Source: Seeking Alpha / Motley Fool transcript
Operator: Good afternoon, and welcome to the Western Digital's Fourth Quarter Fiscal 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Ambrish Srivastava, Vice President of Investor Relations. Please go ahead.
Ambrish Srivastava, VP IR: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer; and Kris Sennesael, WD's Chief Financial Officer. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligation to update these statements. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials posted in the investor relations section of our website.
In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis unless stated otherwise. When we refer to "we," "us," or "are," we are referring only to Western Digital Corporation as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks.
Irving Tan, CEO: Thanks, Ambrish, and good afternoon, everyone. Western Digital Corporation delivered a strong Q4 and fiscal year, with revenue up 44% year-over-year to $3.75 billion, gross margin expanding to 54.4%, and EPS doubling to $3.56. We are focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy. We are well positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand.
It is clear that data and data storage are becoming more critical and valuable. As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly two thirds of all AI compute. This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage.
One leading hyperscaler's LLM processes over 16 billion tokens per minute via direct API used by their customers, while another AI company processes over 2.5 billion prompts every single day from 900 million active users. Every token, every prompt, and every query answered and checkpoints saved create data that require persistent, scalable, and cost-efficient storage, and the majority of this data is stored on hard disk drives.
As we look ahead, we see the rise of agentic AI, the next wave and arguably the biggest yet. Agentic AI frameworks represent a structural shift from AI that answers questions to AI that continuously executes workflows. That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored. As a result, we expect agentic AI to drive a step-function increase in capacity-oriented storage demand.
Beyond agentic AI, two more waves are building simultaneously: synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world inputs that seed it. At scale, robotics, autonomous vehicles, and vision AI generate continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops. These forces are not additive; they are a compounding loop. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high-capacity, reliable, high-performance storage on HDDs.
This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. Our high-capacity drive roadmap now extends from our 44-terabyte HAMR and 40-terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes. On HAMR, we are accelerating our development, and we are now in qualification with four customers. We are qualifying our 40-terabyte EPMR drives with three customers and are on track to start volume production in the second half of calendar year 2026.
Our UltraSMR technology is expanding our customer base significantly. Three of our largest customers have now adopted the technology; two are already meeting nearly all of their exabyte demand with UltraSMR, while the third is rapidly ramping in that direction. We plan to have all of our major customers qualified on UltraSMR by the end of calendar year 2027. Our high-bandwidth drives are currently sampling with two hyperscale customers, with an additional customer scheduled to start this quarter.
Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029.
Kris Sennesael, CFO: Thank you, Irving. Good afternoon, everyone. The Western Digital Corporation team delivered strong results. During fiscal Q4 2026, revenue was $3.75 billion, up 44% year over year, driven by strong demand across all our end markets and an improved pricing environment. Earnings per share was $3.56, beating by $0.26, almost double compared to a year ago. Revenue, gross margin, and earnings per share were all above the high end of the guidance range.
Gross margin expanded to 54.4%, up significantly year over year. Cloud represented the vast majority of revenue, driven by strong demand for our higher-capacity nearline product portfolio and a stronger pricing environment. We delivered strong exabyte growth — exabyte shipments were up 22% year-over-year. In fiscal 2026, incremental gross margins were 75% year-over-year.
We significantly strengthened our balance sheet by monetizing SanDisk shares, which led to a large reduction in our debt. We received an upgrade from S&P and Fitch to investment-grade level. Operating cash flow was strong and, in combination with a disciplined approach to capital expenditures, this resulted in strong free cash flow generation.
The board approved a 20% increase of the cash dividend. We continue to execute on our share buyback program.
Looking at the outlook for fiscal Q1 2027, we anticipate revenue of $4.1 billion, plus or minus $100 million, reflecting strong year-over-year growth. Gross margin is expected to be in the range of 55% to 56%. We expect continued confidence in secular storage demand driven by AI and cloud workloads. We expect UltraSMR will make up around 60% of our nearline exabyte shipments as we exit fiscal 2027.