Western Digital expects Q2 FY2027 revenue of $5.1B +/-$100M with 60%-61% gross margin

• "Q1 marked a strong start to fiscal 2027, reflecting solid execution across the business and results ahead of our expectations." (CEO & Director Tiang Yew Tan) "Revenue grew 55% year-over-year, while gross and operating margins expanded meaningfully to 58% and 49%, respectively." (CEO & Director Tan) "We generated $1.4 billion in free cash flow." (CEO & Director Tan)

• "Our visibility is extending further and with it our conviction in the durability of demand for data storage on HDDs." (CEO & Director Tan) "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." (CEO & Director Tan)

• "Volume production of our latest ePMR platform, delivering up to 40 terabytes of capacity is off to a strong start." (CEO & Director Tan) "We expect this platform to represent close to 30% of our nearline shipments by the second quarter and 50% by the third quarter of fiscal 2027." (CEO & Director Tan)

• "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." (CEO & Director Tan) "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." (CEO & Director Tan)

• "During the first quarter of fiscal year 2027, revenue was $4.4 billion, up 55% year-over-year." (Executive VP & CFO Kris Sennesael) "We delivered 248 exabytes in the quarter, up 22% year-over-year and up 8% sequentially." (Executive VP & CFO Sennesael) "Gross margin expanded to 58.1%." (Executive VP & CFO Sennesael)

• "The Board has approved a 17% increase in the quarterly cash dividend from $0.15 per share to $0.175 per share." (Executive VP & CFO Sennesael) "During the quarter, we took additional steps to simplify our capital structure by substantially reducing our remaining 2028 convertible notes." (Executive VP & CFO Sennesael)

Outlook

• "For the second quarter of fiscal 2027, we expect revenue to be $5.1 billion, plus/minus $100 million." (Executive VP & CFO Kris Sennesael) "Gross margin is expected to be in the range of 60% to 61%." (Executive VP & CFO Sennesael) "As a result, we expect diluted earnings per share to be $5.80 plus/minus $0.20." (Executive VP & CFO Sennesael)

• "We anticipate operating expenses of $400 million to $410 million, a sequential increase driven by the project expenses related to increased product qualification activities." (Executive VP & CFO Sennesael) "While we expect capital expenditures to average 4% to 6% of revenue over a 5-year period, we anticipate that CapEx as a percentage of revenue will be modestly above that range over the next 2 years." (Executive VP & CFO Sennesael)

• Compared with the prior quarter’s guidance for Q1 FY2027, management’s guided ranges moved higher across revenue, gross margin, and EPS: "We expect revenue to be $4.1 billion, plus/minus $100 million." (Executive VP & CFO Kris Sennesael, prior quarter) "Gross margin is expected to be in the range of 55% to 56%." (Executive VP & CFO Sennesael, prior quarter) "We expect diluted earnings per share to be $4, plus/minus $0.15." (Executive VP & CFO Sennesael, prior quarter)

Financial Results

• "Revenue was $4.4 billion." (Executive VP & CFO Kris Sennesael) "Cloud revenue was $3.9 billion, representing 88% of total revenue." (Executive VP & CFO Sennesael) "Client represented 7% of total revenue at $320 million." (Executive VP & CFO Sennesael) "Consumer represented 5% of revenue at $193 million." (Executive VP & CFO Sennesael)

• "Operating income of $2.2 billion increased 152% year-over-year." (Executive VP & CFO Sennesael) "Taking into account a diluted share count of 383 million shares, EPS was $4.64." (Executive VP & CFO Sennesael) "We generated $1.4 billion in free cash flow during the quarter and returned $1.1 billion to shareholders through share repurchases and dividends." (Executive VP & CFO Sennesael)

• "Year-over-year growth in average price per terabyte further increased to 28% versus the high teens we reported in the prior quarter." (Executive VP & CFO Sennesael) "Operating expenses were $391 million or approximately 9% of revenue." (Executive VP & CFO Sennesael)

• "We ended the quarter with a net cash position of $0.5 billion." (Executive VP & CFO Sennesael)

Q&A

• Amit Daryanani, Evercore: asked about HAMR milestones from qualification to volume ramp; CEO & Director Tan: "we are very confident in terms of finishing qualifications with the 2 customers that we have for our first-generation HAMR products in Q1" and "focused very much on scaling it up and getting it into customers' hands."

• Amit Daryanani, Evercore: asked about cost per terabyte trends and sustainability; Executive VP & CFO Sennesael: "we are well on track in the long run to reduce our cost per terabyte approximately 10% year-over-year" but "in the near term... we are facing some input cost increases" including "some DRAM and some NAND inside our hard disk drives."

• Wamsi Mohan, BofA: raised concerns about competitor capacity adds and potential consolidation; CEO & Director Tan: "we don't see any change in terms of the long-term fundamentals" and reiterated "remain committed to not investing in any incremental unit capacity."

• Wamsi Mohan, BofA: pressed on exabyte acceleration and supply-demand gap; CEO & Director Tan: "we sort of see the current quarter as being sort of the floor in terms of exabyte growth" and "we don't see the gap in supply or demand that exists today perishable in the near term."

• Erik Woodring, Morgan Stanley: asked how far visibility extends and whether demand signals are expanding; CEO & Director Tan: "we have good visibility up to 2030, 2031" for "our top 7 customers" and "we see quarter after quarter, the demand signal actually increasing over time."

• Erik Woodring, Morgan Stanley: asked about the source of implied pricing strength; Executive VP & CFO Sennesael: "we continue to operate in a very strong, favorable pricing environment" with strength "across the board" and noted "some of the LTAs are expiring and new agreements are being put in place."

• Christopher Muse, Cantor Fitzgerald: questioned sustainability of incremental margins; CEO & Director Tan: cited pricing, upmix to higher capacity drives, and more exabytes via areal density, concluding "we feel very optimistic about ongoing gross margin expansion."

• Asiya Merchant, Citi: asked how big high-bandwidth drives and physical AI opportunities are; CEO & Director Tan: "the opportunity is still somewhat nascent" for high-bandwidth drives and said physical AI is showing "very promising signs" with demand signals including autonomous vehicles.

• Thomas O'Malley, Barclays: asked about sustainability of ASP per terabyte increases; Executive VP & CFO Sennesael: "there is definitely further room for ASP per terabyte increases going forward over the next, call it, 3, 4 quarters" while also saying "eventually that is going to slow down a little bit."

• Thomas O'Malley, Barclays: probed CapEx stepping above the long-term range and whether it signals capacity expansion; Executive VP & CFO Sennesael: "to be clear... the CapEx is going to head and media and factory automation and not to expanding our unit capacity" and CEO & Director Tan linked spend to HAMR cycle-time and component steps.

• Timothy Arcuri, UBS: asked if WDC can close exabyte growth gap vs a peer; Executive VP & CFO Sennesael: the HAMR transitions "will definitely accelerate our exabyte year-over-year supply growth" and when pressed on a specific target timeframe responded, "we're only guiding one quarter at a time, but you're thinking about it in the right direction."

• Sreekrishnan Sankarnarayanan, TD Cowen: asked if HAMR ramps require discounting and whether head CapEx is effectively capacity adds; CEO & Director Tan: "we're not discounting our HAMR products" and explained head investments offset "throughput loss" and support a roadmap including "drives with up to 14 platters."

• James Schneider, Goldman Sachs: asked about use of external head vendors and response to hypothetical competitor unit expansion; CEO & Director Tan: "We do use some external head capacity" mainly for "lower capacity drives" while "all the high-cap leading-edge platforms... are all on our own internal heads," and said the response remains "to continue to focus on the areal density."

• Mark Newman, Bernstein: asked about price visibility in LTAs and long-term exabyte growth guide; Executive VP & CFO Sennesael: farther out there is "less of it... covered under LTAs" for pricing, and reaffirmed "greater than 25%" nearline exabyte growth, adding "we will exceed that 25%."

Sentiment Analysis

• Analysts’ tone was slightly negative to skeptical on competitive capacity adds and sustainability of pricing/margins, including references to "angst" (Wamsi Mohan, BofA) and "a lot of fear out there" (Benjamin Reitzes, Melius Research).

• Management’s tone was positive and assertive in both prepared remarks and Q&A, emphasizing durability and execution, including "we have high confidence in the durability of long-term storage demand" (CEO & Director Tiang Yew Tan) and "we continue to operate in a very strong, favorable pricing environment" (Executive VP & CFO Kris Sennesael).

• Versus the prior quarter, management continued using long-horizon visibility language but added more concrete specificity in the current quarter, including "good visibility up to 2030, 2031" (CEO & Director Tan, current quarter) compared with prior-quarter visibility framing centered on LTAs extending to "'29, '30 and '31" (CEO & Director Tan, prior quarter).

Quarter-over-Quarter Comparison

• The current quarter added more specific milestones and mix targets for product transitions: "close to 30% of our nearline shipments by the second quarter and 50% by the third quarter" for the 40-terabyte ePMR platform (CEO & Director Tiang Yew Tan, current quarter), while the prior quarter emphasized that shipments had commenced and referenced UltraSMR mix targets for exiting fiscal 2027.

• Current-quarter Q&A was more concentrated on competitive capacity additions, sustainability of pricing power, and the mechanics of head/media CapEx; prior-quarter Q&A leaned more heavily into explaining quarterly exabyte variability (CMR vs UltraSMR mix), LTA pricing constructs, and the breadth of AI workload drivers.

• Management’s guidance language strengthened sequentially, with the current call projecting "revenue... $5.1 billion, plus/minus $100 million" and "diluted earnings per share... $5.80 plus/minus $0.20" for Q2 FY2027 (Executive VP & CFO Kris Sennesael), compared with the prior call’s Q1 FY2027 outlook of "revenue... $4.1 billion, plus/minus $100 million" and EPS of "$4, plus/minus $0.15" (Executive VP & CFO Sennesael, prior quarter).

Risks and Concerns

• "We are facing some input cost increases" tied to components including "some DRAM and some NAND" used in HDDs, with mitigation through "value engineering initiatives" that "takes a little bit of time to implement and qualify." (Executive VP & CFO Kris Sennesael)

• Management acknowledged that LTA pricing coverage diminishes over time: "The further you go out, the less of it is covered under LTAs and for sure, under pricing component of the LTAs." (Executive VP & CFO Sennesael)

• On competitive capacity fears, management maintained its stance that the response is execution-focused: "Our response is going to be the same... to continue to focus on the areal density." (CEO & Director Tiang Yew Tan)

Final Takeaway

Management framed Q1 FY2027 as a stronger-than-expected start with $4.4B in revenue, 58.1% gross margin, $4.64 in EPS, and $1.4B of free cash flow, while emphasizing extending multi-year customer visibility and a technology-led supply strategy centered on areal density rather than unit capacity expansion. For Q2 FY2027, management guided to $5.1B +/-$100M of revenue, 60%-61% gross margin, and EPS of $5.80 +/-$0.20, alongside stepped-up qualification-related opex and a CapEx posture aimed at heads, media, and automation to support ePMR and the planned HAMR ramp and qualifications in calendar 2027.

Read the full Earnings Call Transcript

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