Western Digital Corporation (WDC) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance with a 20% YoY revenue growth and improved gross margins. Product development is robust, with advancements in UltraSMR and HAMR technology, and strong customer commitments extending into 2027. The share repurchase plan and cost efficiencies are additional positives. While management was vague on some specifics, the overall sentiment from the Q&A remains positive, with analysts showing interest in the company's strategic initiatives. Given these factors, the stock is likely to experience a positive price movement in the short term.
Key Financial Performance
Revenue $3 billion, up 25% year-over-year, driven by strong demand for nearline drives.
Earnings Per Share (EPS) $2.13, an increase of 78% year-over-year, attributed to strong financial performance and disciplined execution.
Exabytes Delivered 215 exabytes, up 22% year-over-year, including 103 exabytes of latest generation ePMR drives with capacity points up to 32 terabytes.
Cloud Revenue $2.7 billion, representing 89% of total revenue, up 28% year-over-year, driven by strong demand for higher capacity nearline product portfolio.
Client Revenue $176 million, representing 6% of total revenue, up 26% year-over-year.
Consumer Revenue $168 million, representing 5% of total revenue, down 3% year-over-year.
Gross Margin 46.1%, improved 770 basis points year-over-year and 220 basis points sequentially, reflecting mix shift towards higher capacity drives and tight cost control.
Operating Expenses $372 million, declined 120 basis points sequentially due to operating leverage in the model.
Operating Income Slightly above $1 billion, translating into an operating margin of 33.8%.
Cash and Cash Equivalents $2 billion at the end of the fiscal second quarter.
Total Liquidity $3.2 billion, including undrawn revolver capacity.
Debt Outstanding $4.7 billion, resulting in a net debt position of $2.7 billion and a net leverage EBITDA ratio of well below 1 turn.
Operating Cash Flow $745 million for the fiscal second quarter.
Capital Expenditures $92 million, resulting in free cash flow generation of $653 million for the quarter, reflecting a free cash flow margin of 21.6%.
Share Repurchases $615 million, repurchasing 3.8 million shares of common stock.
Dividends Paid $48 million during the quarter.
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Operating Highlights
HAMR and ePMR drives: Western Digital is accelerating its HAMR and ePMR roadmaps, shipping over 3.5 million units of ePMR products with capacities up to 32 terabytes. They have also started qualification of next-generation HAMR and ePMR products with hyperscale customers.
UltraSMR technology: The company announced UltraSMR-enabled JBOD platforms, expanding UltraSMR adoption to a broader customer base. These platforms offer higher storage density and improved performance for mass-scale data analysis.
Cloud and AI-driven demand: Cloud represented 89% of total revenue, driven by strong demand for higher-capacity nearline products. The company has firm purchase orders with top customers through 2026 and robust agreements with key customers extending to 2027 and 2028.
Financial performance: Revenue for Q2 FY2026 was $3 billion, up 25% year-over-year. Gross margin improved to 46.1%, and operating income reached $1 billion. Free cash flow was $653 million, reflecting a margin of 21.6%.
Cost control and efficiency: Improved gross margin performance was attributed to a mix shift towards higher-capacity drives and tight cost control in manufacturing and supply chain operations.
Strategic investment in Qolab: Western Digital announced a strategic investment in Qolab to advance next-generation nanofabrication processes for quantum hardware, leveraging expertise in material science and precision manufacturing.
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Risk or Challenges
Market Conditions: The company is heavily reliant on the growth of AI and cloud markets. Any slowdown in these sectors could adversely impact demand for high-density storage solutions.
Competitive Pressures: The company faces competition in the development and adoption of advanced storage technologies like HAMR and ePMR. Failure to innovate or meet customer expectations could result in loss of market share.
Regulatory Hurdles: No explicit mention of regulatory challenges was made in the transcript.
Supply Chain Disruptions: The company’s ability to deliver high-capacity drives at scale depends on tight cost control in manufacturing and supply chain efficiency. Any disruptions could impact operations and financial performance.
Economic Uncertainties: The company’s financial performance is tied to broader economic conditions. A downturn could affect customer spending on storage solutions.
Strategic Execution Risks: The company is investing heavily in new technologies and partnerships, such as HAMR innovation and the Qolab partnership. Failure to achieve expected outcomes from these investments could impact long-term growth and profitability.
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Guidance & Outlook
Revenue Expectations: Anticipated revenue for Q3 FY2026 is $3.2 billion, plus/minus $100 million, reflecting approximately 40% year-over-year growth.
Gross Margin Projections: Expected gross margin for Q3 FY2026 is between 47% and 48%.
Operating Expenses: Projected operating expenses for Q3 FY2026 are in the range of $380 million to $390 million.
Earnings Per Share (EPS): Non-GAAP diluted EPS for Q3 FY2026 is expected to be $2.30, plus/minus $0.15.
Tax Rate: Anticipated tax rate for Q3 FY2026 is approximately 16%.
Product Roadmap and Innovation: Plans to accelerate HAMR and ePMR roadmaps, with updated details to be shared during the Innovation Day on February 3rd, 2026. This includes advancements in drive performance, energy efficiency, and throughput.
Customer Agreements: Firm purchase orders with top seven customers through calendar year 2026. Robust commercial agreements with three of the top five customers extend to 2027 and 2028.
Market Trends: Continued growth in AI and cloud driving demand for higher-density storage solutions. Positive momentum expected to continue in meeting customers' exabyte storage requirements.
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Shareholder Return Plan
Dividend Payments: During the quarter, $48 million of dividend payments were made.
Quarterly Cash Dividend: The Board approved a quarterly cash dividend of $0.125 per share, payable on March 18, 2026, to shareholders of record as of March 5, 2026.
Share Repurchases: Increased share repurchases to $615 million, repurchasing 3.8 million shares of common stock during the quarter.
Capital Return Program: Since the launch in Q4 fiscal 2025, $1.4 billion has been returned to shareholders through share repurchases and dividend payments.
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Key Q&A
Q:How does the company view the durability of the incremental gross margin and the cost curve down on a per terabyte basis over the next several quarters?
A:The company is pleased with the gross margin performance, delivering 46.1% gross margin, up 220 basis points quarter-over-quarter and 770 basis points year-over-year. They are guiding to 47%-48% gross margin, with incremental gross margin around 75%. They see a stable pricing environment with prices per terabyte flattish to slightly up, and cost per terabyte has decreased by about 10% year-over-year. They expect further gross margin expansion in the coming quarters.
Q:How is the company approaching signing purchase orders for calendar '27 and beyond, and how does it impact economics?
A:The company is sold out for calendar '26 and has LTAs with two customers for calendar '27 and one for calendar '28. These LTAs include volume and price conditions. The pricing reflects the value delivered to customers, especially in terms of total cost of ownership as the business shifts towards inference. The company sees a stable pricing environment and opportunities to extract more value.
Q:What are the company's plans for monetizing SanDisk shares and leveraging the proceeds?
A:The company intends to monetize its 7.5 million SanDisk shares before the one-year anniversary of the separation, likely through a debt-for-equity swap. The proceeds will be used to reduce debt.
Q:How are customer engagement and contracts evolving in the current tight environment?
A:The company has developed a more customer-centric approach, deepening relationships with hyperscale customers through dedicated teams. This has resulted in longer-term LTAs and better visibility of demand requirements. They aim to deliver predictable pricing and sustainable value creation for both customers and the company.
Q:What are the company's plans for share repurchase after monetizing SanDisk shares?
A:The company has already repurchased $1.3 billion worth of shares under a $2 billion share repurchase authorization announced in May 2025. They plan to continue using this program.
Q:How is the mix of UltraSMR trending, and how does it impact gross margins?
A:The UltraSMR mix in the nearline portfolio crossed 50% last quarter and is expected to increase. UltraSMR provides a 20% capacity uplift over CMR and a 10% uplift over standard SMR. It is also accretive to gross margins as it is a software-based solution.
Q:What is the status of yields and reliability for ePMR products, and how does it impact cost per bit declines?
A:Yields for ePMR products are in the low 90% range, with positive feedback on reliability and quality. Higher yields and increased UltraSMR mix contribute to cost declines.
Q:What progress has been made at the Rochester test and integration site, and how does it support customer transitions?
A:The Rochester site plays a critical role in ensuring smooth and quick qualification of new products. The company has started qualification for HAMR and next-generation ePMR drives, with updates to be shared at the upcoming Innovation Day.
Q:Are there notable investments related to HAMR, and how will they impact costs as HAMR ramps?
A:The company has been investing in HAMR for 10 years and will continue to innovate. Once HAMR ramps, it is expected to be neutral to accretive to gross margins. CapEx as a percentage of revenue will remain within the 4%-6% range.
Q:Can Agentic AI demand enable the company to exceed its long-term exabyte growth CAGR of low 20s?
A:The company sees inference driving significant data storage requirements, which is positive for HDDs. They expect exabyte growth to remain strong, supported by hyperscalers managing data across storage tiers.
Q:What is the interest in HAMR beyond the initial customer, and how is the qualification process progressing?
A:The company has started HAMR qualification with one hyperscale customer and will soon begin with another. They are accelerating the HAMR road map to meet strong demand for exabytes.
Q:What details can be shared about the recent IP acquisition on the laser side?
A:The terms of the deal are confidential, but the technology will reduce real estate in drives, improve manufacturability and reliability, and lower energy requirements for lasers. More details will be shared at the Innovation Day.
Q:How is the company engaging with hyperscalers regarding custom silicon deployment and storage solutions?
A:The company is working on innovations to improve bandwidth and throughput of drives, which will be shared at the Innovation Day. They see increased data generation and storage requirements as positive for HDDs.
Q:Is the company pulling in the HAMR road map timeline due to tight supply?
A:The company has pulled in HAMR qualification by six months and started the process with one customer, with another to follow soon. They are also ramping next-generation ePMR drives to meet demand.
Q:What is the revenue per exabyte trend, and how is it influenced by customer qualifications and efficiencies?
A:Revenue per exabyte is driven by strong demand from hyperscale customers, with stable pricing. The company delivered 215 exabytes last quarter, up 22% year-over-year, supported by scalable and reliable ePMR products.
Q:Can cost reductions per exabyte increase in coming years with UltraSMR and HAMR adoption?
A:Cost reductions are currently around 10% per year, driven by higher capacity drives and UltraSMR adoption. Accelerated road maps could potentially increase cost reductions.
Q:How far can CMR and UltraSMR go in terms of areal density before HAMR ramps?
A:Details will be shared at the Innovation Day.
Q:Why are LTAs for 2027 and 2028 volume and price-based, and what is the reasoning behind this structure?
A:The LTAs for 2027 and 2028 include both price and volume conditions, reflecting the value delivered to customers and ensuring flexibility to meet demand.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the recent IP acquisition on the laser side, citing confidentiality. They also deferred sharing information about the areal density potential of CMR and UltraSMR before HAMR ramps, indicating that more details would be shared at the Innovation Day.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI capability
AI cloud
AI enabler
AI inference
AI model
Ambrish
Digital Chief
HAMR ePMR
Interest tax
President Investor
Qolab
UltraSMR
Vice President
afternoon Western
agreement
approach
capital return
cost ownership
count share
dividend payment
ePMR product
flow capital
generation ePMR
increase
innovation
leverage
manufacturing
margin Interest
nearline
platform
property
requirement
road map
share count
share repurchase
share stock
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