WESTERN DIGITAL CORP — Call Transcript 2025

Yeah, and thanks, Tim, for having us at this wonderful conference. So before we begin, we will be making some forward-looking statements and today's discussions based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends, and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties, so please refer to our most recent financial report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making reference to non-GAAP financials and reconciliation of our GAAP to non-GAAP results can be found on the investor relations section. So with that, turning it back to Tim. Perfect, great. So let's just start, like your biggest competitor, you're enjoying a very favorable pricing environment along with very tight supply. Can you just talk about what's driving that, and how much of it's cyclical and how much of it do you think is secular? Yeah, I think, you know, if you go back to the investor day that we had back in February, we laid out two cases, a base case where we saw exabytes growing at a CAGR of 15%, and that was primarily driven by what we saw would be just fundamentally cloud-based growth. And we also laid out an upside case where, if what we saw, the potential of AI would materialize, we would see a CAGR of 23% growth. What we've been seeing more recently is probably growth rates around in the mid-20s%, and we think that trajectory will probably continue into the 12- to 24-month period. If you just take our last quarter results, you know, exabytes grew at 30% year-on-year as well. So, ongoing strong growth in the cloud, the transition to more AI, enterprise LLMs is driving a lot of growth demand as well. So we see that trajectory continuing, and that's translating into longer-term contracts that we're seeing from our customers. We have firm purchase orders from five of our largest customers for all of calendar year 2026. One of those five customers has given us purchase orders for all of calendar year 2027. All of calendar year 2027. Correct. Can you just, in light of that, talk about your pricing strategy in this environment? Do you see if you keep increasing pricing, is there a point where you see some elasticity where, you know, customers are, like, pushing back on paying the higher prices? Sure. Maybe I'll touch about philosophy towards pricing. I'll talk about, let Chris share a bit more about, how we see that translated into the financials. You know, our focus around pricing is to ensure there's a fair value exchange, with our customers, to always ensure we're delivering better TCO value to them. And that's driven by two key areas. One, continuing to deliver higher capacity drives to them so they get better TCO through better rack density, lower energy consumption, better real estate, cost. And then we're also looking at innovations that drive better throughput, in terms of those drives. So as we deliver better TCO value, we're able to share in that TCO value that translates to a better pricing, environment for us. So that's a fundamental philosophy, especially as we structurally have become a data center company. 90% of our business today is within the data center, concentrated on a few set of very large customers. And our approach is to really form long-term strategic partnerships with them to ensure we have fair value exchange, primarily through the TCO value that we deliver. And maybe, Kris, you wanna touch on the pricing? Yeah. And so historically, when the business was more cyclical, we have seen ASP erosion on a dollar per terabyte basis of approximately 7%. Although now, when the business is more secular and we see a long-term secular tailwind, that has changed a lot. And so currently, I describe the pricing environment as being stable, which means kind of flattish to slightly up, low single digits on a year-over-year basis on a dollar per terabyte. And you think that that's gonna continue, Kris? Yeah, again, based on the long-term agreements that we have in place or are negotiating, as well as the POs that we have in place covering 2026 and 2027, I expect the pricing environment to remain stable. Can we just talk about the visibility and the way that your customers are actually placing orders? They're, you know, obviously, you're booked out through, you know, 2026, sounds like, and you know, one through 2027. Are they getting to the point, or is there risk that they get to the point where they force your hand to start to expand unit, you know, unit capacity because they say, "I just don't wanna wait, you know, 60 weeks for a drive"? Yeah. I mean, our focus is to really meet the exabyte demand that they have, which is exabyte focus through improvements in the following areas. One, continuing to accelerate the roadmap that we have to continue to deliver higher capacity drives, both in terms of HAMR technology and our ePMR capabilities as well. Second, to up-level our customers to higher capacity drives, right? If you take the last quarter, the average capacity for all our nearline customers was 22 terabytes per drive. We're shipping the highest capacity as 32, so there's a lot more room to move up capacity points as well. And third is to transition more of our customers to our Ultra SMR technology. And the benefit of that to them is Ultra SMR gives them a 20% capacity uplift versus the standard CMR drive and 10% capacity uplift over a standard SMR drive. So for those reasons, we feel we can meet their exabyte demand requirements in the fastest way possible by transitioning them up to higher cap drives, accelerating the roadmap of higher capacity drives we're delivering, and getting more of them to adopt Ultra SMR. Last quarter, 50% of the nearline bits we shipped were already on Ultra SMR. And we see that growing as more customers adopt Ultra SMR going forward. And I think you mentioned that there could be more to your ePMR roadmap even beyond 36T. What is so hard about scaling beyond 36T and you know, how do you think about stretching that roadmap to 40 or beyond and marrying that with, you know, you wanna now pull a HAMR in a little bit? So. Yes. So how do you think about that? Yeah. So we have shared that we are pulling forward our HAMR qualification to start in the first half of calendar year 2026 with one customer, and then we look to extend that with two more customers in the second half of the year. So through the course of calendar year 2026, we'll be qualifying three customers on HAMR. The current roadmap for that is to introduce a 36-terabyte CMR and 44-terabyte Ultra SMR HAMR drive. We also have indicated we've pulled forward the qualification of our next iteration of ePMR to Q1 of calendar year 2026. We will be sending an invitation to all of you for an innovation day that we'll be having in New York on February the 3rd. The invitation will go out latter part of this week, where we'll be in touch highlighting all the latest innovations we're gonna bring to the market and how that's gonna translate into the new roadmap for both HAMR and ePMR and also the performance improvements that we look to deliver for our drives going forward. So stay tuned for that. So you think you'll have a seamless transition. Your, you know, 44T Ultra SMR in mid 2026 will sort of lead right into HAMR. Yeah. I mean, our goal is really to focus on not only having the highest capacity drives, but to be able to deliver that at scale. There's been a lot of talk about, you know, we have a 40-terabyte drive or 44-terabyte drive, but ultimately what our customers want are exabytes, right? If you look at those contracts that we've talked about just recently, those contracts are exabyte-based. They're technology agnostic. They don't have any mention of units. Customers want. They're signing up for a certain amount of exabytes. And so the ability to deliver exabytes at scale is what we're really focusing on. And if you look at our current latest generation of ePMR drives, last quarter, we shipped 2.2 million units, which total a total of 70 exabytes. This quarter, that same platform will ship well north of 3 million units. So that's a really great example of what our customers appreciate from us: fast qualification of our ePMR products, the ability to ramp up very quickly and deliver exabytes at scale. And we anticipate that will be the case with our next iteration of ePMR. And as we transition to HAMR, we wanna make sure that customers have a seamless transition to HAMR that will give us 50, 60, up to 100 terabytes, up to 100 terabytes in the future. What went into the decision to pull in qualification for HAMR? Was it more that you saw your, you know, your competitor had gone through the trials and tribulations and you saw that the customers were sort of, you know, adopting HAMR, and so you thought, "Oh, I, you know, I, I better pull that in"? No, it's really driven by the progress that we saw that we had been making. And in the prior earnings calls, you know, I've highlighted that, we were pleased and ahead of the internal milestones that we had set for ourselves. We were definitely comfortable with the areal density improvements that we were seeing in our HAMR development. As a result of us being ahead of those milestones and the confidence that we had, we felt it was the right time to pull forward that qualification. As I mentioned, we are comfortable with the areal density improvements we can deliver through HAMR. The focus in our qualification is really twofold. It's ensuring we can get the right reliability for HAMR because our customers are telling us what they're concerned about is what's gonna happen one year, two years, three years down the road. Will there be systemic failures in the HAMR fleet? So we want to make sure we avoid that for them. And secondly, making sure we can get the yields for HAMR in production up to the same yield levels that we've been able to deliver on our ePMR portfolio, which we've shared based on our platforms, has been in the high 80s to low 90s% range. So, your average capacity per drive is still well below what these higher densities are. Why is that number so far below, and what applications are still on these older, smaller drives, you know, less dense drives, and what effort are you making to migrate those to higher capacities? Yeah. Part of it is because there's still a material number of customers on CMR, right? So as they move to Ultra SMR, they get a capacity uplift. In order for them to transition from CMR to Ultra SMR, there's a degree of software work that they need to make on the application side of the house. There's always been a bit of contention to get their application colleagues to free up resources to do some of the rewrites. But in the environment that we're seeing where, you know, supply is being challenged because of the demands that we're seeing driven by cloud and AI, there's been a very concerted effort by many of our customers to get their application teams to rewrite software to take advantage of Ultra SMR. So we've seen very fast adoption and qualification of it, currently. And then also some of the, as they refresh their fleets, they're moving very quickly up the capacity points as well. We're also doing work in our platforms business, to eliminate some of the heavy lift that they potentially might have to do, on the conversion from CMR to Ultra SMR by using our platforms to be able to convert Ultra SMR to CMR recording technology for them as well. Can you just, sort of double-click on the HAMR roadmap for us? I know you're pulling in the qualification, but sort of once you do qualify HAMR, where does HAMR go from there? Yeah. So we're looking to qualify HAMR through the course of calendar year 2026. The current roadmap is we will ramp that in the first half of calendar year 2027, and in the current roadmap, the capacity points will be 36 terabytes on CMR and 44 terabytes on Ultra SMR. Customers don't care whether it's on HAMR or it's on? No. In fact, all those POs and contracts that we have 2026, 2027, and we're in discussions with customers who are talking about 2027, 2028 timeframe contracts. They are exabyte-based. They are technology agnostic. What they want is highest velocity of, volume of drives at the highest capacity that's the most reliable. And these contracts are not only volume, but they come with fixed pricing. Is that right? There's a degree of fixed pricing associated with it as well. Yeah. Degree of fixed pricing. So it's not, it's not you will, that will take exabyte-. There's a degree of base price, base volume at fixed price, and there's incremental upside pricing. Got it. Okay, and can you talk about your willingness to expand unit capacity? In other words, are your largest customers offering to co-invest in your CapEx to get you to expand unit capacity? Yeah. Or are they happy with you just moving density higher? Yeah. We've been very clear that we are not expanding unit capacity. None of our customers have had the discussion with us about investing in unit capacity, and you know, the company is in a very different position. We have a very healthy balance sheet. We are generating a lot of cash flow. We can make the appropriate investment decisions that we need to. We feel that with the areal density improvements that we are gonna make with the roadmap, with the ability to upscale customers to higher drive capacity points and through Ultra SMR adoption, we're gonna be able to meet their demand requirements without adding any unit capacity. Can you just talk about the interplay between HDD and SSD and whether these extended lead times are pushing any demand in nearline over to SSD? We don't see that. I mean, the good news is right now, with the ongoing growth of the cloud, with AI driving a lot, the increased data generation and the demand for storage, we are seeing an environment where, you know, we're all, it's lifting all boats, right? You're seeing SSD demands for SSDs go up. You're seeing demands for HDDs go up. Even good old tape is seeing demand increase as the value of data increases and more data is getting stored. What we also see is data center architectures are pretty much set with the chassis that they have for a period of time forward-looking, two, three years. So you don't see any rapid changes between the ratio of HDDs and SSDs. The ratio's gonna be roughly about 75%-80% of data is gonna continue to be stored on HDDs, 10%-15% on SSDs, and then the remainder on flash. That ratios may adjust a little bit quarter to quarter, but by and large, they will stay the same. HDDs continue to have very strong TCO benefit, 6x delta in terms of acquisition cost, 3.6x delta in terms of total cost of ownership. We probably think that gap has widened, as SSD prices have gone up as well. With the announcements and some of the innovations we'll share in February, we'll also share some of the performance improvements we're making on throughput that will address some of the gaps that we have in terms of throughput performance that HDDs sort of lack SSDs. Can you speak just from a strategic perspective about what the puts and takes are now that the company is back to being independent and the split happened? What are some of the puts and takes? I mean, obviously there was a thesis to put them together in the first place. So if you disaggregate them, obviously there are some negatives because, you know, you wouldn't have put them together in the first place. You know, not that you did, but the company wouldn't have put it in the first place. So can you speak a little bit to how you run the company differently now versus how you ran it in the past? Yeah. I would say at a high level, maybe this synergy that we have from splitting the company up. We did have to incur more G&A costs, right? 'Cause you could amortize that over a larger business. But I think the bet that has been far outweighed by having two independent businesses that are singly focused on the success of the HDD business and the SSD business, right? Because if you look at it technology-wise, they're really quite different. One's electromechanical-based. One is semiconductor-based. It has no commonality in technology, in the manufacturing assets, in the technology, intellectual property, even in the supply base. And so, having that singular focus of each company on what is the right processes to run the business by, the right KPIs, the right financial model to run each business by, has really given the ultimate, you know, it's proven that the spin has made sense. And if you look at the market cap of the two companies combined today, they're in the mid-$80-plus billion. It's proven to be the right decision ultimately. Yeah. The markets help too, but you've lost. Yeah. Of course. For sure. So, can we just talk about, the, there's a third competitor that people don't talk about very often, but they do have a MAMR roadmap and some of the hyperscalers are talking about trying to keep them alive. So can you just talk about the relative share between you and your main competitor and the third competitor? Do you see that third competitor like withering away, or do you see the customer trying to keep them alive and maybe they become more of a? I treat all our peers with a lot of respect and a healthy dose of competition. I would say, I think we trust in our technology. You know, we have a 32-terabyte drive on PMR. We have HAMR qualification starting. We are introducing our next generation of PMR, which currently is slated for 36, but probably will be slightly north of that, when we bring it out, in the first half of calendar year 2026. I think, you know, the third player is a good competitor. We look forward to competing then with them in the marketplace. And I'll leave it at that. Great. And then, on the last quarter's call, you discussed your systems integration and test lab in Rochester. How important is joint development in this lab and, and what kind of partners do you work with there? Yeah. I, I would say it plays a very critical role in a couple of things. One, in the Rochester lab right now, we have two environments. Each environment is a complete replica of two of our largest customers' production data center environments. Everything from the racks that are in the lab to the temperature that we operate the lab in, right, to the speed at which we run the hard drives. In fact, I can't even enter those labs 'cause they're effectively my customer's environment. So when I visited the lab recently, I had to get approval from the two customers to be able to enter the lab to see what they're doing. The only people that can enter it are our engineers assigned to those specific accounts. The benefit to that is we're actually testing both our new generation drives early in the process in a production environment. So we're ironing out bugs. It gives customers, it leads to faster qualification cycles. It gives customers a lot more confidence in the reliability of the drives when we do put them at scale into production data center environments. So it's played a massive role. And there's a third customer now looking to us to replicate that dedicated environment in our facility as well. I would think that this is gonna help to risk mitigate the HAMR ramp as well. Are you operating HAMR drives in those facilities? Absolutely. Yeah. We've been operating HAMR drives in those facilities for over a year now. Is that part of what led, or was it a particular customer because of what's happening in that location to push you to qualify HAMR a bit earlier? Yeah. We've been sending HAMR drives, engineering samples, to those two facilities for well over a year. We have quality feedback from our customers on the performance of the drives, what enhancements they would like to see. We take that feedback on board. Every quarter, we ship them new iterations of those drives. And the progress that we've been making there has given us the confidence to accelerate the qualification of our HAMR drives. Kris, you've expanded gross margin 400-500 basis points over the past 12 months, which is, you know, obviously great. How much of that comes from better pricing versus better utilization versus other factors? Yeah. I'm very pleased with the progress in gross margin expansion that we have seen, even in the last couple of years, moving from the 20s into the 30s and now into the mid-40s. So great progress has been made there. Also at the last earnings call, I've indicated that incremental gross margins, I'm very confident to see them at 50-plus%, right? So, even if we look at last quarter, the incremental gross margin was actually 75%. And in this quarter guidance, at the midpoint, it was implied at 65%. So really good progress. And so how are we driving gross margin improvement? There's mainly three elements to it. First of all, it's pricing, and we already talked about that, right? Compared to historically where we've seen ASP erosion, now we are in a stable price environment, actually with some modest increases in ASP per terabyte. Secondly, of course, there is a mixed element. And as Irving has indicated before, working and collaborating with our customers, moving to higher capacity drives is a win-win for our customers as well as for us. Also, moving to Ultra SMR, that gives us higher capacity at a very little cost, because most of that is done in firmware and software. And then third, of course, we are focused on driving down the cost in our own manufacturing facilities, leveraging automation, machine learning, and AI tools in our own factories. And we drive cost reductions through our supply chain as well. So when you combine all of that, good progress and still further gross margins expansion to be expected. So where do you think gross margin can go? I mean, obviously, you know, asymptotic gross margin, if the incremental gross margin's 50%, then, you know, the asymptotic gross margin's 50%. But, do your customers care what your gross margin is? Like, do they, you know, if it was above 50%, would they start to say, I don't know, this whole, you know, I'm gonna finally force your hand and make you expand, you know, unit capacity? Or how does that, how does that all play into it? Maybe a couple of things. I said 50-plus. I didn't say 50. 50-plus. Okay. That's one. Secondly, I mean, our customers for the vast majority of the infrastructure, they pay 60%-70% gross margin, right, on the GPUs, the CPUs, the memory, all of that. So they're, I think, used to that kind of environment. I think what fundamentally has changed is that our customers recognize how important data storage and HDD is in their overall infrastructure buildout, right? It's a key element. It might only be $20 billion out of $500 billion, but they need to have that $20 billion right. And there is a tight balance between supply and demand. There's a lot of technology innovation going on, new technology that's being ramped up. And they understand the value of that technology. There's a point where, I mean, we've seen this movie before where I, you know, I'm just an old-school semiconductor guy. And whenever you tell these super rich companies that they can't get a product for, you know, 60 weeks, they're gonna do whatever they have to do to get what they need as fast as they can. So they're gonna place orders and they're gonna book out into 2027. But when push comes to shove, they might not take those drives. And if that were the case, how do you protect against that? Do you, like, look at bookings? And is bookings the leading indicator where if there's this big, huge surge of bookings and then it completely falls off, you're like, "Okay, that's the first indicator of maybe they've just placed a bunch of orders just for the sake of, you know, getting in the backlog and they might not take the? Yeah. I mean, we look at the demand signal that our customers give us as one data point as an input data into what we do to determine what supply output we generate, right? So customer demand signal is one. We look at what is the CapEx they're spending over the next few years as another data point. We're looking at data center builds. When are they coming on stream? What is the ratio of data center builds to how much storage they'll need? We look at also refresh cycles. Typically, customers refresh the hard drive fleets every five to seven years. So we factor all those data points in, and we come up with our own internal view of what we think the supply environment should be. And so that's the decision that we make. that may be sometimes slightly below what the customer expectation is, but we form our own opinion on what's required. Right. And so currently, we don't see any inventory build in the channel or at the customer level. Most of the hard disk drives that are shipped to the customer are deployed right away. And what, just thinking in the past, like, what would be the first sign if X happened, you would begin to worry that maybe demand is faltering? Is it, I mean, the first order what the customers are saying about their CapEx? Is it just that simple? Yeah. I mean, we start to see potentially maybe data center builds starting to slow down. You know, we've had instances where they may have, they've had some delays, and those are just temporary issues. In fact, three quarters ago, you know, we had a slight dip in revenue because there was a delay of one of our customers' large data centers. But that, the rest of what they had planned in the pipeline was still on stream, so that didn't change it. But we look at all these factors as far out as we can get, and we factor that into our planning process in terms of the CapEx investments that we make. Great. And Kris, I just wanted to ask you about share repurchase and, you know, free cash flows obviously going, you know, growing quite nicely. Can we expect to see a more aggressive share repurchase going forward? And/or does it make sense to maybe pay down debt or substantially raise the dividend as well? Yeah. So I mean, first of all, we're experiencing very strong demand that translates into strong revenue growth, gross margins, and operating margin expansion that also translates to very strong free cash flow and free cash flow margin, right? Just the last couple of quarters, we had more than 20% free cash flow margin. And here as well, free cash flow margin can move from the low 20s into the mid 20s. So we're executing really good there. And what do we do with the cash? Well, of course, we continue to invest in our business, as Irving indicated. We continue to invest in our technology and product roadmap. We continue to invest to a certain extent in our manufacturing footprint with CapEx on or about 4%-6%. But despite all those investments, we deliver very strong free cash flow. And that free cash flow is being returned back to the shareholder through a combination of our dividend program and a buyback program. The dividend program was installed six months ago, and we started really low. But six months into it, we already increased the dividend at our last earnings call by 25%, now to $0.125 per share per quarter. And so there is still plenty of room to further grow our dividend over time. In addition to that, on or about six months ago, we installed a share buyback program. We got a $2 billion authorization from the board. And we immediately started using that. In the first quarter, we used on or about $150 million. In the second quarter, we used $550 million. Actually, when you look at it in the last quarter, we returned all the free cash flow using those two programs back to the shareholders. We will continue to do so in this quarter. There's no hesitation at that, even at current valuation. There's no hesitation to return the cash flow back through the combination of dividend and share buyback. So. You want to touch on the retained stake and, you know. Yeah. So, in addition to that, I think we have a pretty healthy balance sheet by now, right? On or about $4.7-$4.8 billion of debt. We have $2 billion of cash. So net debt is down to $2.7-$2.8 billion. In addition to that, we still have 7.5 million of SanDisk shares at today's price. That's on or about $1.5 billion. And we've said publicly that it's our intention to monetize that stake in a debt-for-equity transaction before the one-year anniversary. So that's coming up as well. That will further reduce the debt on the balance sheet. Great. Thank you for the time. We're out of time. Thank you again. Thanks, Tim. All right. Thanks. Thanks.

Speaker 1: Yeah, and thanks, Tim, for having us at this wonderful conference. So before we begin, we will be making some forward-looking statements and today's discussions based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends, and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties, so please refer to our most recent financial report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making reference to non-GAAP financials and reconciliation of our GAAP to non-GAAP results can be found on the investor relations section. So with that, turning it back to Tim. Yeah, and thanks, Tim, for having us at this wonderful conference. yeah and thanks tim for having us at this wonderful conference So before we begin, we will be making some forward-looking statements and today's discussions based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends, and dynamics and future financial results. so before we begin we will be making some forward-looking statements and today's discussions based on management's current assumptions and expectations including with respect to our product portfolio business plans and performance market trends and dynamics and future financial results These forward-looking statements are subject to risks and uncertainties, so please refer to our most recent financial report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. these forward-looking statements are subject to risks and uncertainties so please refer to our most recent financial report on form 10-k and other filings with the sec for more information on the risks and uncertainties that could cause actual results to differ materially from expectations We will also be making reference to non-GAAP financials and reconciliation of our GAAP to non-GAAP results can be found on the investor relations section. we will also be making reference to non-gaap financials and reconciliation of our gaap to non-gaap results can be found on the investor relations section So with that, turning it back to Tim. so with that turning it back to tim

Speaker 3: Perfect, great. So let's just start, like your biggest competitor, you're enjoying a very favorable pricing environment along with very tight supply. Can you just talk about what's driving that, and how much of it's cyclical and how much of it do you think is secular? Perfect, great. perfect great So let's just start, like your biggest competitor, you're enjoying a very favorable pricing environment along with very tight supply. so let's just start like your biggest competitor you're enjoying a very favorable pricing environment along with very tight supply Can you just talk about what's driving that, and how much of it's cyclical and how much of it do you think is secular? can you just talk about what's driving that and how much of it's cyclical and how much of it do you think is secular

Speaker 2: Yeah, I think, you know, if you go back to the investor day that we had back in February, we laid out two cases, a base case where we saw exabytes growing at a CAGR of 15%, and that was primarily driven by what we saw would be just fundamentally cloud-based growth. And we also laid out an upside case where, if what we saw, the potential of AI would materialize, we would see a CAGR of 23% growth. What we've been seeing more recently is probably growth rates around in the mid-20s%, and we think that trajectory will probably continue into the 12- to 24-month period. If you just take our last quarter results, you know, exabytes grew at 30% year-on-year as well. Yeah, I think, you know, if you go back to the investor day that we had back in February, we laid out two cases, a base case where we saw exabytes growing at a CAGR of 15%, and that was primarily driven by what we saw would be just fundamentally cloud-based growth. yeah i think you know if you go back to the investor day that we had back in february we laid out two cases a base case where we saw exabytes growing at a cagr of 15% and that was primarily driven by what we saw would be just fundamentally cloud-based growth And we also laid out an upside case where, if what we saw, the potential of AI would materialize, we would see a CAGR of 23% growth. and we also laid out an upside case where if what we saw the potential of ai would materialize we would see a cagr of 23% growth What we've been seeing more recently is probably growth rates around in the mid-20s%, and we think that trajectory will probably continue into the 12- to 24-month period. what we've been seeing more recently is probably growth rates around in the mid-20s% and we think that trajectory will probably continue into the 12- to 24-month period If you just take our last quarter results, you know, exabytes grew at 30% year-on-year as well. if you just take our last quarter results you know exabytes grew at 30% year-on-year as well So, ongoing strong growth in the cloud, the transition to more AI, enterprise LLMs is driving a lot of growth demand as well. So we see that trajectory continuing, and that's translating into longer-term contracts that we're seeing from our customers. We have firm purchase orders from five of our largest customers for all of calendar year 2026. One of those five customers has given us purchase orders for all of calendar year 2027. So, ongoing strong growth in the cloud, the transition to more AI, enterprise LLMs is driving a lot of growth demand as well. so ongoing strong growth in the cloud the transition to more ai enterprise llms is driving a lot of growth demand as well So we see that trajectory continuing, and that's translating into longer-term contracts that we're seeing from our customers. so we see that trajectory continuing and that's translating into longer-term contracts that we're seeing from our customers We have firm purchase orders from five of our largest customers for all of calendar year 2026. we have firm purchase orders from five of our largest customers for all of calendar year 2026 One of those five customers has given us purchase orders for all of calendar year 2027. one of those five customers has given us purchase orders for all of calendar year 2027

Speaker 3: All of calendar year 2027. All of calendar year 2027. all of calendar year 2027

Speaker 2: Correct. Correct. correct

Speaker 3: Can you just, in light of that, talk about your pricing strategy in this environment? Do you see if you keep increasing pricing, is there a point where you see some elasticity where, you know, customers are, like, pushing back on paying the higher prices? Can you just, in light of that, talk about your pricing strategy in this environment? can you just in light of that talk about your pricing strategy in this environment Do you see if you keep increasing pricing, is there a point where you see some elasticity where, you know, customers are, like, pushing back on paying the higher prices? do you see if you keep increasing pricing is there a point where you see some elasticity where you know customers are like pushing back on paying the higher prices

Speaker 2: Sure. Maybe I'll touch about philosophy towards pricing. I'll talk about, let Chris share a bit more about, how we see that translated into the financials. You know, our focus around pricing is to ensure there's a fair value exchange, with our customers, to always ensure we're delivering better TCO value to them. And that's driven by two key areas. One, continuing to deliver higher capacity drives to them so they get better TCO through better rack density, lower energy consumption, better real estate, cost. And then we're also looking at innovations that drive better throughput, in terms of those drives. So as we deliver better TCO value, we're able to share in that TCO value that translates to a better pricing, environment for us. So that's a fundamental philosophy, especially as we structurally have become a data center company. Sure. sure Maybe I'll touch about philosophy towards pricing. maybe i'll touch about philosophy towards pricing I'll talk about, let Chris share a bit more about, how we see that translated into the financials. i'll talk about let chris share a bit more about how we see that translated into the financials You know, our focus around pricing is to ensure there's a fair value exchange, with our customers, to always ensure we're delivering better TCO value to them. you know our focus around pricing is to ensure there's a fair value exchange with our customers to always ensure we're delivering better tco value to them And that's driven by two key areas. and that's driven by two key areas One, continuing to deliver higher capacity drives to them so they get better TCO through better rack density, lower energy consumption, better real estate, cost. one continuing to deliver higher capacity drives to them so they get better tco through better rack density lower energy consumption better real estate cost And then we're also looking at innovations that drive better throughput, in terms of those drives. and then we're also looking at innovations that drive better throughput in terms of those drives So as we deliver better TCO value, we're able to share in that TCO value that translates to a better pricing, environment for us. so as we deliver better tco value we're able to share in that tco value that translates to a better pricing environment for us So that's a fundamental philosophy, especially as we structurally have become a data center company. so that's a fundamental philosophy especially as we structurally have become a data center company 90% of our business today is within the data center, concentrated on a few set of very large customers. And our approach is to really form long-term strategic partnerships with them to ensure we have fair value exchange, primarily through the TCO value that we deliver. And maybe, Kris, you wanna touch on the pricing? 90% of our business today is within the data center, concentrated on a few set of very large customers. 90% of our business today is within the data center concentrated on a few set of very large customers And our approach is to really form long-term strategic partnerships with them to ensure we have fair value exchange, primarily through the TCO value that we deliver. and our approach is to really form long-term strategic partnerships with them to ensure we have fair value exchange primarily through the tco value that we deliver And maybe, Kris, you wanna touch on the pricing? and maybe kris you wanna touch on the pricing

Speaker 1: Yeah. And so historically, when the business was more cyclical, we have seen ASP erosion on a dollar per terabyte basis of approximately 7%. Although now, when the business is more secular and we see a long-term secular tailwind, that has changed a lot. And so currently, I describe the pricing environment as being stable, which means kind of flattish to slightly up, low single digits on a year-over-year basis on a dollar per terabyte. Yeah. yeah And so historically, when the business was more cyclical, we have seen ASP erosion on a dollar per terabyte basis of approximately 7%. and so historically when the business was more cyclical we have seen asp erosion on a dollar per terabyte basis of approximately 7% Although now, when the business is more secular and we see a long-term secular tailwind, that has changed a lot. although now when the business is more secular and we see a long-term secular tailwind that has changed a lot And so currently, I describe the pricing environment as being stable, which means kind of flattish to slightly up, low single digits on a year-over-year basis on a dollar per terabyte. and so currently i describe the pricing environment as being stable which means kind of flattish to slightly up low single digits on a year-over-year basis on a dollar per terabyte

Speaker 3: And you think that that's gonna continue, Kris? And you think that that's gonna continue, Kris? and you think that that's gonna continue kris

Speaker 1: Yeah, again, based on the long-term agreements that we have in place or are negotiating, as well as the POs that we have in place covering 2026 and 2027, I expect the pricing environment to remain stable. Yeah, again, based on the long-term agreements that we have in place or are negotiating, as well as the POs that we have in place covering 2026 and 2027, I expect the pricing environment to remain stable. yeah again based on the long-term agreements that we have in place or are negotiating as well as the pos that we have in place covering 2026 and 2027 i expect the pricing environment to remain stable

Speaker 3: Can we just talk about the visibility and the way that your customers are actually placing orders? They're, you know, obviously, you're booked out through, you know, 2026, sounds like, and you know, one through 2027. Are they getting to the point, or is there risk that they get to the point where they force your hand to start to expand unit, you know, unit capacity because they say, "I just don't wanna wait, you know, 60 weeks for a drive"? Can we just talk about the visibility and the way that your customers are actually placing orders? can we just talk about the visibility and the way that your customers are actually placing orders They're, you know, obviously, you're booked out through, you know, 2026, sounds like, and you know, one through 2027. they're you know obviously you're booked out through you know 2026 sounds like and you know one through 2027 Are they getting to the point, or is there risk that they get to the point where they force your hand to start to expand unit, you know, unit capacity because they say, "I just don't wanna wait, you know, 60 weeks for a drive"? are they getting to the point or is there risk that they get to the point where they force your hand to start to expand unit you know unit capacity because they say "i just don't wanna wait you know 60 weeks for a drive"

Speaker 2: Yeah. I mean, our focus is to really meet the exabyte demand that they have, which is exabyte focus through improvements in the following areas. One, continuing to accelerate the roadmap that we have to continue to deliver higher capacity drives, both in terms of HAMR technology and our ePMR capabilities as well. Second, to up-level our customers to higher capacity drives, right? If you take the last quarter, the average capacity for all our nearline customers was 22 terabytes per drive. We're shipping the highest capacity as 32, so there's a lot more room to move up capacity points as well. And third is to transition more of our customers to our Ultra SMR technology. And the benefit of that to them is Ultra SMR gives them a 20% capacity uplift versus the standard CMR drive and 10% capacity uplift over a standard SMR drive. Yeah. yeah I mean, our focus is to really meet the exabyte demand that they have, which is exabyte focus through improvements in the following areas. i mean our focus is to really meet the exabyte demand that they have which is exabyte focus through improvements in the following areas One, continuing to accelerate the roadmap that we have to continue to deliver higher capacity drives, both in terms of HAMR technology and our ePMR capabilities as well. one continuing to accelerate the roadmap that we have to continue to deliver higher capacity drives both in terms of hamr technology and our epmr capabilities as well Second, to up-level our customers to higher capacity drives, right? second to up-level our customers to higher capacity drives right If you take the last quarter, the average capacity for all our nearline customers was 22 terabytes per drive. if you take the last quarter the average capacity for all our nearline customers was 22 terabytes per drive We're shipping the highest capacity as 32, so there's a lot more room to move up capacity points as well. we're shipping the highest capacity as 32 so there's a lot more room to move up capacity points as well And third is to transition more of our customers to our Ultra SMR technology. and third is to transition more of our customers to our ultra smr technology And the benefit of that to them is Ultra SMR gives them a 20% capacity uplift versus the standard CMR drive and 10% capacity uplift over a standard SMR drive. and the benefit of that to them is ultra smr gives them a 20% capacity uplift versus the standard cmr drive and 10% capacity uplift over a standard smr drive So for those reasons, we feel we can meet their exabyte demand requirements in the fastest way possible by transitioning them up to higher cap drives, accelerating the roadmap of higher capacity drives we're delivering, and getting more of them to adopt Ultra SMR. Last quarter, 50% of the nearline bits we shipped were already on Ultra SMR. And we see that growing as more customers adopt Ultra SMR going forward. So for those reasons, we feel we can meet their exabyte demand requirements in the fastest way possible by transitioning them up to higher cap drives, accelerating the roadmap of higher capacity drives we're delivering, and getting more of them to adopt Ultra SMR. so for those reasons we feel we can meet their exabyte demand requirements in the fastest way possible by transitioning them up to higher cap drives accelerating the roadmap of higher capacity drives we're delivering and getting more of them to adopt ultra smr Last quarter, 50% of the nearline bits we shipped were already on Ultra SMR. last quarter 50% of the nearline bits we shipped were already on ultra smr And we see that growing as more customers adopt Ultra SMR going forward. and we see that growing as more customers adopt ultra smr going forward

Speaker 3: And I think you mentioned that there could be more to your ePMR roadmap even beyond 36T. What is so hard about scaling beyond 36T and you know, how do you think about stretching that roadmap to 40 or beyond and marrying that with, you know, you wanna now pull a HAMR in a little bit? So. And I think you mentioned that there could be more to your ePMR roadmap even beyond 36T. and i think you mentioned that there could be more to your epmr roadmap even beyond 36t What is so hard about scaling beyond 36T and you know, how do you think about stretching that roadmap to 40 or beyond and marrying that with, you know, you wanna now pull a HAMR in a little bit? what is so hard about scaling beyond 36t and you know how do you think about stretching that roadmap to 40 or beyond and marrying that with you know you wanna now pull a hamr in a little bit So. so

Speaker 2: Yes. Yes. yes

Speaker 3: So how do you think about that? So how do you think about that? so how do you think about that

Speaker 2: Yeah. So we have shared that we are pulling forward our HAMR qualification to start in the first half of calendar year 2026 with one customer, and then we look to extend that with two more customers in the second half of the year. So through the course of calendar year 2026, we'll be qualifying three customers on HAMR. The current roadmap for that is to introduce a 36-terabyte CMR and 44-terabyte Ultra SMR HAMR drive. We also have indicated we've pulled forward the qualification of our next iteration of ePMR to Q1 of calendar year 2026. We will be sending an invitation to all of you for an innovation day that we'll be having in New York on February the 3rd. Yeah. yeah So we have shared that we are pulling forward our HAMR qualification to start in the first half of calendar year 2026 with one customer, and then we look to extend that with two more customers in the second half of the year. so we have shared that we are pulling forward our hamr qualification to start in the first half of calendar year 2026 with one customer and then we look to extend that with two more customers in the second half of the year So through the course of calendar year 2026, we'll be qualifying three customers on HAMR. so through the course of calendar year 2026 we'll be qualifying three customers on hamr The current roadmap for that is to introduce a 36-terabyte CMR and 44-terabyte Ultra SMR HAMR drive. the current roadmap for that is to introduce a 36-terabyte cmr and 44-terabyte ultra smr hamr drive We also have indicated we've pulled forward the qualification of our next iteration of ePMR to Q1 of calendar year 2026. we also have indicated we've pulled forward the qualification of our next iteration of epmr to q1 of calendar year 2026 We will be sending an invitation to all of you for an innovation day that we'll be having in New York on February the 3rd. we will be sending an invitation to all of you for an innovation day that we'll be having in new york on february the 3rd The invitation will go out latter part of this week, where we'll be in touch highlighting all the latest innovations we're gonna bring to the market and how that's gonna translate into the new roadmap for both HAMR and ePMR and also the performance improvements that we look to deliver for our drives going forward. So stay tuned for that. The invitation will go out latter part of this week, where we'll be in touch highlighting all the latest innovations we're gonna bring to the market and how that's gonna translate into the new roadmap for both HAMR and ePMR and also the performance improvements that we look to deliver for our drives going forward. the invitation will go out latter part of this week where we'll be in touch highlighting all the latest innovations we're gonna bring to the market and how that's gonna translate into the new roadmap for both hamr and epmr and also the performance improvements that we look to deliver for our drives going forward So stay tuned for that. so stay tuned for that

Speaker 3: So you think you'll have a seamless transition. Your, you know, 44T Ultra SMR in mid 2026 will sort of lead right into HAMR. So you think you'll have a seamless transition. so you think you'll have a seamless transition Your, you know, 44T Ultra SMR in mid 2026 will sort of lead right into HAMR. your you know 44t ultra smr in mid 2026 will sort of lead right into hamr

Speaker 2: Yeah. I mean, our goal is really to focus on not only having the highest capacity drives, but to be able to deliver that at scale. There's been a lot of talk about, you know, we have a 40-terabyte drive or 44-terabyte drive, but ultimately what our customers want are exabytes, right? If you look at those contracts that we've talked about just recently, those contracts are exabyte-based. They're technology agnostic. They don't have any mention of units. Customers want. They're signing up for a certain amount of exabytes. And so the ability to deliver exabytes at scale is what we're really focusing on. And if you look at our current latest generation of ePMR drives, last quarter, we shipped 2.2 million units, which total a total of 70 exabytes. This quarter, that same platform will ship well north of 3 million units. Yeah. yeah I mean, our goal is really to focus on not only having the highest capacity drives, but to be able to deliver that at scale. i mean our goal is really to focus on not only having the highest capacity drives but to be able to deliver that at scale There's been a lot of talk about, you know, we have a 40-terabyte drive or 44-terabyte drive, but ultimately what our customers want are exabytes, right? there's been a lot of talk about you know we have a 40-terabyte drive or 44-terabyte drive but ultimately what our customers want are exabytes right If you look at those contracts that we've talked about just recently, those contracts are exabyte-based. if you look at those contracts that we've talked about just recently those contracts are exabyte-based They're technology agnostic. they're technology agnostic They don't have any mention of units. they don't have any mention of units Customers want. customers want They're signing up for a certain amount of exabytes. they're signing up for a certain amount of exabytes And so the ability to deliver exabytes at scale is what we're really focusing on. and so the ability to deliver exabytes at scale is what we're really focusing on And if you look at our current latest generation of ePMR drives, last quarter, we shipped 2.2 million units, which total a total of 70 exabytes. and if you look at our current latest generation of epmr drives last quarter we shipped 2.2 million units which total a total of 70 exabytes This quarter, that same platform will ship well north of 3 million units. this quarter that same platform will ship well north of 3 million units So that's a really great example of what our customers appreciate from us: fast qualification of our ePMR products, the ability to ramp up very quickly and deliver exabytes at scale. And we anticipate that will be the case with our next iteration of ePMR. And as we transition to HAMR, we wanna make sure that customers have a seamless transition to HAMR that will give us 50, 60, up to 100 terabytes, up to 100 terabytes in the future. So that's a really great example of what our customers appreciate from us: fast qualification of our ePMR products, the ability to ramp up very quickly and deliver exabytes at scale. so that's a really great example of what our customers appreciate from us fast qualification of our epmr products the ability to ramp up very quickly and deliver exabytes at scale And we anticipate that will be the case with our next iteration of ePMR. and we anticipate that will be the case with our next iteration of epmr And as we transition to HAMR, we wanna make sure that customers have a seamless transition to HAMR that will give us 50, 60, up to 100 terabytes, up to 100 terabytes in the future. and as we transition to hamr we wanna make sure that customers have a seamless transition to hamr that will give us 50 60 up to 100 terabytes up to 100 terabytes in the future

Speaker 3: What went into the decision to pull in qualification for HAMR? Was it more that you saw your, you know, your competitor had gone through the trials and tribulations and you saw that the customers were sort of, you know, adopting HAMR, and so you thought, "Oh, I, you know, I, I better pull that in"? What went into the decision to pull in qualification for HAMR? what went into the decision to pull in qualification for hamr Was it more that you saw your, you know, your competitor had gone through the trials and tribulations and you saw that the customers were sort of, you know, adopting HAMR, and so you thought, "Oh, I, you know, I, I better pull that in"? was it more that you saw your you know your competitor had gone through the trials and tribulations and you saw that the customers were sort of you know adopting hamr and so you thought "oh i you know i i better pull that in"

Speaker 2: No, it's really driven by the progress that we saw that we had been making. And in the prior earnings calls, you know, I've highlighted that, we were pleased and ahead of the internal milestones that we had set for ourselves. We were definitely comfortable with the areal density improvements that we were seeing in our HAMR development. As a result of us being ahead of those milestones and the confidence that we had, we felt it was the right time to pull forward that qualification. As I mentioned, we are comfortable with the areal density improvements we can deliver through HAMR. The focus in our qualification is really twofold. It's ensuring we can get the right reliability for HAMR because our customers are telling us what they're concerned about is what's gonna happen one year, two years, three years down the road. No, it's really driven by the progress that we saw that we had been making. no it's really driven by the progress that we saw that we had been making And in the prior earnings calls, you know, I've highlighted that, we were pleased and ahead of the internal milestones that we had set for ourselves. and in the prior earnings calls you know i've highlighted that we were pleased and ahead of the internal milestones that we had set for ourselves We were definitely comfortable with the areal density improvements that we were seeing in our HAMR development. we were definitely comfortable with the areal density improvements that we were seeing in our hamr development as As a result of us being ahead of those milestones and the confidence that we had, we felt it was the right time to pull forward that qualification. as a result of us being ahead of those milestones and the confidence that we had we felt it was the right time to pull forward that qualification As I mentioned, we are comfortable with the areal density improvements we can deliver through HAMR. as i mentioned we are comfortable with the areal density improvements we can deliver through hamr The focus in our qualification is really twofold. the focus in our qualification is really twofold It's ensuring we can get the right reliability for HAMR because our customers are telling us what they're concerned about is what's gonna happen one year, two years, three years down the road. it's ensuring we can get the right reliability for hamr because our customers are telling us what they're concerned about is what's gonna happen one year two years three years down the road Will there be systemic failures in the HAMR fleet? So we want to make sure we avoid that for them. And secondly, making sure we can get the yields for HAMR in production up to the same yield levels that we've been able to deliver on our ePMR portfolio, which we've shared based on our platforms, has been in the high 80s to low 90s% range. Will there be systemic failures in the HAMR fleet? will there be systemic failures in the hamr fleet So we want to make sure we avoid that for them. so we want to make sure we avoid that for them And secondly, making sure we can get the yields for HAMR in production up to the same yield levels that we've been able to deliver on our ePMR portfolio, which we've shared based on our platforms, has been in the high 80s to low 90s% range. and secondly making sure we can get the yields for hamr in production up to the same yield levels that we've been able to deliver on our epmr portfolio which we've shared based on our platforms has been in the high 80s to low 90s% range

Speaker 3: So, your average capacity per drive is still well below what these higher densities are. Why is that number so far below, and what applications are still on these older, smaller drives, you know, less dense drives, and what effort are you making to migrate those to higher capacities? So, your average capacity per drive is still well below what these higher densities are. so your average capacity per drive is still well below what these higher densities are Why is that number so far below, and what applications are still on these older, smaller drives, you know, less dense drives, and what effort are you making to migrate those to higher capacities? why is that number so far below and what applications are still on these older smaller drives you know less dense drives and what effort are you making to migrate those to higher capacities

Speaker 2: Yeah. Part of it is because there's still a material number of customers on CMR, right? So as they move to Ultra SMR, they get a capacity uplift. In order for them to transition from CMR to Ultra SMR, there's a degree of software work that they need to make on the application side of the house. There's always been a bit of contention to get their application colleagues to free up resources to do some of the rewrites. But in the environment that we're seeing where, you know, supply is being challenged because of the demands that we're seeing driven by cloud and AI, there's been a very concerted effort by many of our customers to get their application teams to rewrite software to take advantage of Ultra SMR. So we've seen very fast adoption and qualification of it, currently. Yeah. yeah Part of it is because there's still a material number of customers on CMR, right? part of it is because there's still a material number of customers on cmr right So as they move to Ultra SMR, they get a capacity uplift. so as they move to ultra smr they get a capacity uplift In order for them to transition from CMR to Ultra SMR, there's a degree of software work that they need to make on the application side of the house. in order for them to transition from cmr to ultra smr there's a degree of software work that they need to make on the application side of the house There's always been a bit of contention to get their application colleagues to free up resources to do some of the rewrites. there's always been a bit of contention to get their application colleagues to free up resources to do some of the rewrites But in the environment that we're seeing where, you know, supply is being challenged because of the demands that we're seeing driven by cloud and AI, there's been a very concerted effort by many of our customers to get their application teams to rewrite software to take advantage of Ultra SMR. but in the environment that we're seeing where you know supply is being challenged because of the demands that we're seeing driven by cloud and ai there's been a very concerted effort by many of our customers to get their application teams to rewrite software to take advantage of ultra smr So we've seen very fast adoption and qualification of it, currently. so we've seen very fast adoption and qualification of it currently And then also some of the, as they refresh their fleets, they're moving very quickly up the capacity points as well. We're also doing work in our platforms business, to eliminate some of the heavy lift that they potentially might have to do, on the conversion from CMR to Ultra SMR by using our platforms to be able to convert Ultra SMR to CMR recording technology for them as well. And then also some of the, as they refresh their fleets, they're moving very quickly up the capacity points as well. and then also some of the as they refresh their fleets they're moving very quickly up the capacity points as well We're also doing work in our platforms business, to eliminate some of the heavy lift that they potentially might have to do, on the conversion from CMR to Ultra SMR by using our platforms to be able to convert Ultra SMR to CMR recording technology for them as well. we're also doing work in our platforms business to eliminate some of the heavy lift that they potentially might have to do on the conversion from cmr to ultra smr by using our platforms to be able to convert ultra smr to cmr recording technology for them as well

Speaker 3: Can you just, sort of double-click on the HAMR roadmap for us? I know you're pulling in the qualification, but sort of once you do qualify HAMR, where does HAMR go from there? Can you just, sort of double-click on the HAMR roadmap for us? can you just sort of double-click on the hamr roadmap for us I know you're pulling in the qualification, but sort of once you do qualify HAMR, where does HAMR go from there? i know you're pulling in the qualification but sort of once you do qualify hamr where does hamr go from there

Speaker 2: Yeah. So we're looking to qualify HAMR through the course of calendar year 2026. The current roadmap is we will ramp that in the first half of calendar year 2027, and in the current roadmap, the capacity points will be 36 terabytes on CMR and 44 terabytes on Ultra SMR. Yeah. yeah So we're looking to qualify HAMR through the course of calendar year 2026. so we're looking to qualify hamr through the course of calendar year 2026 The current roadmap is we will ramp that in the first half of calendar year 2027, and in the current roadmap, the capacity points will be 36 terabytes on CMR and 44 terabytes on Ultra SMR. the current roadmap is we will ramp that in the first half of calendar year 2027 and in the current roadmap the capacity points will be 36 terabytes on cmr and 44 terabytes on ultra smr

Speaker 3: Customers don't care whether it's on HAMR or it's on? Customers don't care whether it's on HAMR or it's on? customers don't care whether it's on hamr or it's on

Speaker 2: No. In fact, all those POs and contracts that we have 2026, 2027, and we're in discussions with customers who are talking about 2027, 2028 timeframe contracts. They are exabyte-based. They are technology agnostic. What they want is highest velocity of, volume of drives at the highest capacity that's the most reliable. No. no In fact, all those POs and contracts that we have 2026, 2027, and we're in discussions with customers who are talking about 2027, 2028 timeframe contracts. in fact all those pos and contracts that we have 2026 2027 and we're in discussions with customers who are talking about 2027 2028 timeframe contracts They are exabyte-based. they are exabyte-based They are technology agnostic. they are technology agnostic What they want is highest velocity of, volume of drives at the highest capacity that's the most reliable. what they want is highest velocity of volume of drives at the highest capacity that's the most reliable

Speaker 3: And these contracts are not only volume, but they come with fixed pricing. Is that right? And these contracts are not only volume, but they come with fixed pricing. and these contracts are not only volume but they come with fixed pricing Is that right? is that right

Speaker 2: There's a degree of fixed pricing associated with it as well. Yeah. There's a degree of fixed pricing associated with it as well. there's a degree of fixed pricing associated with it as well Yeah. yeah

Speaker 3: Degree of fixed pricing. So it's not, it's not you will, that will take exabyte-. Degree of fixed pricing. degree of fixed pricing So it's not, it's not you will, that will take exabyte-. so it's not it's not you will that will take exabyte-

Speaker 2: There's a degree of base price, base volume at fixed price, and there's incremental upside pricing. There's a degree of base price, base volume at fixed price, and there's incremental upside pricing. there's a degree of base price base volume at fixed price and there's incremental upside pricing

Speaker 3: Got it. Okay, and can you talk about your willingness to expand unit capacity? In other words, are your largest customers offering to co-invest in your CapEx to get you to expand unit capacity? Got it. got it Okay, and can you talk about your willingness to expand unit capacity? okay and can you talk about your willingness to expand unit capacity In other words, are your largest customers offering to co-invest in your CapEx to get you to expand unit capacity? in other words are your largest customers offering to co-invest in your capex to get you to expand unit capacity

Speaker 2: Yeah. Yeah. yeah

Speaker 3: Or are they happy with you just moving density higher? Or are they happy with you just moving density higher? or are they happy with you just moving density higher

Speaker 2: Yeah. We've been very clear that we are not expanding unit capacity. None of our customers have had the discussion with us about investing in unit capacity, and you know, the company is in a very different position. We have a very healthy balance sheet. We are generating a lot of cash flow. We can make the appropriate investment decisions that we need to. We feel that with the areal density improvements that we are gonna make with the roadmap, with the ability to upscale customers to higher drive capacity points and through Ultra SMR adoption, we're gonna be able to meet their demand requirements without adding any unit capacity. Yeah. yeah We've been very clear that we are not expanding unit capacity. we've been very clear that we are not expanding unit capacity None of our customers have had the discussion with us about investing in unit capacity, and you know, the company is in a very different position. none of our customers have had the discussion with us about investing in unit capacity and you know the company is in a very different position We have a very healthy balance sheet. we have a very healthy balance sheet We are generating a lot of cash flow. we are generating a lot of cash flow We can make the appropriate investment decisions that we need to. we can make the appropriate investment decisions that we need to We feel that with the areal density improvements that we are gonna make with the roadmap, with the ability to upscale customers to higher drive capacity points and through Ultra SMR adoption, we're gonna be able to meet their demand requirements without adding any unit capacity. we feel that with the areal density improvements that we are gonna make with the roadmap with the ability to upscale customers to higher drive capacity points and through ultra smr adoption we're gonna be able to meet their demand requirements without adding any unit capacity

Speaker 3: Can you just talk about the interplay between HDD and SSD and whether these extended lead times are pushing any demand in nearline over to SSD? Can you just talk about the interplay between HDD and SSD and whether these extended lead times are pushing any demand in nearline over to SSD? can you just talk about the interplay between hdd and ssd and whether these extended lead times are pushing any demand in nearline over to ssd

Speaker 2: We don't see that. I mean, the good news is right now, with the ongoing growth of the cloud, with AI driving a lot, the increased data generation and the demand for storage, we are seeing an environment where, you know, we're all, it's lifting all boats, right? You're seeing SSD demands for SSDs go up. You're seeing demands for HDDs go up. Even good old tape is seeing demand increase as the value of data increases and more data is getting stored. What we also see is data center architectures are pretty much set with the chassis that they have for a period of time forward-looking, two, three years. So you don't see any rapid changes between the ratio of HDDs and SSDs. We don't see that. we don't see that I mean, the good news is right now, with the ongoing growth of the cloud, with AI driving a lot, the increased data generation and the demand for storage, we are seeing an environment where, you know, we're all, it's lifting all boats, right? i mean the good news is right now with the ongoing growth of the cloud with ai driving a lot the increased data generation and the demand for storage we are seeing an environment where you know we're all it's lifting all boats right You're seeing SSD demands for SSDs go up. you're seeing ssd demands for ssds go up You're seeing demands for HDDs go up. you're seeing demands for hdds go up Even good old tape is seeing demand increase as the value of data increases and more data is getting stored. even good old tape is seeing demand increase as the value of data increases and more data is getting stored What we also see is data center architectures are pretty much set with the chassis that they have for a period of time forward-looking, two, three years. what we also see is data center architectures are pretty much set with the chassis that they have for a period of time forward-looking two three years So you don't see any rapid changes between the ratio of HDDs and SSDs. so you don't see any rapid changes between the ratio of hdds and ssds The ratio's gonna be roughly about 75%-80% of data is gonna continue to be stored on HDDs, 10%-15% on SSDs, and then the remainder on flash. That ratios may adjust a little bit quarter to quarter, but by and large, they will stay the same. HDDs continue to have very strong TCO benefit, 6x delta in terms of acquisition cost, 3.6x delta in terms of total cost of ownership. We probably think that gap has widened, as SSD prices have gone up as well. With the announcements and some of the innovations we'll share in February, we'll also share some of the performance improvements we're making on throughput that will address some of the gaps that we have in terms of throughput performance that HDDs sort of lack SSDs. The ratio's gonna be roughly about 75%-80% of data is gonna continue to be stored on HDDs, 10%-15% on SSDs, and then the remainder on flash. the ratio's gonna be roughly about 75%-80% of data is gonna continue to be stored on hdds 10%-15% on ssds and then the remainder on flash That ratios may adjust a little bit quarter to quarter, but by and large, they will stay the same. that ratios may adjust a little bit quarter to quarter but by and large they will stay the same HDDs continue to have very strong TCO benefit, 6x delta in terms of acquisition cost, 3.6x delta in terms of total cost of ownership. hdds continue to have very strong tco benefit 6x delta in terms of acquisition cost 3.6x delta in terms of total cost of ownership We probably think that gap has widened, as SSD prices have gone up as well. we probably think that gap has widened as ssd prices have gone up as well With the announcements and some of the innovations we'll share in February, we'll also share some of the performance improvements we're making on throughput that will address some of the gaps that we have in terms of throughput performance that HDDs sort of lack SSDs. with the announcements and some of the innovations we'll share in february we'll also share some of the performance improvements we're making on throughput that will address some of the gaps that we have in terms of throughput performance that hdds sort of lack ssds

Speaker 3: Can you speak just from a strategic perspective about what the puts and takes are now that the company is back to being independent and the split happened? What are some of the puts and takes? I mean, obviously there was a thesis to put them together in the first place. So if you disaggregate them, obviously there are some negatives because, you know, you wouldn't have put them together in the first place. You know, not that you did, but the company wouldn't have put it in the first place. So can you speak a little bit to how you run the company differently now versus how you ran it in the past? Can you speak just from a strategic perspective about what the puts and takes are now that the company is back to being independent and the split happened? can you speak just from a strategic perspective about what the puts and takes are now that the company is back to being independent and the split happened What are some of the puts and takes? what are some of the puts and takes I mean, obviously there was a thesis to put them together in the first place. i mean obviously there was a thesis to put them together in the first place So if you disaggregate them, obviously there are some negatives because, you know, you wouldn't have put them together in the first place. so if you disaggregate them obviously there are some negatives because you know you wouldn't have put them together in the first place You know, not that you did, but the company wouldn't have put it in the first place. you know not that you did but the company wouldn't have put it in the first place So can you speak a little bit to how you run the company differently now versus how you ran it in the past? so can you speak a little bit to how you run the company differently now versus how you ran it in the past

Speaker 2: Yeah. I would say at a high level, maybe this synergy that we have from splitting the company up. We did have to incur more G&A costs, right? 'Cause you could amortize that over a larger business. But I think the bet that has been far outweighed by having two independent businesses that are singly focused on the success of the HDD business and the SSD business, right? Because if you look at it technology-wise, they're really quite different. One's electromechanical-based. One is semiconductor-based. It has no commonality in technology, in the manufacturing assets, in the technology, intellectual property, even in the supply base. Yeah. yeah I would say at a high level, maybe this synergy that we have from splitting the company up. i would say at a high level maybe this synergy that we have from splitting the company up We did have to incur more G&A costs, right? 'Cause you could amortize that over a larger business. we did have to incur more g&a costs right 'cause you could amortize that over a larger business But I think the bet that has been far outweighed by having two independent businesses that are singly focused on the success of the HDD business and the SSD business, right? but i think the bet that has been far outweighed by having two independent businesses that are singly focused on the success of the hdd business and the ssd business right Because if you look at it technology-wise, they're really quite different. because if you look at it technology-wise they're really quite different One's electromechanical-based. one's electromechanical-based One is semiconductor-based. one is semiconductor-based It has no commonality in technology, in the manufacturing assets, in the technology, intellectual property, even in the supply base. it has no commonality in technology in the manufacturing assets in the technology intellectual property even in the supply base And so, having that singular focus of each company on what is the right processes to run the business by, the right KPIs, the right financial model to run each business by, has really given the ultimate, you know, it's proven that the spin has made sense. And if you look at the market cap of the two companies combined today, they're in the mid-$80-plus billion. It's proven to be the right decision ultimately. And so, having that singular focus of each company on what is the right processes to run the business by, the right KPIs, the right financial model to run each business by, has really given the ultimate, you know, it's proven that the spin has made sense. and so having that singular focus of each company on what is the right processes to run the business by the right kpis the right financial model to run each business by has really given the ultimate you know it's proven that the spin has made sense And if you look at the market cap of the two companies combined today, they're in the mid-$80-plus billion. and if you look at the market cap of the two companies combined today they're in the mid-$80-plus billion It's proven to be the right decision ultimately. it's proven to be the right decision ultimately

Speaker 3: Yeah. The markets help too, but you've lost. Yeah. yeah The markets help too, but you've lost. the markets help too but you've lost

Speaker 2: Yeah. Of course. Yeah. yeah Of course. of course

Speaker 3: For sure. So, can we just talk about, the, there's a third competitor that people don't talk about very often, but they do have a MAMR roadmap and some of the hyperscalers are talking about trying to keep them alive. So can you just talk about the relative share between you and your main competitor and the third competitor? Do you see that third competitor like withering away, or do you see the customer trying to keep them alive and maybe they become more of a? For sure. for sure So, can we just talk about, the, there's a third competitor that people don't talk about very often, but they do have a MAMR roadmap and some of the hyperscalers are talking about trying to keep them alive. so can we just talk about the there's a third competitor that people don't talk about very often but they do have a mamr roadmap and some of the hyperscalers are talking about trying to keep them alive So can you just talk about the relative share between you and your main competitor and the third competitor? so can you just talk about the relative share between you and your main competitor and the third competitor Do you see that third competitor like withering away, or do you see the customer trying to keep them alive and maybe they become more of a? do you see that third competitor like withering away or do you see the customer trying to keep them alive and maybe they become more of a

Speaker 2: I treat all our peers with a lot of respect and a healthy dose of competition. I would say, I think we trust in our technology. You know, we have a 32-terabyte drive on PMR. We have HAMR qualification starting. We are introducing our next generation of PMR, which currently is slated for 36, but probably will be slightly north of that, when we bring it out, in the first half of calendar year 2026. I think, you know, the third player is a good competitor. We look forward to competing then with them in the marketplace. And I'll leave it at that. I treat all our peers with a lot of respect and a healthy dose of competition. i treat all our peers with a lot of respect and a healthy dose of competition I would say, I think we trust in our technology. i would say i think we trust in our technology You know, we have a 32-terabyte drive on PMR. you know we have a 32-terabyte drive on pmr We have HAMR qualification starting. we have hamr qualification starting We are introducing our next generation of PMR, which currently is slated for 36, but probably will be slightly north of that, when we bring it out, in the first half of calendar year 2026. we are introducing our next generation of pmr which currently is slated for 36 but probably will be slightly north of that when we bring it out in the first half of calendar year 2026 I think, you know, the third player is a good competitor. i think you know the third player is a good competitor We look forward to competing then with them in the marketplace. we look forward to competing then with them in the marketplace And I'll leave it at that. and i'll leave it at that

Speaker 3: Great. And then, on the last quarter's call, you discussed your systems integration and test lab in Rochester. How important is joint development in this lab and, and what kind of partners do you work with there? Great. great And then, on the last quarter's call, you discussed your systems integration and test lab in Rochester. and then on the last quarter's call you discussed your systems integration and test lab in rochester How important is joint development in this lab and, and what kind of partners do you work with there? how important is joint development in this lab and and what kind of partners do you work with there

Speaker 2: Yeah. I, I would say it plays a very critical role in a couple of things. One, in the Rochester lab right now, we have two environments. Each environment is a complete replica of two of our largest customers' production data center environments. Everything from the racks that are in the lab to the temperature that we operate the lab in, right, to the speed at which we run the hard drives. In fact, I can't even enter those labs 'cause they're effectively my customer's environment. So when I visited the lab recently, I had to get approval from the two customers to be able to enter the lab to see what they're doing. The only people that can enter it are our engineers assigned to those specific accounts. The benefit to that is we're actually testing both our new generation drives early in the process in a production environment. Yeah. yeah I, I would say it plays a very critical role in a couple of things. i i would say it plays a very critical role in a couple of things One, in the Rochester lab right now, we have two environments. one in the rochester lab right now we have two environments Each environment is a complete replica of two of our largest customers' production data center environments. each environment is a complete replica of two of our largest customers' production data center environments Everything from the racks that are in the lab to the temperature that we operate the lab in, right, to the speed at which we run the hard drives. everything from the racks that are in the lab to the temperature that we operate the lab in right to the speed at which we run the hard drives In fact, I can't even enter those labs 'cause they're effectively my customer's environment. in fact i can't even enter those labs 'cause they're effectively my customer's environment So when I visited the lab recently, I had to get approval from the two customers to be able to enter the lab to see what they're doing. so when i visited the lab recently i had to get approval from the two customers to be able to enter the lab to see what they're doing The only people that can enter it are our engineers assigned to those specific accounts. the only people that can enter it are our engineers assigned to those specific accounts The benefit to that is we're actually testing both our new generation drives early in the process in a production environment. the benefit to that is we're actually testing both our new generation drives early in the process in a production environment So we're ironing out bugs. It gives customers, it leads to faster qualification cycles. It gives customers a lot more confidence in the reliability of the drives when we do put them at scale into production data center environments. So it's played a massive role. And there's a third customer now looking to us to replicate that dedicated environment in our facility as well. So we're ironing out bugs. so we're ironing out bugs It gives customers, it leads to faster qualification cycles. it gives customers it leads to faster qualification cycles It gives customers a lot more confidence in the reliability of the drives when we do put them at scale into production data center environments. it gives customers a lot more confidence in the reliability of the drives when we do put them at scale into production data center environments So it's played a massive role. so it's played a massive role And there's a third customer now looking to us to replicate that dedicated environment in our facility as well. and there's a third customer now looking to us to replicate that dedicated environment in our facility as well

Speaker 3: I would think that this is gonna help to risk mitigate the HAMR ramp as well. Are you operating HAMR drives in those facilities? I would think that this is gonna help to risk mitigate the HAMR ramp as well. i would think that this is gonna help to risk mitigate the hamr ramp as well Are you operating HAMR drives in those facilities? are you operating hamr drives in those facilities

Speaker 2: Absolutely. Yeah. We've been operating HAMR drives in those facilities for over a year now. Absolutely. absolutely Yeah. yeah We've been operating HAMR drives in those facilities for over a year now. we've been operating hamr drives in those facilities for over a year now

Speaker 3: Is that part of what led, or was it a particular customer because of what's happening in that location to push you to qualify HAMR a bit earlier? Is that part of what led, or was it a particular customer because of what's happening in that location to push you to qualify HAMR a bit earlier? is that part of what led or was it a particular customer because of what's happening in that location to push you to qualify hamr a bit earlier

Speaker 2: Yeah. We've been sending HAMR drives, engineering samples, to those two facilities for well over a year. We have quality feedback from our customers on the performance of the drives, what enhancements they would like to see. We take that feedback on board. Every quarter, we ship them new iterations of those drives. And the progress that we've been making there has given us the confidence to accelerate the qualification of our HAMR drives. Yeah. yeah We've been sending HAMR drives, engineering samples, to those two facilities for well over a year. we've been sending hamr drives engineering samples to those two facilities for well over a year We have quality feedback from our customers on the performance of the drives, what enhancements they would like to see. we have quality feedback from our customers on the performance of the drives what enhancements they would like to see We take that feedback on board. we take that feedback on board Every quarter, we ship them new iterations of those drives. every quarter we ship them new iterations of those drives And the progress that we've been making there has given us the confidence to accelerate the qualification of our HAMR drives. and the progress that we've been making there has given us the confidence to accelerate the qualification of our hamr drives

Speaker 3: Kris, you've expanded gross margin 400-500 basis points over the past 12 months, which is, you know, obviously great. How much of that comes from better pricing versus better utilization versus other factors? Kris, you've expanded gross margin 400-500 basis points over the past 12 months, which is, you know, obviously great. kris you've expanded gross margin 400-500 basis points over the past 12 months which is you know obviously great How much of that comes from better pricing versus better utilization versus other factors? how much of that comes from better pricing versus better utilization versus other factors

Speaker 1: Yeah. I'm very pleased with the progress in gross margin expansion that we have seen, even in the last couple of years, moving from the 20s into the 30s and now into the mid-40s. So great progress has been made there. Also at the last earnings call, I've indicated that incremental gross margins, I'm very confident to see them at 50-plus%, right? So, even if we look at last quarter, the incremental gross margin was actually 75%. And in this quarter guidance, at the midpoint, it was implied at 65%. So really good progress. And so how are we driving gross margin improvement? There's mainly three elements to it. First of all, it's pricing, and we already talked about that, right? Compared to historically where we've seen ASP erosion, now we are in a stable price environment, actually with some modest increases in ASP per terabyte. Yeah. yeah I'm very pleased with the progress in gross margin expansion that we have seen, even in the last couple of years, moving from the 20s into the 30s and now into the mid-40s. i'm very pleased with the progress in gross margin expansion that we have seen even in the last couple of years moving from the 20s into the 30s and now into the mid-40s So great progress has been made there. so great progress has been made there Also at the last earnings call, I've indicated that incremental gross margins, I'm very confident to see them at 50-plus%, right? also at the last earnings call i've indicated that incremental gross margins i'm very confident to see them at 50-plus% right So, even if we look at last quarter, the incremental gross margin was actually 75%. so even if we look at last quarter the incremental gross margin was actually 75% And in this quarter guidance, at the midpoint, it was implied at 65%. and in this quarter guidance at the midpoint it was implied at 65% So really good progress. so really good progress And so how are we driving gross margin improvement? and so how are we driving gross margin improvement There's mainly three elements to it. there's mainly three elements to it First of all, it's pricing, and we already talked about that, right? first of all it's pricing and we already talked about that right Compared to historically where we've seen ASP erosion, now we are in a stable price environment, actually with some modest increases in ASP per terabyte. compared to historically where we've seen asp erosion now we are in a stable price environment actually with some modest increases in asp per terabyte Secondly, of course, there is a mixed element. And as Irving has indicated before, working and collaborating with our customers, moving to higher capacity drives is a win-win for our customers as well as for us. Also, moving to Ultra SMR, that gives us higher capacity at a very little cost, because most of that is done in firmware and software. And then third, of course, we are focused on driving down the cost in our own manufacturing facilities, leveraging automation, machine learning, and AI tools in our own factories. And we drive cost reductions through our supply chain as well. So when you combine all of that, good progress and still further gross margins expansion to be expected. Secondly, of course, there is a mixed element. secondly of course there is a mixed element And as Irving has indicated before, working and collaborating with our customers, moving to higher capacity drives is a win-win for our customers as well as for us. and as irving has indicated before working and collaborating with our customers moving to higher capacity drives is a win-win for our customers as well as for us Also, moving to Ultra SMR, that gives us higher capacity at a very little cost, because most of that is done in firmware and software. also moving to ultra smr that gives us higher capacity at a very little cost because most of that is done in firmware and software And then third, of course, we are focused on driving down the cost in our own manufacturing facilities, leveraging automation, machine learning, and AI tools in our own factories. and then third of course we are focused on driving down the cost in our own manufacturing facilities leveraging automation machine learning and ai tools in our own factories And we drive cost reductions through our supply chain as well. and we drive cost reductions through our supply chain as well So when you combine all of that, good progress and still further gross margins expansion to be expected. so when you combine all of that good progress and still further gross margins expansion to be expected

Speaker 3: So where do you think gross margin can go? I mean, obviously, you know, asymptotic gross margin, if the incremental gross margin's 50%, then, you know, the asymptotic gross margin's 50%. But, do your customers care what your gross margin is? Like, do they, you know, if it was above 50%, would they start to say, I don't know, this whole, you know, I'm gonna finally force your hand and make you expand, you know, unit capacity? Or how does that, how does that all play into it? So where do you think gross margin can go? so where do you think gross margin can go I mean, obviously, you know, asymptotic gross margin, if the incremental gross margin's 50%, then, you know, the asymptotic gross margin's 50%. i mean obviously you know asymptotic gross margin if the incremental gross margin's 50% then you know the asymptotic gross margin's 50% But, do your customers care what your gross margin is? but do your customers care what your gross margin is Like, do they, you know, if it was above 50%, would they start to say, I don't know, this whole, you know, I'm gonna finally force your hand and make you expand, you know, unit capacity? like do they you know if it was above 50% would they start to say i don't know this whole you know i'm gonna finally force your hand and make you expand you know unit capacity Or how does that, how does that all play into it? or how does that how does that all play into it

Speaker 1: Maybe a couple of things. I said 50-plus. I didn't say 50. Maybe a couple of things. maybe a couple of things I said 50-plus. i said 50-plus I didn't say 50. i didn't say 50

Speaker 3: 50-plus. Okay. 50-plus. 50-plus okay Okay. 50-plus okay

Speaker 1: That's one. Secondly, I mean, our customers for the vast majority of the infrastructure, they pay 60%-70% gross margin, right, on the GPUs, the CPUs, the memory, all of that. So they're, I think, used to that kind of environment. I think what fundamentally has changed is that our customers recognize how important data storage and HDD is in their overall infrastructure buildout, right? It's a key element. It might only be $20 billion out of $500 billion, but they need to have that $20 billion right. And there is a tight balance between supply and demand. There's a lot of technology innovation going on, new technology that's being ramped up. And they understand the value of that technology. That's one. that's one Secondly, I mean, our customers for the vast majority of the infrastructure, they pay 60%-70% gross margin, right, on the GPUs, the CPUs, the memory, all of that. secondly i mean our customers for the vast majority of the infrastructure they pay 60%-70% gross margin right on the gpus the cpus the memory all of that So they're, I think, used to that kind of environment. so they're i think used to that kind of environment I think what fundamentally has changed is that our customers recognize how important data storage and HDD is in their overall infrastructure buildout, right? i think what fundamentally has changed is that our customers recognize how important data storage and hdd is in their overall infrastructure buildout right It's a key element. it's a key element It might only be $20 billion out of $500 billion, but they need to have that $20 billion right. it might only be $20 billion out of $500 billion but they need to have that $20 billion right And there is a tight balance between supply and demand. and there is a tight balance between supply and demand There's a lot of technology innovation going on, new technology that's being ramped up. there's a lot of technology innovation going on new technology that's being ramped up And they understand the value of that technology. and they understand the value of that technology

Speaker 3: There's a point where, I mean, we've seen this movie before where I, you know, I'm just an old-school semiconductor guy. And whenever you tell these super rich companies that they can't get a product for, you know, 60 weeks, they're gonna do whatever they have to do to get what they need as fast as they can. So they're gonna place orders and they're gonna book out into 2027. But when push comes to shove, they might not take those drives. And if that were the case, how do you protect against that? Do you, like, look at bookings? There's a point where, I mean, we've seen this movie before where I, you know, I'm just an old-school semiconductor guy. there's a point where i mean we've seen this movie before where i you know i'm just an old-school semiconductor guy And whenever you tell these super rich companies that they can't get a product for, you know, 60 weeks, they're gonna do whatever they have to do to get what they need as fast as they can. and whenever you tell these super rich companies that they can't get a product for you know 60 weeks they're gonna do whatever they have to do to get what they need as fast as they can So they're gonna place orders and they're gonna book out into 2027. so they're gonna place orders and they're gonna book out into 2027 But when push comes to shove, they might not take those drives. but when push comes to shove they might not take those drives And if that were the case, how do you protect against that? and if that were the case how do you protect against that Do you, like, look at bookings? do you like look at bookings And is bookings the leading indicator where if there's this big, huge surge of bookings and then it completely falls off, you're like, "Okay, that's the first indicator of maybe they've just placed a bunch of orders just for the sake of, you know, getting in the backlog and they might not take the? And is bookings the leading indicator where if there's this big, huge surge of bookings and then it completely falls off, you're like, "Okay, that's the first indicator of maybe they've just placed a bunch of orders just for the sake of, you know, getting in the backlog and they might not take the? and is bookings the leading indicator where if there's this big huge surge of bookings and then it completely falls off you're like "okay that's the first indicator of maybe they've just placed a bunch of orders just for the sake of you know getting in the backlog and they might not take the

Speaker 2: Yeah. I mean, we look at the demand signal that our customers give us as one data point as an input data into what we do to determine what supply output we generate, right? So customer demand signal is one. We look at what is the CapEx they're spending over the next few years as another data point. We're looking at data center builds. When are they coming on stream? What is the ratio of data center builds to how much storage they'll need? We look at also refresh cycles. Typically, customers refresh the hard drive fleets every five to seven years. So we factor all those data points in, and we come up with our own internal view of what we think the supply environment should be. And so that's the decision that we make. Yeah. yeah I mean, we look at the demand signal that our customers give us as one data point as an input data into what we do to determine what supply output we generate, right? i mean we look at the demand signal that our customers give us as one data point as an input data into what we do to determine what supply output we generate right So customer demand signal is one. so customer demand signal is one We look at what is the CapEx they're spending over the next few years as another data point. we look at what is the capex they're spending over the next few years as another data point We're looking at data center builds. we're looking at data center builds When are they coming on stream? when are they coming on stream What is the ratio of data center builds to how much storage they'll need? what is the ratio of data center builds to how much storage they'll need We look at also refresh cycles. we look at also refresh cycles Typically, customers refresh the hard drive fleets every five to seven years. typically customers refresh the hard drive fleets every five to seven years So we factor all those data points in, and we come up with our own internal view of what we think the supply environment should be. so we factor all those data points in and we come up with our own internal view of what we think the supply environment should be And so that's the decision that we make. and so that's the decision that we make that may be sometimes slightly below what the customer expectation is, but we form our own opinion on what's required. that may be sometimes slightly below what the customer expectation is, but we form our own opinion on what's required. that may be sometimes slightly below what the customer expectation is but we form our own opinion on what's required

Speaker 1: Right. And so currently, we don't see any inventory build in the channel or at the customer level. Most of the hard disk drives that are shipped to the customer are deployed right away. Right. right And so currently, we don't see any inventory build in the channel or at the customer level. and so currently we don't see any inventory build in the channel or at the customer level Most of the hard disk drives that are shipped to the customer are deployed right away. most of the hard disk drives that are shipped to the customer are deployed right away

Speaker 3: And what, just thinking in the past, like, what would be the first sign if X happened, you would begin to worry that maybe demand is faltering? Is it, I mean, the first order what the customers are saying about their CapEx? Is it just that simple? And what, just thinking in the past, like, what would be the first sign if X happened, you would begin to worry that maybe demand is faltering? and what just thinking in the past like what would be the first sign if x happened you would begin to worry that maybe demand is faltering Is it, I mean, the first order what the customers are saying about their CapEx? is it i mean the first order what the customers are saying about their capex Is it just that simple? is it just that simple

Speaker 2: Yeah. I mean, we start to see potentially maybe data center builds starting to slow down. You know, we've had instances where they may have, they've had some delays, and those are just temporary issues. In fact, three quarters ago, you know, we had a slight dip in revenue because there was a delay of one of our customers' large data centers. But that, the rest of what they had planned in the pipeline was still on stream, so that didn't change it. But we look at all these factors as far out as we can get, and we factor that into our planning process in terms of the CapEx investments that we make. Yeah. yeah I mean, we start to see potentially maybe data center builds starting to slow down. i mean we start to see potentially maybe data center builds starting to slow down You know, we've had instances where they may have, they've had some delays, and those are just temporary issues. you know we've had instances where they may have they've had some delays and those are just temporary issues In fact, three quarters ago, you know, we had a slight dip in revenue because there was a delay of one of our customers' large data centers. in fact three quarters ago you know we had a slight dip in revenue because there was a delay of one of our customers' large data centers But that, the rest of what they had planned in the pipeline was still on stream, so that didn't change it. but that the rest of what they had planned in the pipeline was still on stream so that didn't change it But we look at all these factors as far out as we can get, and we factor that into our planning process in terms of the CapEx investments that we make. but we look at all these factors as far out as we can get and we factor that into our planning process in terms of the capex investments that we make

Speaker 3: Great. And Kris, I just wanted to ask you about share repurchase and, you know, free cash flows obviously going, you know, growing quite nicely. Can we expect to see a more aggressive share repurchase going forward? And/or does it make sense to maybe pay down debt or substantially raise the dividend as well? Great. great And Kris, I just wanted to ask you about share repurchase and, you know, free cash flows obviously going, you know, growing quite nicely. and kris i just wanted to ask you about share repurchase and you know free cash flows obviously going you know growing quite nicely Can we expect to see a more aggressive share repurchase going forward? can we expect to see a more aggressive share repurchase going forward And/or does it make sense to maybe pay down debt or substantially raise the dividend as well? and/or does it make sense to maybe pay down debt or substantially raise the dividend as well

Speaker 1: Yeah. So I mean, first of all, we're experiencing very strong demand that translates into strong revenue growth, gross margins, and operating margin expansion that also translates to very strong free cash flow and free cash flow margin, right? Just the last couple of quarters, we had more than 20% free cash flow margin. And here as well, free cash flow margin can move from the low 20s into the mid 20s. So we're executing really good there. And what do we do with the cash? Well, of course, we continue to invest in our business, as Irving indicated. We continue to invest in our technology and product roadmap. We continue to invest to a certain extent in our manufacturing footprint with CapEx on or about 4%-6%. Yeah. yeah So I mean, first of all, we're experiencing very strong demand that translates into strong revenue growth, gross margins, and operating margin expansion that also translates to very strong free cash flow and free cash flow margin, right? so i mean first of all we're experiencing very strong demand that translates into strong revenue growth gross margins and operating margin expansion that also translates to very strong free cash flow and free cash flow margin right Just the last couple of quarters, we had more than 20% free cash flow margin. just the last couple of quarters we had more than 20% free cash flow margin And here as well, free cash flow margin can move from the low 20s into the mid 20s. and here as well free cash flow margin can move from the low 20s into the mid 20s So we're executing really good there. so we're executing really good there And what do we do with the cash? and what do we do with the cash Well, of course, we continue to invest in our business, as Irving indicated. well of course we continue to invest in our business as irving indicated We continue to invest in our technology and product roadmap. we continue to invest in our technology and product roadmap We continue to invest to a certain extent in our manufacturing footprint with CapEx on or about 4%-6%. we continue to invest to a certain extent in our manufacturing footprint with capex on or about 4%-6% But despite all those investments, we deliver very strong free cash flow. And that free cash flow is being returned back to the shareholder through a combination of our dividend program and a buyback program. The dividend program was installed six months ago, and we started really low. But six months into it, we already increased the dividend at our last earnings call by 25%, now to $0.125 per share per quarter. And so there is still plenty of room to further grow our dividend over time. In addition to that, on or about six months ago, we installed a share buyback program. We got a $2 billion authorization from the board. And we immediately started using that. In the first quarter, we used on or about $150 million. In the second quarter, we used $550 million. But despite all those investments, we deliver very strong free cash flow. but despite all those investments we deliver very strong free cash flow And that free cash flow is being returned back to the shareholder through a combination of our dividend program and a buyback program. and that free cash flow is being returned back to the shareholder through a combination of our dividend program and a buyback program The dividend program was installed six months ago, and we started really low. the dividend program was installed six months ago and we started really low But six months into it, we already increased the dividend at our last earnings call by 25%, now to $0.125 per share per quarter. but six months into it we already increased the dividend at our last earnings call by 25% now to $0.125 per share per quarter And so there is still plenty of room to further grow our dividend over time. and so there is still plenty of room to further grow our dividend over time In addition to that, on or about six months ago, we installed a share buyback program. in addition to that on or about six months ago we installed a share buyback program We got a $2 billion authorization from the board. we got a $2 billion authorization from the board And we immediately started using that. and we immediately started using that In the first quarter, we used on or about $150 million. in the first quarter we used on or about $150 million In the second quarter, we used $550 million. in the second quarter we used $550 million Actually, when you look at it in the last quarter, we returned all the free cash flow using those two programs back to the shareholders. We will continue to do so in this quarter. There's no hesitation at that, even at current valuation. There's no hesitation to return the cash flow back through the combination of dividend and share buyback. Actually, when you look at it in the last quarter, we returned all the free cash flow using those two programs back to the shareholders. actually when you look at it in the last quarter we returned all the free cash flow using those two programs back to the shareholders We will continue to do so in this quarter. we will continue to do so in this quarter There's no hesitation at that, even at current valuation. there's no hesitation at that even at current valuation There's no hesitation to return the cash flow back through the combination of dividend and share buyback. there's no hesitation to return the cash flow back through the combination of dividend and share buyback

Speaker 3: So. So. so You want to touch on the retained stake and, you know. You want to touch on the retained stake and, you know. you want to touch on the retained stake and you know

Speaker 1: Yeah. So, in addition to that, I think we have a pretty healthy balance sheet by now, right? On or about $4.7-$4.8 billion of debt. We have $2 billion of cash. So net debt is down to $2.7-$2.8 billion. In addition to that, we still have 7.5 million of SanDisk shares at today's price. That's on or about $1.5 billion. And we've said publicly that it's our intention to monetize that stake in a debt-for-equity transaction before the one-year anniversary. So that's coming up as well. That will further reduce the debt on the balance sheet. Yeah. yeah So, in addition to that, I think we have a pretty healthy balance sheet by now, right? so in addition to that i think we have a pretty healthy balance sheet by now right On or about $4.7-$4.8 billion of debt. on or about $4.7-$4.8 billion of debt We have $2 billion of cash. we have $2 billion of cash So net debt is down to $2.7-$2.8 billion. so net debt is down to $2.7-$2.8 billion In addition to that, we still have 7.5 million of SanDisk shares at today's price. in addition to that we still have 7.5 million of sandisk shares at today's price That's on or about $1.5 billion. that's on or about $1.5 billion And we've said publicly that it's our intention to monetize that stake in a debt-for-equity transaction before the one-year anniversary. and we've said publicly that it's our intention to monetize that stake in a debt-for-equity transaction before the one-year anniversary So that's coming up as well. so that's coming up as well that That will further reduce the debt on the balance sheet. that will further reduce the debt on the balance sheet

Speaker 3: Great. Thank you for the time. We're out of time. Thank you again. Great. great Thank you for the time. thank you for the time We're out of time. we're out of time Thank you again. thank you again

Speaker 1: Thanks, Tim. Thanks, Tim. thanks tim

Speaker 3: All right. Thanks. All right. all right Thanks . thanks

Speaker 2: Thanks. Thanks. thanks