to understand what the seasonality is going to look like between the two sides of the business there.

I'll give an indication in terms of total units just from an HDD perspective, the TAM came in this past quarter in terms of calendar Q4 at, call it, 112 million unit range.

We would say that it probably would drop to, let's call it 100 million unit range.

And pretty much all of that decline is largely due to the PC area, in terms of from a unit perspective.

And NAND we would expect to be seasonally down, understanding that there has been tight supply, so you're going to see a little bit better demand than what you normally would see just from a sequential perspective, as well as the fact as pricing continues to remain healthy.

So that will help from an overall revenue perspective so that's just general guidance for you to work from.

Thanks and if I could just follow-up, I wanted to ask about the consumer electronics and branded segment of HDDs.

Can you help us understand what the trends there -- was a bit worse than seasonal, any product portfolio shift going on there?

Should we think about new products coming online in that area as we get throughout the year?

Thanks a lot.

Yes, actually we really were operating within our expected range.

I think we saw a little more strength on the flash side of the business driven by the same factors we talked about but nothing unexpected there relative to either the HDD base or flash base parts of that business.

Thank you.

Our next question comes from the line of Amit Daryanani from RBC Capital Markets.

Perfect, thanks.

Congrats on a great quarter guys.

I guess to start off with, could you just maybe talk about how much gross margin expansion do you still have from the cost take out from HGST and SanDisk.

I think it's a couple hundred basis points ahead of you, but if you could help us quantify those two buckets and if that's still ahead of you, then could we operate in the 38% or 40% plus scenario provided the current supply demand dynamics sustained?

That's a really good question, I'll have Mark address the specifics, but yes, I failed to mention that when Sherri asked her question.

But yes, we still have meaningful synergies to be had, particularly on the WD and HGST side.

We also have some revenue synergies and then vertical integration synergies on the SanDisk side but you're absolutely right.

As those begin to kick in further that will certainly help us to maintain or improve our existing margin levels.

So Mark?

Let me just build on what Steve was saying, so as far as the COGS side from the HGST integration, we have achieved approximately half of the $350 million in run rate synergies that we expect to finish by the end of calendar 2017, so closing out this quarter, we had approximately $175 million of costs of revenue synergies and another $175 million to go.

So you were about right in that ballpark.

Fair enough that's really helpful and I guess maybe just on the gross margin side, sequentially you guys are talking about revenues being down on a 6%, 7%, 8% in the March quarter.

Gross margin are still inflecting higher, are there a couple of things you'd call it maybe it's mix or pricing that's helping you, but what's enabling such a big gross margin uptick when I'd imagine there's revenue deleverage?

Primarily mix and pricing and then we continue to make progress on our cost improvement operations.

Perfect, thank you.

Thank you.

Our next question comes from the line of Ananda Baruah from Brean Capital.

Hi thank you guys and congrats on the progress and on the strength of the quarter.

I guess two quick ones for me.

The first is, I would love to get your view, Steve, on the likelihood of Hammer products being introduced over the next couple of years and if you do think that there's a possibility for that, I guess how should we think about the impact on economics that you guys would see it both on the hard drive side and potentially on the SSD side, thanks.

Yes, so what we talked about at Investor Day is that we expect that Hammer Technology will be productized some time in the 2019 time frame.

There's been no change in our expectations as it relates to ourselves.

Others talked about maybe earlier than that, but in terms of our expectations it's 2019.

Now to be perfectly honest about that in terms of the second part of your question, I mean there's two things we have to do is that we have to demonstrate the capability of the technology, both from an aerial density standpoint as well as from a reliability and manufacturing perspective, and we also have to enable that technology so that it's competitive from a cost standpoint.

Obviously given that we're not productizing until 2019, we haven't demonstrated that.

And our view is that we wouldn't look to implement it until the economics or the products makes sense from a commercial perspective and so at this point we would expect it largely to not impact our financials in any material way in terms of our financial model and that sort of thing.

Got it.

That's helpful and just real quickly, you made prepared remarks about revenue synergy benefit.

I guess I was just wondering, ultimately, how do you guys view what the revenue synergy potential is from adding SanDisk to the portfolio?

It occurs to us simplistically that it sort of alters now that you have a holistic portfolio it just alters the way you can engage with the majority of your important customers.

And so why wouldn't there be just super significant potential there over time, whatever over time means, when you get it to normalize, to really drive [very] material benefit from that dynamic, thanks.

I think you articulated our strategy very well and the benefits that we're actually seeing today and we expect to see on into the future as a result of our broad product portfolio and the way our teams are now able to engage differently with our customers.

So we've seen great traction as Mike has talked about in terms of client SSDs as a great example, but really, this applies to the way we manage the entire portfolio.

So that's exactly how we see it and that's why we feel very good about our ability to achieve the near term $500 million total synergy target, that's the 18 month target after the deal.

And then the longer term, I think it was the $1.1 billion that we expected in 2020, so you're right on.

Okay great.

Thanks so much.

Thank you, our next question comes from the line of Katie Huberty from Morgan Stanley.

Thank you.

Your closest competitor yesterday reported really significant unit and profit contribution from the non-PC non-enterprise business that you call consumer electronics and branded.

Are you not seeing that market, do you share the view that new applications like surveillance and NAS will drive growth there and you're just late to the party or what do you think the differential is?

Because their business grew 20% sequentially and your business declined.

Well let me comment on that.

We're all like chomping at the bit to respond to that.

We actually lead the market in surveillance, and so what's happening is that our largest competitor is now catching up to the party.

The other part goes to the way we classify this, so when we talk about our client solutions, that is our retail branded businesses, both flash and HDD based, where things like surveillance show up is in our client devices business, so I think you would expect similar trends that we saw relative to the strength of that business in our portfolio.

And can you talk about why over the last year, surveillance has become more of a driver of demand and how long you think that plays out?

Well that's, I mean that's kind of -- I don't want to say it's difficult.

I think that's going to continue.

Obviously given the world that we live in, and look at the geopolitical kind of thing, surveillance is a meaningfully growing part of the market and these are drives that are obviously optimized for those kind of use cases.

And I think that it's important to note that there were drives bought before for surveillance applications, maybe on a smaller scale, they just weren't optimized for those applications.

And so it does not necessarily mean that it is incremental growth in the overall HDD market.

It's just a matter of where they are being utilized.

The positive trend that comes with that market, certainly on the HDD side, is the capacity requirements, so you get a preferable mix, we all benefit from that.

But the other thing you should think about is that surveillance market is not just HDD based, so when you think about the broader ecosystem around surveillance, depending on the system and class of it, certainly there's an HDD component of it, but there's a very strong forward-looking demand that requires flash based storage, when you think about the cameras themselves, things that sit on the edge.

Okay that's helpful, thank you.

Thank you, our next question comes from the line of Rob Cihra from Guggenheim Partners.

Hi thanks very much.

A couple maybe confirmations at this stage.

One on your 3D NAND migration.

Can you just -- is there any updates or are you still looking at the same targets which I believe were the crossover on a bit basis in calendar 2017, is there any sense as you start working through it of when is that exiting calendar 2017 and same thing on a cost crossover 64 layer versus 2D?

And then I guess finally, you mentioned FAB6.

I think your initial targets were to crossover from a wafer standpoint in 2018, is that reliant on FAB6?

Thanks very much.

So a few comments, so Rob yes.

Just to talk about what we've -- to reaffirm what we talked about in the past, is that we expect that the cost crossover point for our BIX3 technology, the 64 layer NAND, will crossover against our 1 Z technology in the first half of calendar 2017.

That remains the case, no change in that expectation at this point.

And then the other thing is that what we've said historically is that approximately 50% of our total bit output for calendar 2017 will be 3D based and obviously the majority of that will be 64 layer, because that's what we're transitioning to in terms of that cost crossover point.

So no real change in our expectations in that regard and I believe on the last conference call we had talked about, I think it was 40% of wafers out by the end of the year and that expectation remains the same.

Alright, and if I could just ask a quick follow-up again a confirmation, you guys resolved the licensing deal with Samsung in the quarter, which is great, so that started to help the December quarter again for your positive guide mid quarter.

Any chance you can give us from how much profit or margin or anything, was it a meaningful help in the December quarter, thanks.

No, in the December quarter it was not a significant driver.

It helped but we had a lot of underlying strength that really drove the overall performance, so it was a nice addition.

Yes and Rob, just to be literal, we don't have an intention to disclosing the dollar amount of that arrangement with Samsung.

Thank you very much.

Thank you our next question comes from the line of Mark Moskowitz from Barclays.

Yes, thanks, good afternoon.

I apologize, I jumped off for a few moments, so if its been asked I apologize.

I want to understand firstly, is there any area within the business right now in terms of mix that you feel you're out-earning or maybe seeing outsized gains because of the NAND flash tightness broadly speaking for the hard disk drive business and if so, where is that?

Is that in the cloud, the enterprise or other?

And then the other question--

Repeat that again Mark, I want to make sure I understand the question.

The question is just I'm trying to understand, if because of what's going on in the NAND market from a capacity constraint perspective, has that allowed for any sort of displacement of disk drives to slowdown and therefore maybe you've seen a resurgence, if you will, in your hard disk drive business either with cloud or enterprise or other that maybe is not sustainable, or maybe it is now, maybe people are recognizing you guys can still offer a lot of goodness on the hard disk drive side as well.

That's my first question if it makes sense.

Yes, sure.

And Mike --

So to give you some specifics, I think the tightness is helping in the client space, so the fact that there is tightness of supply makes for more opportunity in the near term for HDD demand to satisfy the storage requirement of a PC.

Potentially in a much more modest way in the performance enterprise space, we talked about that relative to our sequential growth in performance enterprise, but the more pronounced factor there was actually just the year-end budget seasonal demand for enterprise systems.

And on the cloud side, no real effect.

So where we're shipping disk drives as an industry, that's a specific value proposition and that demand is real and ongoing.

So there's clear differentiation in the architectures relative to where flash is utilized and where disc is utilized, so there's no reverse displacement there.

Okay and then my second question is kind of a loaded question but I'm going to ask it anyway.

In terms of the cloud, the cloud buying patterns over the past few years have at times been punctuated with up and downs or some pauses.

Do you see this year ahead maybe having less pause and actually just continuing up cycle?

And if that is the case, because of the combined model now of SanDisk and WD, are you giving more reception or greater reception from the cloud providers to do more?

Are you getting more of a land and expand with those accounts and thereby can that actually continue to put upward pressure or goodness on gross margin.

Let me answer it in sequence the way you asked it.

So I think relative to the buying behavior, we've certainly always characterized this segment on an annualized basis for that reason.

I think the fact that we've updated and increased our annual growth rate is an indication of our confidence in the ongoing strength.

We've talked in previous conference calls around some of the reasons that's happening, as there's sort of fewer efficiency things happening in hyper scale, whether they be operational or technological, we believe we continue to see more of the raw or base demand flowing through to us for HD petabyte growth.

So we would expect that 40% growth for the current calendar year.

Relative to the way we engage them, I think we talked about this earlier, we certainly benefit from the broad portfolio of products we have, our ability to participate across both HDD and flash based product offerings gives us a unique position to work, not only short-term relative to sort of business engagement, but also long term as we think about long range data center architectures of the future.

So we have all of the components, we're uniquely positioned to have that conversation and we're already benefiting from that portfolio optimization.

Thank you.

Alright, so that's our last question, so I want to thank you for joining us today.

We look forward to seeing many of you at upcoming investor conferences.

Thank you very much.

Ladies and gentlemen this concludes today's conference call.

Thank you for your participation, you may now disconnect.