Western Digital Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations
• David Goeckeler, Chief Executive Officer
• Wissam Jabre, Chief Financial Officer

Analysts

• Joseph Moore, Morgan Stanley
• C.J. Muse, Evercore ISI
• Unidentified Participant
• Tom O'Malley, Barclays PLC
• Krish Sankar, Cowen Inc
• Wamsi Mohan, Bank of America Co.
• Sidney Ho, Deutsche Bank Aktiengesellschaft
• Toshiya Hari, The Goldman Sachs Group, Inc.
• Shannon Cross, Credit Suisse Group AG
• Timothy Arcuri, UBS Group AG
• Ananda Baruah, Loop Capital
• Karl Ackerman, BNP Paribas Exane

Presentation

[Operator]

Good afternoon, and thank you for standing-by. Welcome to the Western Digital Fiscal fourth-Quarter and Fiscal 2023 Conference Call. [Operator Instructions] Now, I would like to turn the call over to Mr. Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations. You may begin.

[Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations at Western Digital]

Thank you and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including expectations for our product portfolio, spending and cost reductions, business plans and performance, market trends and financial results based on management's current assumptions and expectations and as such does include risks and uncertainties.

We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I'll now turn the call over to David for introductory remarks.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our fourth-quarter and fiscal year 2023 Results. Western Digital's Fiscal fourth-quarter revenue exceeded expectations as our access to broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end-markets reaffirming our strength in a challenging market environment.

We reported fourth-quarter revenue of $2.7 billion and non-GAAP gross margin of 3.9%. Non-GAAP loss per share was $1.98. Before diving into the specifics of the quarter and the full-fiscal year I would like to take a moment to reflect on our accomplishments in fiscal year 2023. Importantly, we continued to optimize our operations and successfully executed our innovative product roadmap priming ourselves for greater profitability when demand rebounds across hard drives and flash. Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility.

In HDD, we have successfully qualified our latest family of capacity enterprise hard drives that all major customers and are shipping our 26 terabyte ultra SMR drive in high-volume. In Flash, we pioneered the use of Wafer Bonding and advanced 3D NAND manufacturing and introduced the groundbreaking technology and BiCS eight which sets the foundation for future of 3D NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce quarterly operating expense while continuing to deliver innovative products and technologies to address customers' growing storage needs.

Further, we reduced our cash capital expenditure run-rate by over 50% in the fiscal second half and consolidated our hard drive manufacturing footprint. These efforts enabled the Western Digital to preserve capital, while effectively executing on product strategies and aligning our supply with post pandemic demand environment. Notably, we reduced our inventory by nearly $300 million, sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro-dynamics.

In summary, we continue to proactively take action to bolster our agility, enhance our liquidity position, optimize our inventory levels across HDD and Flash, and strengthened our position as an industry and market leader. We exited fiscal year 2023 well-positioned to capitalize on improving market conditions and capture long-term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing. We continue to make progress on this process and we'll provide updates as appropriate.

Turning to the fiscal fourth-quarter revenue in both client and consumer end-markets returned to sequential growth led by normalized end-market demand and higher average capacity per unit in Flash. In consumer retail Flash exceeded our expectations across all major product categories. We saw similar results in client, was upside in both HDD and Flash and across almost all major product categories, including client SSD, gaming console, embedded flash, and client hard drives. In cloud, demand for both hard drive and flash products remained subdued.

I'll now turn to business updates starting with HDD. In the fiscal fourth-quarter ongoing cloud weakness drove the overall decline in HDD revenue, however, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end-of-the fiscal fourth quarter, we have successfully qualified all variants of our 22 terabyte CMR and 26 terabyte ultra SMR hard drive platforms at all major cloud customers, setting the stage to improve shipments and profitability. In addition, we are about to begin product sampling of our 28 terabyte ultra SMR drive. This cutting-edge product is built upon the success of our ePMR and ultra SMR technologies with features and reliability trusted by our customers worldwide.

We are staging this product for quick qualification in ramp as demand improves. Turning to Flash, revenue increased sequentially led by growth in both client and consumer flash bit[phonetic] shipments, which exceeded our expectations with total bit shipments returning to Year-over-Year growth. The stronger-than-expected bit growth is attributable to -- attributable to normalizing PC and consumer demand, as well as content growth. Average capacity per consumer and client SSD increased over 40% and 20% Year-over-Year, respectively. Moving to technology developments, we continued to aggressively productize BiCS8 based on a chip, bonded to array architecture. BiCS8 solidifies Western Digital and Kioxia's leadership and cost -- capital efficiency, an IO performance into the future.

Before I turn it over to Wissam, I wanted to share some perspective on our outlook. In HDD, as we look to the fiscal first-quarter, we expect overall demand to remain stable. Beyond the fiscal first-quarter, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability. In Flash, we are encouraged by several indicators signaling improving market dynamics. Notably, our two largest end markets, client and consumer are returning to growth. Inventories are normalizing, content per unit is increasing, and price declines have been moderating. With that, I'll turn it over to Wissam.

[Wissam Jabre, Chief Financial Officer at Western Digital]

Thanks, David and good afternoon, everyone. As David mentioned, fiscal fourth-quarter revenue exceeded our expectations. Total revenue for the quarter was $2.7 billion, down 5% sequentially and 41% Year-over-Year. Non-GAAP loss per share was $1.98. Looking at end-markets for the fiscal fourth-quarter cloud represented 37% of total revenue at $1 billion, down 18% sequentially and 53% Year-over-Year. Sequentially, the decline was primarily due to a decrease in capacity enterprise drive shipments.

Nearline bit shipments were 59 exabytes, down 26% sequentially, driven by ongoing weakness at cloud customers. The year-over-year decrease was primarily due to declines in both hard drive and flash product shipments. Client represented 39% of total revenue at $1 billion, up 6% sequentially and down 37% year-over-year. Sequentially, the increase was driven by growth in bit shipments for gaming consoles. The year-over-year decrease was due to declines in flash pricing and lower client SSD and hard drive unit shipments for PC applications. Consumer represented 24% of total revenue at $0.6 billion, up 3% sequentially and down 19% year-over-year.

Sequentially, the increase was primarily due to higher retail SSD shipments. The year-over-year decrease was driven by price declines in flash and lower retail hard drive shipments. For the fiscal year, revenue was $12.3 billion, down 34% from fiscal 2022. Non-GAAP gross margin declined 17.2 percentage points to 15.7%, and non-GAAP operating margin decreased 21.8 percentage points to negative 4.8%. Non-GAAP loss per share was $3.59. Looking at end markets for fiscal year 2023, cloud revenue decreased 34% year-over-year, primarily due to reduced shipments of capacity enterprise hard drives and enterprise SSDs.

Client revenue decreased 39% year-over-year, primarily due to declines in flash pricing as well as lower client SSD and hard drive unit shipments for PC applications. Lastly, consumer revenue decreased 26% for the year as growth in retail SSD bit shipments was more than offset by broad-based flash price decline and lower consumer hard drive shipments. Turning now to revenue by segment. In the fiscal fourth quarter, HDD revenue was $1.3 billion, down 13% sequentially and 39% year-over-year. Sequentially, total HDD exabyte shipments decreased 18% and average price per unit decreased 9% to $99.

On a year-over-year basis, HDD exabyte shipments decreased 38% and average price per unit decreased 17%. Flash revenue was $1.4 billion, up 5% sequentially and down 43% year-over-year. Sequentially, Flash ASPs decreased 6% on a blended basis and 9% on a like-for-like basis. Flash bit shipments increased 15% sequentially and 7% year-over-year. Moving to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal fourth quarter was 3.9%, down 6.7 percentage points sequentially and 28.4 percentage points year-over-year.

This includes $272 million in costs or 10.2 percentage points for manufacturing underutilization, flash inventory write-downs and other items. HDD gross margin was 20.7%, down 3.6 percentage points sequentially and 7.5 percentage points year-over-year. Sequentially, the decrease was primarily due to lower capacity enterprise volume as well as higher underutilization-related charges. Underutilization charges were $76 million or 5.9 percentage points. Flash gross margin was negative 11.9%, down 6.9 percentage points sequentially and 47.8 percentage points year-over-year.

Underutilization charges due to the reduced manufacturing volumes were $135 million, and inventory write-downs were $27 million, resulting in an 11.8 percentage point reduction. We continue to tightly manage our operating expenses of $582 million for the quarter, down $20 million sequentially and $178 million year-over-year. Operating loss in the quarter was $478 million, driven mainly by underutilization charges, inventory write-downs, and other items totaling $272 million. Income tax expense was $57 million for fiscal fourth quarter and $237 million for fiscal year 2023.

Despite a consolidated loss, we continue to have taxable income in certain geographies resulting in taxes payable in those areas. Fiscal fourth quarter loss per share was $1.98, inclusive of $15 million dividend associated with the convertible preferred equity. Operating cash flow for the fourth quarter was an outflow of $68 million and free cash flow was an outflow of $219 million. Cash capital expenditures, which include the purchase of property planning and equipment and activity related to our flash joint ventures on the cash flow statement were $151 million.

Gross debt outstanding was $7.1 billion at the end of fiscal fourth quarter. Trailing 12-month adjusted EBITDA at the end-of-the fourth-quarter, as defined in our credit agreement, was $1.6 billion, resulting in a gross leverage ratio of 4.5 times compared to 2.8 times in the fiscal third quarter. As a reminder, the credit agreement includes $0.7 billion in depreciation add back associated with the flash joint ventures. This is not reflected in the cash-flow statement. Please refer to the earnings presentation on the Investor Relations website for further details.

During the fiscal fourth quarter, we executed an amendment to our credit agreements. These amendments include modifications to the leverage ratio requirements applicable through the fourth quarter of fiscal year 2025, which provide additional financial flexibility in the near term. We also extended the commitment under the delayed-draw term-loan agreement to August 14, 2023. Please refer to our earnings presentation for details. At the end-of-the quarter, total liquidity was $4.9 billion, including cash and cash equivalents of $2 billion, undrawn revolver capacity of $2.25 billion, and unused delayed-draw term-loan facility of $600 million.

Before I cover guidance for the fiscal first quarter, I'll discuss our business outlook. For fiscal first quarter, sequentially, we expect both HDD and Flash revenue to be relatively stable. In fiscal first quarter, we are continuing to adjust production to better match demand and anticipate underutilization charges to impact both HDD and Flash gross margins along with product mix pressures on Flash ASP. Beyond the fiscal first quarter, we anticipate both HDD and Flash revenue to improve through the remainder of fiscal year 2024, driven by normalizing demand in storage, as well as higher average content per unit in Flash.

Gross margin is expected to gradually improve driven by higher HDD volume and lower underutilization charges in both Flash and HDD. We will continue to tightly manage our cost structure and expenses as we navigate the challenging environment. For fiscal year 2024, we expect capital expenditures to decline significantly. I'll now turn to guidance. For the fiscal first quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $2.55 billion to $2.75 billion. We expect gross margin to be between 2.5% and 4.5%, which includes underutilization charges across Flash and HDD totaling $200 million to $220 million.

We expect operating expenses to be between $570 million to $590 million. Interest and other expenses are expected to be approximately $90 million. We expect income tax expense to be between $30 million and $40 million for the fiscal first quarter and $130 million to $170 million for fiscal year 2024. We expect the loss per share of $1.80 to $2.10, assuming approximately 323 million shares outstanding. I'll now turn the call back over to David.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thanks, Wissam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress and strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater profitability as demand inevitably rebounds across hard drives and flash. As we move forward, we remain confident in our ability to capitalize on emerging opportunities and deliver continued success. Before opening up for Q&A, I would like to take a moment to recognize Siva Sivaram, our team's President of Technology and Strategy. Siva will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain. Siva has made significant contributions to Western Digital and SanDisk over the past 10 years and he is a wonderful friend. We wish him all the best going forward. Peter, let's start the Q&A.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] First question is going to come from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead.

[Joseph Moore, Analyst at Morgan Stanley]

Great, thank you. I wonder if you could talk to NAND in the current quarter, it looks like the underutilization charges are similar. Does that mean your utilization is unchanged and I guess it seems like you're able to make some inventory progress? Does that mean that you can, at some point have line-of-sight to bring that back up?

[David Goeckeler, Chief Executive Officer at Western Digital]

Hey, Joe, thanks for the question, NAND in the current quarter, as we said, we saw a good I guess, good market reaction in consumer and in the client business. Both returned growth on an exabyte basis they both were sequential grower. So we saw incremental upside there so we were happy about that. We are still underutilizing the fab. I'll let Wissam talk about that a little bit more detail. We do plan to underutilize for another couple of quarters, but we feel good about the overall -- the signs in the overall market, price declines are moderating. Our inventory is down, bit shipments are up, we expect bit shipments to be up again, double-digits next quarter. So not quite where we want to be yet but the market is stabilizing and we see a lot of good things, but a lot of metrics going in the right direction.

[Wissam Jabre, Chief Financial Officer at Western Digital]

Yeah, Joe. And with respect to underutilization, we saw similar type of underutilization charges in fiscal Q4 versus Q3. For the Flash side, and when you look at HDD, we had a bit of more underutilization but sticking with the Flash, also in our guidance, we've noted similar levels into fiscal Q1. Albeit, if you look at sort of the range of $200 million to $220 million, I would say it is split 70% Flash, 30% HDD. And also we're -- if I think of, let's say, the fiscal Q2, I anticipate more or less similar levels of underutilization from where we stand today.

[Joseph Moore, Analyst at Morgan Stanley]

Great. Thank you. And if I could just follow up. In terms of the uses of cash in the next few quarters, I know you've got the convert that comes due early next year. I think there's still some issues about a potential tax payment. Can you just update us there and sort of do you need to raise money to pay those.

[Wissam Jabre, Chief Financial Officer at Western Digital]

So with respect to uses of cash, as you noted, we do have the convert that matures in February '24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up and we expect also this payment to be very likely this quarter. But with respect to liquidity, exiting fiscal Q4, we had approximately $4.9 billion of liquidity. And so if you recall the delayed-draw term loan was put in place in the event we need to address the IRS settlement. So that will be drawn down to take care of the IRS settlement when it happens and with respect to the convert, I mentioned we'd address it in the coming two quarters.

[Joseph Moore, Analyst at Morgan Stanley]

Great. Thank you very much.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thanks, Joe.

[Wissam Jabre, Chief Financial Officer at Western Digital]

You're welcome.

[Operator]

Thank you. And one moment please for our next question. Our next question is going to come from the line of C.J. Muse with Evercore ISI. Your line is open. Please go ahead.

[C.J. Muse, Analyst at Evercore ISI]

Yeah. Good afternoon. [Technical issue) question [Technical issue] from a supply perspective, we haven't seen any [Technical issue] aggressively as we've seen. So how would you think about the current impact of supply-demand normalization in the next six, nine, 12 months?

[David Goeckeler, Chief Executive Officer at Western Digital]

Okay. Hey, C.J., right? C.J., that was very -- it was a little tough to hear you there, but I think we got the gist of the question, which was supply-demand normalization. Is that right in Flash?

[C.J. Muse, Analyst at Evercore ISI]

Yes. Sorry about that. Yes.

[David Goeckeler, Chief Executive Officer at Western Digital]

No, that's right. Okay. So look, I think as I said, there are a number of things we saw in the market. This quarter we saw sequential bit growth overall, we saw clients and consumer returning to exabyte growth on a year-over-year basis, with consumer SSD content up 40%, client SSD up 20%. We saw our inventory down. We think in the client -- in the consumer and client markets, PC markets basically shipping to demand at this point. We expect our -- for the fiscal year, we saw our bits about flat year-over-year. For the calendar year, we see them down low-single digits. We probably see the industry down a little lower than that. So we're taking the actions to bring supply-and-demand better into balance, and I think we're seeing that across our markets. Cloud is still -- there's still a couple of quarters ago, there and that's a larger story, but in our two biggest markets for flash, we're seeing that supply-demand balance start to move closer together, put it that way.

[C.J. Muse, Analyst at Evercore ISI]

Thank you. And my second question is strategic review you announced [Technical issue] I think there was a hope that maybe there might be some underlying deposits underneath that [Technical issue] How should we be thinking about training and hearing about [Technical issue]

[David Goeckeler, Chief Executive Officer at Western Digital]

Okay. I think that was the strategic review and timing, C.J. So as the process is active, we look forward to talking more about it when we reach a conclusion.

[C.J. Muse, Analyst at Evercore ISI]

Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you.

[Operator]

Thank you. And one moment for our next question, please. Our next question is going to come from the line of Aaron Rakers with Wells Fargo. Your line is open. Please go ahead.

[Unidentified Participant, at Western Digital]

Thank you, guys. This is Michael on behalf of Aaron. I wanted to ask, how are you guys thinking with the recent uptick in AI investment in the data center? How do you think that impacts the mix of flash relative to HDD capacity being deployed, or maybe how that would impact you going forward? And then kind of related to that, how -- are you guys -- can you guys just give us an update on where you stand with your enterprise SSD qualifications? Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. I've been thinking a lot about generative AI. It's clearly a big topic these days and obviously, a lot of spend going on to build out the infrastructure in the cloud, which I think, quite frankly, is a great thing. The cloud distribution model of new technology is something that is pretty amazing. That's been built out over the last decade so we all get access to this technology very rapidly and when I think about this in the storage domain, clearly, the compute infrastructure is being built-out now, but what we're all going to be enabled with there are like incredible tools to automate data creation at many different levels, whether it's text data, video data. Whatever it happens to be, I think that we're essentially going to really accelerate our ability all of us to create information that needs to be stored. So I see this as kind of a catalyst for just a profound increase in the amount of data creation.

I think that once those tools get distributed and we all start using them, I think that drives incremental growth across SSDs and hard drives. I mean hard drives are the foundational storage in the cloud. It's going to be that way for a very long-time. So while gen AI may have some disruptions on the business in the near term, as the compute infrastructure gets built out, very optimistic that this is a -- as I said, I think it's a profound -- it's a catalyst for a profound increase in the rate of data creation.

So quite excited about that. We don't know exactly what -- how you model that just yet, except that there is new innovation, drives new data creation, which drives the need for storage. So we look forward as these -- as this infrastructure gets built out and rapidly adopted, the impact it's going to have on our business. Now on enterprise SSD, we still have the qualifications. We've recently qualified BiCS5 in some of these places. That market along with nearline HDD or capacity enterprise HDD is depressed right now or subdued. So we're not seeing a lot of growth in that, but we fully expect that when that market comes back-in that part of cloud infrastructure spending comes back, that will be in a good position. We're still investing in the products and feel-good about the position we have with the major cloud vendors.

[Unidentified Participant, at Western Digital]

I appreciate that. Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you.

[Operator]

Thank you. And one moment for our next question. Our next question is going to come from the line of Tom O'Malley with Barclays. Your line is open. Please go ahead.

[Tom O'Malley, Analyst at Barclays]

Hey, good afternoon, guys, and thanks for taking my question. I just -- I wanted to narrow in on the HDD side. There's been a variance of timing of recovery across the industry. Could you just give us your latest on when you think the cloud portion of your HDD business is going to recover? I know you previously have said the fourth quarter. Has there been any push out in that expectation? And could you also just comment on the health? I know it's down this quarter, but just the health of that HDD business as you're seeing it today. So just the timing of the recovery and how it's spinning today.

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. I think as we move to -- so first of all, we think we're going to see sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but it's going to be towards the end of the year into the first quarter where we start -- yeah, we start to get line-of-sight to all of the customers coming back. I think we're having discussions across all of our customers about what they are -- we always have conversations, but some of the big ones have been in inventory digestion for quite a while. So we're getting better line-of-sight to the end of that, but I think we still have a couple of quarters to go but improving I think next quarter, things will be stable. Will be a bit of mixed impact there. We expect clients to be a little bit more challenged than this quarter. But I think as we move throughout the year, things will get, and I think your timing of a couple of more quarters of getting through this phase and as we get into early next year, we expect things to look better.

[Tom O'Malley, Analyst at Barclays]

Helpful. And then also on the HDD business, your competitor kind of talked about being more aggressive in certain areas on pricing. Have you guys also looked to be more aggressive on pricing? And any comments that you have on just your strategy with clients on the pricing side? Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. Pricing really starts with innovation. I mean, I think that's where we're staging our 28T[phonetic] Ultra SMR product. We're really happy with where Ultra SMR is at. ePMR or OptiNAND we're already staging our next product for growth there. That's the underpinnings of where we're able to bring a better TCO proposition to our customers. And as we do that, we're able to share in the benefits of that as those drives get deployed. The rest of the market is more market-driven pricing. We have a lot of different channels, a lot different markets we sell into and that type of pricing is just -- is more than what you would typically think in any big market around supply and demand.

[Tom O'Malley, Analyst at Barclays]

Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thanks, Tom.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Krish Sankar with Cowen. Your line is open. Please go ahead.

[Krish Sankar, Analyst at Cowen]

Yeah. Hi. Thanks for taking my question. I told them first [Technical issue] that pricing should improve after -- or revenue should improve after December. Is that a function of overall NAND pricing getting better, or your specific exposure to retail and PCs about BU? And then I have a followup.

[David Goeckeler, Chief Executive Officer at Western Digital]

I missed the first part of the question.

[Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations at Western Digital]

Yeah. Sorry. Sorry, Krish. Could you please repeat?

[David Goeckeler, Chief Executive Officer at Western Digital]

Sorry, Krish. You were never great. There was a little bit of static on the line.

[Krish Sankar, Analyst at Cowen]

I apologize. I was just trying to figure out the pricing [Technical issue] spoken about revenues improving up. Is it a function of NAND pricing improving, or just your specific [Technical issue] is going to get better?

[David Goeckeler, Chief Executive Officer at Western Digital]

Okay. I think I got it at that time. So NAND pricing, so first of all, in the last quarter, NAND price -- you saw like-for-like pricing down 9%, blended down 6%, so moderating from the quarter before. Next quarter, we expect volume to pick up, which will drive -- volume pick-up margin to be impacted a little bit more from where it is today. So continue to moderate, but volume picking up. Does that help answer your question? I don't know. I didn't get all of your questions, Krish. so I'm sorry if I'm not answering it.

[Krish Sankar, Analyst at Cowen]

No, no. I think it does. It does. I was just trying to figure out the specific end verticals, which is PCs and retail.

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. I got you. So as we said, we saw the client and consumer markets return to growth -- exabyte growth and sequential revenue growth. So we see those markets have kind of through their inventory digestion and more shipping to end demand so that -- we expect that to continue as we go forward.

[Krish Sankar, Analyst at Cowen]

Got it. Thanks, David. And then a quick follow-up on hard drives. You said that you're sampling the 28 terabyte ePMR. Is the 32 terabyte ePMR still early in your roadmap? And are you doing that by increasing the number of disks per drive? And how to think about the gross margin [Technical issue] 32 terabyte?

[David Goeckeler, Chief Executive Officer at Western Digital]

Okay. So let me -- again. I think I got most of the questions. So we're not adding more disks I mean, Ultra SMR is -- it's a combination of our ePMR OptiNAND and Ultra SMR technology. So the next step on the roadmap, I think we've talked a lot over the last year, plus about this driving from 20 to 30 plus with a set of technologies around ePMR, OptiNAND, Ultra SMR. And this is the next step in that roadmap. We still have a couple of more steps to go. So we'll announce the products one at a time, but we're happy with where we are and continue to drive innovation and as demand comes back, we'll be ramping into a great set of products. And these are products that can be staged quickly and ramp in volumes very quickly, very established technology. And the 26-T drive, Ultra SMR drive, we really -- that sold at scale this quarter and we expect a significant growth in that in the next quarter as well.

[Krish Sankar, Analyst at Cowen]

Awesome. Very good update. Very helpful. Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open. Please go ahead.

[Wamsi Mohan, Analyst at Bank of America]

Yes. Thank you so much. So we've had a few head fakes on phone recovery on the cloud side, particularly in HDDs. And wondering as you think through sort of this improvement starting in fiscal 2Q, what's underpinning some of the confidence? You noted demand recovery. Are you seeing particular signs from customers that are pointing to that? And your primary competitor also noted taking some changes, including a build-to-order philosophy. Curious if you guys are contemplating any such changes. And I have a follow-up.

[David Goeckeler, Chief Executive Officer at Western Digital]

Hey, Wamsi. So first of all, yeah, I mean, you hit it. I mean we have ongoing and very significant conversations with our customers on a -- many quarters out so that's what gives us -- that's what underpins the view we have. To your point, things can change, but that's the current view and the conversations are productive and positive. On the build, the order comment, look, I think the industry is going to come out of -- well, let me speak about us. So Western Digital will come out of this downturn. It's a pretty severe downturn in a cyclical industry, but we've done a lot of things that I think the business is going to be different on the other side of this.

So first of all, we've taken a significant amount of capacity out-of-the system. We've talked about the shifts from client to capacity enterprise, at least as long as I've been here and it's been going on for many, many years before that. I think that transition is going to be essentially done. There is a long tail on any technology, but if you look on a unit basis, we'll come out of this with significant less spending on our infrastructure. We'll have the lowest fixed-cost we've had in a decade-plus in our HDD infrastructure, and we'll really be focused exclusively on that client enterprise business going forward. That's not a -- we still have a client business. Don't get me wrong. It's still going to be there. Like I said, there's a long-tail of technology. But I think as part of that, the industry will come out and we will come out of this as more of a build-the-order, if you will as opposed to a build-to-forecast. So that's why we're having these conversations with our customers because it is a long build time on an HDD and we want to make sure that we've got the infrastructure in place, we've got the components in place and we're running the right process to deliver what our customers need. At the right time, so. I think maybe the short answer to your question is yes, Western Digital will be -- is going to more of that kind of process.

[Wamsi Mohan, Analyst at Bank of America]

Okay. Thanks, David. And just a clarification on the underutilization charges which look roughly flattish quarter-on-quarter. Are those charges roughly similar in Flash and HDD as this past quarter, or are they definitely moving pieces underlying for September? Thank you.

[Wissam Jabre, Chief Financial Officer at Western Digital]

Sure, Wamsi. So when you look at the September quarter, the guidance $200 million to $220 million of underutilization charges and there split is roughly 70% Flash, 30% HDD. And I would -- just to clarify also to add with respect to probably to the following quarter, I expect HD -- sorry, underutilization related charges to be, let's say, 5% to 10% down and most of the -- if not all of the decrease would be coming from HDD.

[Wamsi Mohan, Analyst at Bank of America]

Thank you, Wissam.

[Wissam Jabre, Chief Financial Officer at Western Digital]

You're welcome.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thanks, Wamsi.

[Operator]

One moment for our next question, please. Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

[Sidney Ho, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. I wanted to ask about the cloud weakness again. I understand the cloud things are -- could be lumpy, but curious about your conversations with the large hyperscale guys. How has that changed from a quarter ago? Are they giving you signals about when inventory would start stabilizing? Are they worried about supply in the second half given production cuts by all the suppliers? Are they more receptive to purchase commitments?

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. What I would say is that it's always a very robust conversation given the amount of business we do with the hyperscalers. It's clear that some of them have been in a very severe inventory digestion phase and kind of took a pause on buying anything. But we're back to having conversations with those customers, I mean, they're still growing and storage is still being created and growing. So we expect those conversations and those businesses to -- the buying will reemerge and we're having the conversations on when that will happen and in what magnitude just to make sure that we've got all of our capacity aligned to deliver that.

I think we're getting a very good reception on the product roadmap. As we talked about our 22-terabyte, 24-terabyte, 26-terabyte platform and products have now been qualified by all of the major cloud vendors, we're just -- we expect to ramp those significantly, especially the 26-T next quarter. That's really becoming a major capacity point for some of the biggest cloud builders and right on the back of that, we're launching a 28-T Ultra SMR drive. So the conversations are strong and it's about making sure we have clear alignment on what their requirements are going to be and then we get the proper manufacturing in place to deliver on them.

[Sidney Ho, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thanks. Maybe a quick follow-up on the hard drive side. Clearly, you guys are doing better than the competitor in the last quarter but just wanted to hone in on the SMR drives which you said have qualified at all major cloud customers. Can you give us an idea of what SMR adoption is today, and where you think it will be in the few quarters from now? Thanks.

[David Goeckeler, Chief Executive Officer at Western Digital]

SMR, it's very idiosyncratic, right. I mean the intersection of adoption and inventory digestion makes it very lumpy and if you look at the current quarter or last quarter. But I can say going forward that several of the major cloud providers are standardizing on an SMR deployment, Ultra SMR for us, and we expect to have a significant ramp of that technology over the next several quarters.

[Sidney Ho, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you, Sidney.

[Operator]

Thank you. And one moment for our next question, please. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open. Please go ahead.

[Toshiya Hari, Analyst at The Goldman Sachs Group]

Hi, guys. Good afternoon, thank you so much for taking the question. And I had one clarification and then a question. David, on NAND ASPs for the current quarter, I guess you talked about bits being up double-digits sequentially and you're kind of guiding revenue to flat sequentially. So I guess the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is the sharper price decline in September that's implied in guidance or embedded in guidance primarily a function of the mix? Or am I missing something there?

[David Goeckeler, Chief Executive Officer at Western Digital]

Yeah. It's maybe a little bit -- sequentially, maybe a little bit lower than what you're modeling, so I think that's where it is, Toshiya. We can follow up with you on kind of more details, but I think that's probably the clarification.

[Toshiya Hari, Analyst at The Goldman Sachs Group]

Okay, got it. Thank you. And then as my follow-up and maybe one for Wissam. You mentioned that for fiscal '24, you plan to cut capex significantly curious if it's purely impacting your capacity decisions in NAND, or are there any changes or shifts to how you think about the roadmap? And related to that, I think on the bit shipments, David, you mentioned for calendar '24, you guys are going to be, I think down low-single digits. But how should we think about bit production in calendar '24, given the capex and production cuts that you're going through right now? Thank you.

[Wissam Jabre, Chief Financial Officer at Western Digital]

Well, maybe let me first start with the first part of the question on capex, Toshiya. The comment on capex is -- well, when you look at calendar -- sorry, fiscal '23, we've taken quite a bit of capex out from our plans as we continue to preserve cash. I mean, you can see that we've spent -- I think year-on-year we're down roughly 30% to 35%. It's almost $1 billion lower than the gross capex level almost $1 billion lower than what our plan was at the beginning of the year for fiscal '23. For fiscal '24, we're projecting to be significantly lower. It's mostly in-line. It doesn't impact necessarily our product roadmap. It is more or less what we see today relative to what our NAND or basically, other types of investments, meaning no other transitions or other types of investments planned. And so I wouldn't say there's any major change relative to what we've already been planning. But given the dynamic macro-environment we're operating in, we will continue to monitor just like we've done in fiscal '23 on a quarterly basis and adjust as needed.

[Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations at Western Digital]

Thanks, Toshiya.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is open. Please go ahead.

[Shannon Cross, Analyst at Credit Suisse Group]

Thank you, guys, for taking my questions. I'm wondering do you have any unique perspective, having both HDDs and SSDs? There's commentary coming out of peer and I'm hearing from some of the other storage vendors, growing use of grid [phonetic] withing cloud, within data -- growing use of SSDs within cloud and data centers and almost like a potential secular shift, again, pure takes it kind of to the extreme. But I'm just wondering how you think about how the mix will trend over time, maybe layer-in AI if you want? And Just think about [Technical issue] what you're hearing from your customers and then I have a quick follow-up. Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

Hey, Shannon, and thanks for the question. We've talked about this a lot over the years. I think that both technologies are growing in the data center. HDD is the predominant storage mechanism in the data center. We don't expect that to change. Our customers don't expect that to change. As long -- as we continue to drive the HDD roadmap forward, we just -- we're ramping 26-terabyte, or we are launching 28-terabyte. So we're moving forward with capacity points on HDD, and we expect robust growth of HDD storage in the data center going forward. We also expect growth of enterprise SSD storage in the data center going forward. It's probably growing a little bit faster than HDD, but not in a way where you're looking at, one, as a substitute for the other. They are highly complementary technologies and we expect that to be the case for -- any useful planning horizon in the future. We look a decade out, the cost differences are still significant. And that's certainly the way we talk to our customers about how they're building mass-scale data centers.

[Shannon Cross, Analyst at Credit Suisse Group]

Okay. And Wissam, can you talk a little bit about opex? How you're thinking about it relative to maybe a more normalized level and how much [Technical issue] model as revenues come back if you have to start spending more from an opex perspective? Thank you.

[Wissam Jabre, Chief Financial Officer at Western Digital]

Yeah, sure. So on opex, you saw we continue to manage it very, very tightly. In fiscal Q4, we ended at $582 million, which is around $180 million lower than the same quarter last year. As to your question, over the near term, I think we're within sort of the range where we expect to be. But as the business starts coming back, there could be some small increase as we start layering up some of the variable expenses on that. However, we should never -- we shouldn't expect the increase in opex to be faster than the increase in revenue. And so we would be monitoring that and it will be agile. And similarly, if there's a need for us to take additional action on opex to continue to manage very tightly, we also have some room to do that.

[Peter Andrew, Vice-President, Financial Planning and Analysis and Investor Relations at Western Digital]

Michelle, can we have the next question, please?

[Operator]

Sure, we can. Just one moment. Our next question comes from the line of Timothy Arcuri with UBS. Your line is open. Please go ahead.

[Timothy Arcuri, Analyst at UBS Group]

Thanks a lot. I had two, Wissam. The first one is on under-utilization charges and it's kind of like a two-part question. So the first is, what's the current utilization in NAND? And then on the HDD side, is there kind of milepost as to where these could start to go away because you're guiding $70 million for September for under-utilization in HDD, it sounds like it goes to maybe $60 million to $65 million in December quarter but when does that go away because you started to take underutilization charges I think when HDD revenue went sub to $2 billion per quarter. So do we have to get all the way back to $2 billion a quarter to have those HDD under-utilization charges go away?

[Wissam Jabre, Chief Financial Officer at Western Digital]

Okay. So, Tim, with respect to the Flash side, we continue to make these decisions on an ongoing basis, and from the numbers, you can tell the underutilization-related charges were -- are projected to be roughly flat from Q4 to Q1. And as for HDD, I think the math is -- your math on Q1 is close to where the guide is, but I think in December quarter if you think of the underutilization charges going, let's say, from Q1 to Q2 going down 5% or 10%, and all of that decrease coming from HDD, you start seeing some declines basically in the HDD underutilization in the December quarter. And based on what we see today, it's a bit too early to talk about the second half of fiscal year 2024. But to the point you were making around the $2 billion revenue mark, we don't need to get to the $2 billion revenue mark to really fully utilize our capacity. And if you recall, we've restructured quite a bit of our manufacturing capacity in the hard drive business and we continue to take and optimize that fixed-cost aspect of the cost structure and so we can be fully utilized at a lower level than $2 billion given the current cost structure.

[Timothy Arcuri, Analyst at UBS Group]

Thanks a lot for that, Wissam. And then just on the debt service cost. So you have the convert due in February. I think that's had a pretty good rate. I think it's at 1.5%. So the debt you're going to replace that with I imagine is going to be pretty expensive. So it seems sort of -- I guess my question is sort of where does that leave you in the cap structure? Obviously, it seems like debt service costs are going to go up maybe $20 million a quarter once you have to issue new debt for that. So can you just talk about sort of how you solve for all that? Thanks.

[Wissam Jabre, Chief Financial Officer at Western Digital]

So -- yeah, the current rate on the convert is 1.5%, and given where the interest-rate environment is today, I would expect that to be if replaced by that to be -- when replaced by that would to be roughly more expensive than that. So look, it's a little bit too early to talk about it in a lot of details but this is something that is definitely a focus for us as we think through the various options that are available to us with respect to refinancing, for instance, we look at the potential cost-of-capital and our goal is to make sure that we maintain a lower-cost of capital to the extent possible. But I expect it to be slightly up from here all said.

[Timothy Arcuri, Analyst at UBS Group]

Thanks a lot, Wissam.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Ananda Baruah with Loop Capital. Your line is open. Please go ahead.

[Ananda Baruah, Analyst at Loop Capital]

Yeah. Thanks, guys. I appreciate you taking the questions. [technical issue] Thanks, David. Two quick ones, if I could. When would you expect 26-terabyte and maybe I'll even through 28-terabyte in there since you mentioned it's driven to reach crossover. And then just have a quick follow-up to that. Thanks.

[David Goeckeler, Chief Executive Officer at Western Digital]

Crossover as -- well, look, let us that there's multiple different capacity points, so I think we need to maybe talk about this a little bit differently. It doesn't just move from 14-terabytes, 16-terabytes, 18-terabytes, and maybe like it did two-three years ago. Now, there's a bit of distribution of different customers and what kind of technologies they are using, whether it's 20-terabyte or 22-terabyte or 26-terabyte, or go into 28-terabyte so even some 24-terabyte. So as I look at where things are going to be, in the next couple of quarters, you're going to see a pretty even distribution across three or four different capacity points, all of them shipping 0.5 million or more drive. So we expect a very substantial ramp of 26-terabytes. Here I don't want to take away from the ramp that's going to happen there. It's going to be very quick and very rapid. Now that's qualified and getting close to being a leading capacity point in the next couple of quarters.

[Ananda Baruah, Analyst at Loop Capital]

Thanks for making those [indecipherable]. That's actually really helpful. And the follow-up is, you guys have any view yet, any opinion on when things normalize out in hard drives, if the hyperscalers return to what their clastic utilization levels have been historically, how they run the capacity? Or do you think they settle in somewhere different on the utilization?

[David Goeckeler, Chief Executive Officer at Western Digital]

Look, I think anytime you go through a period like this, there is some work done on optimization of the infrastructure and consolidation I think that's happening. But I would expect things. You go through that and you just incrementally get better. Like anything in technology, you're constantly improving and constantly getting more efficient. I think that is something that's always going to go on and we're still going to see the growth in exabytes on top of that. So I think we're still looking at 20%, 25% exabyte growth in the HDD business, and I think we clearly haven't seen that in the last year, but we know it's a cyclical business, and we expect to get back to those levels.

[Ananda Baruah, Analyst at Loop Capital]

Got it. That's awesome. Thanks a lot.

[David Goeckeler, Chief Executive Officer at Western Digital]

Thank you.

[Operator]

Thank you. And our last question is going to come from the line of Karl Ackerman before we have a short statement by our CEO.

[Karl Ackerman, Analyst at BNP Paribas Exane]

Could you discuss how we should think about a recovery in nearline units and unit pricing as you and your peer implement a build-to-order process? And as you address that question, can you discuss how this build-to-order process may differ from long-term agreements signed in 2021 that were a bit challenging to implement over time? Thank you.

[David Goeckeler, Chief Executive Officer at Western Digital]

So units I expect to recover, right? I mean, we're going to get exabyte growth. For the low point on units, we expect units to recover and get back to where they were and eclipse that actually as we continue to get exabyte growth, I'll put and say once again, I am very excited about generative AI. I know everybody is, but I think it's going to come to our world on storage once all of that's gets deployed. And so I expect to see units recover. I think the build to order process is going to be a fairly straightforward process because we have deep relationships with the set of customers here. It's a big market, it's a big relationship, and I think it's just getting the business model to a place where there is better alignment between the infrastructure we have in place.

Again, we've been talking about this for many years now. In a lot of ways, cloud has significantly benefited from the reduction in client and there has been a consistent availability of infrastructure to build hard drives and we're at the end of that transition now so we have to just have more planning around that. I think the long-term agreements were a step into that. I think this is maybe the next step into how do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important. The storage is incredibly important part of the data center and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model and I expect it to be very positive on all sides.

Thank you, Karl. All right, everyone, and thanks for joining the call. We look forward to talking to you all throughout the quarter. Take care.

[Operator]

[Operator Closing Remarks]