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WD knocks earnings out of the park - again WD’s first fiscal 2027 quarters earnings rose 55 percent Y/Y to $4.38 billion, beating its $4.1 billion outlook, with a $1.8 billion GAAP profit, 50.5 percent up on the year. However, the profit was down 44 percent compared to the previous quarter’s $3.2 billion profit. The prior quarter’s results included a large one-time Sandisk-related fair value gain (roughly $1.7 billion in the “interest and other” line. Revenue, non-GAAP gross margin, and non-GAAP EPS were all above its high end guidance with growth driven by public clouds and enterprises buying disks for cloud and AI workloads. Gross margins also improved on higher volumes, a mix shift toward higher-capacity nearline HDDs, and better pricing. Its revenue per exabyte shipped was $17.7 million, up 28 percent Y/Y and 8.8 percent Q/Q; price rises are working in its favor. CFO Kris Sennesael, said: “Our first quarter results demonstrate the continued momentum in our business, with robust exabyte growth and improved pricing driving another quarter of strong financial performance.” Exabytes shipped rose 21.6 percent Y/Y to 248, up from 231 EB in the previous quarter. Some 88 percent of WD’s revenues came from the cloud segment, 7 percent from client drives (up 119 percent Y/Y) and 5 percent from consumer drives. Ninety percent of its shipped drives were mass-capacity, nearline disks. CEO Irving Tan said: “We are executing well through our technology transitions to meet the growing demand for storage. As we deepen our customer relationships, broaden the customer base to new areas of the market, and extend our visibility into future demand, we are building an increasingly durable foundation for long-term value creation.” Financial summary: - Gross margin: 57.8% vs 50.2% in prior quarter - Operating cash flow: $1.6 billion vs $1.12 billion in prior quarter - Free cash flow: $1.4 billion vs last quarter’s $978 million - Cash and cash equivalents: $1.3 billion vs prior quarter’s $1.58 billion - Diluted EPS: $4.64 vs last quarter’s $8.20 WD declared a $0.175 quarterly cash dividend for shareholders, up 17 percent Q/Q. It noted that, “In connection with the company’s actions to monetize its retained interest in Sandisk and reduce its debt, it completed a number of transactions, including a debt-for-equity exchange, equity-for-equity exchanges, and the private settlement of a portion of the company’s convertible note obligations. In connection with these transactions, the company recognized costs primarily related to discounts given to the counterparties of the transaction.” We think that helps explain the $265 million drop in the cash and cash equivalents number, together with share repurchases. It has a net $0.5 billion cash position. The company said that it’s ramping production of its next generation ePMR platform, meaning another jump in capacity, to the 40 TB level. Tan said: “We expect this platform to represent close to 30 percent of our nearline shipments by the second quarter and 50 percent by the third quarter of fiscal 2027.” The next-generation HAMR (heat-assisted magnetic recording) tech is progressing; Tan said in the earnings call: “On our first-generation HAMR product, we are on track to finish qualifications with 2 hyperscale customers in the first quarter of calendar year 2027 and are on schedule to begin volume shipments in the first half of calendar year 2027. We also expect to begin qualifications with 2 additional customers during the first half of calendar year 2027.” This will be for 44 TB HAMR drives. That looks like a far shorter HAMR drive qualification period than Seagate endured. Tan noted: “Feedback from our customers have been very positive, particularly around the failure rates that we've seen in our drive performance vis-a-vis what they've seen with other players within the market.” There’s more: “Starting in the second half of calendar year '27, we will also start qualification of our second-generation HAMR drives, and this will be at 5 terabytes per platter on [an] 11-disk platform.” Expect 55 TB drives. Tan is confident higher drive IO speeds are needed: “We are expanding the role of HDDs within cloud and AI infrastructure through innovations such as our high-bandwidth drive and dual pivot technology. By combining the economics of HDDs with significantly higher levels of performance, we believe this technology can address a broader range of existing and emerging workloads.” “We are currently sampling our high-bandwidth drives with multiple customers, and the feedback has been positive with clear use cases and value creation identified.” He expanded in this nascent opportunity: “Things like high-bandwidth drives provide customers with an opportunity to use HDDs for different workloads that they may have to use alternative storage media for, which will be much more costly. For example, KV cache workloads in AI inferencing and in video streaming as well.” KV cache workloads are served totally from NVMe SSDs at present. The idea that disk drives with faster IO could cannibalize some much lower latency NVMe SSD KV cache units seems a tad far-fetched. Nevertheless Tan pointed out: ”We've been actually providing samples to many of our customers in terms of this product so that they can test out different use cases. And I highlighted that's been very positively received.” Tan said: “We are increasingly seeing storage demand grow beyond our core cloud and hyperscale customers into enterprise environments and into newer end markets such as neocloud and AI frontier labs, resulting in a larger and more diversified customer base. Our customers are making longer-term infrastructure investments and continue to extend their planning horizons into the next decade.” He added: “Our visibility is extending further and with it our conviction in the durability of demand for data storage on HDDs. … As we ramp production across our next-generation ePMR and HAMR platforms, we expect our exabyte shipments to continue to increase through fiscal 2027 and beyond.” Tan dismissed Toshiba’s plan to increase its shipped drive unit numbers and move from a 10 percent to 30 percent market share: “There may be some other players in the market who don't have that unique ability to build their own media, build out their own heads, drive that areal density improvement. And they have to compensate that by potentially maybe increasing the number of units just to maintain their share and position in the marketplace.” He reckons vertical manufacturing integration gives WD (and Seagate) the edge over Toshiba, which uses some third-party components; platters and heads for example. Tan said WD had excellent visibility into demand durability: “if you take our top 7 customers as an example, we have good visibility up to 2030, 2031 for … all of them. …we see quarter after quarter, the demand signal actually increasing over time. And as we move forward into the '28, '29, '30 time frame, we see that demand continuing to be very durable.” WD can keep raising prices, Sennesael saying: “We continue to operate in a very strong, favorable pricing environment. …The pricing environment is strong because we do execute on our technology and product road map, and we continue to deliver higher capacity drives to our customers that help our customers to reduce their total cost of ownership because you have better rack density, lower power consumption and a lot of benefits for our customers.” “As we continue to execute on that strategy and continue to deliver higher capacity drives, there is an opportunity to further enhance our price per terabyte over time.” Sennesael said: “For our fiscal second quarter of 2027, at the midpoint of the ranges, we expect revenue of $5.1 billion (+/- $100 million), non-GAAP gross margin of 60.5 percent, and non-GAAP EPS of $5.80.” That would be 70 percent revenue increase on the year-ago Q2, a heck of a jump.
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