Western Digital Q3 Earnings Call Highlights

Key Points

• Western Digital says an “AI-driven data economy” will underpin long-term HDD demand—management expects exabyte growth “beyond 25% CAGR” as AI training, inference/agentic AI and synthetic data drive storage needs, and it is advancing a capacity roadmap (40TB EPMR volume slated H2 2026, HAMR qualifying with customers, and plans beyond 100TB) alongside broad UltraSMR adoption.
• The company reported strong fiscal Q3 results—$3.3 billion revenue (up 45% YoY), non-GAAP EPS $2.72, 222 exabytes shipped (up 34% YoY) and a 50.5% gross margin—and guided Q4 to roughly $3.65 billion revenue with a 51–52% gross margin and about $3.25 EPS.
• Western Digital strengthened its balance sheet by monetizing SanDisk shares (reducing debt by $3.1 billion), finished the quarter with a net positive cash position (~$450 million), earned investment-grade upgrades, returned $2.2 billion to shareholders to date, and raised the quarterly dividend 20% to $0.15 while continuing sizable buybacks.

Western Digital NASDAQ: WDC executives highlighted strong fiscal third-quarter results and an upbeat near-term outlook as demand for high-capacity hard disk drives (HDDs) benefits from rising AI-related data generation and an improved pricing environment. On the company’s earnings call, CEO Irving Tan said the company entered calendar 2026 with “great execution,” citing broad-based sequential and year-over-year revenue growth across cloud, consumer, and client end markets and gross margin that exceeded 50%.

AI-driven data growth underpins long-term demand outlook

Tan framed the company’s strategy around what he described as an “AI-driven data economy,” arguing that as AI workloads expand from training to “large-scale inferencing,” data creation is accelerating and requires “persistent, scalable, and cost-efficient storage,” which he said is largely stored on HDDs. He also pointed to “agentic AI” as the next wave, describing it as a shift from AI that answers questions to AI that “continuously executes workflows,” which he said could materially increase data generation and retention cycles.

In response to a question from Morgan Stanley’s Erik Woodring about how agentic AI translates to HDD demand, Tan outlined what he called “three core drivers” of storage growth: ongoing AI training and retraining, inference and agentic AI producing and storing new data for future use, and “physical AI” generating synthetic datasets and associated storage needs. Tan said these dynamics support the company’s view that long-term exabyte growth will be “beyond 25% CAGR.”

Technology roadmap: EPMR, HAMR, UltraSMR, and high-bandwidth drives

Tan said Western Digital’s high-capacity roadmap extends from 44-terabyte HAMR and 40-terabyte EPMR drives that are “currently in qualification” to a roadmap “beyond 100 terabytes.” He said the company is qualifying HAMR with four customers and qualifying 40-terabyte EPMR drives with three customers, with volume production for the 40-terabyte EPMR drives expected to begin in the second half of calendar 2026.

UltraSMR adoption was another key theme. Tan said three of the company’s largest customers have adopted UltraSMR, with two meeting “nearly all of their exabyte demand” with the technology and a third “rapidly ramping in that direction.” He added that the company plans to have all major customers qualified on UltraSMR by the end of calendar 2027.

On cost efficiency, Tan told Evercore ISI’s Amit Daryanani that UltraSMR can provide a “20% uplift on capacity without the associated cost,” and he said Western Digital expects that by the end of fiscal 2027, “close to about 60%” of total exabytes shipped will be on UltraSMR.

Tan also said the company’s high-bandwidth drives are sampling with two hyperscale customers, with an additional customer set to start in the quarter, and described Dual Pivot Technology as being built for new AI workloads with an OpenAPI approach intended to simplify deployment at scale.

Fiscal Q3 results: revenue, margins, and segment performance

CFO Kris Sennesael said fiscal third-quarter revenue was $3.3 billion, up 45% year-over-year, driven by strong demand across end markets and “an improved pricing environment.” He said non-GAAP earnings per share were $2.72, “almost double compared to a year ago,” and that revenue, gross margin, and EPS were all above the high end of the company’s guidance range.

Western Digital delivered 222 exabytes in the quarter, up 34% year-over-year, including 4.1 million drives (118 exabytes) of its latest-generation EPMR products with capacity points up to 32 terabytes, which Sennesael said demonstrated the company’s ability to ramp new technologies.

• Cloud: $3.0 billion, 89% of revenue, up 48% year-over-year
• Consumer: $186 million, 6% of revenue, up 24% year-over-year
• Client: $179 million, 5% of revenue, up 31% year-over-year

Gross margin expanded to 50.5%, improving 1,040 basis points year-over-year and 440 basis points sequentially. Sennesael attributed the performance to a mix shift toward higher-capacity drives, pricing execution, and cost controls. Operating expenses were $397 million (11.9% of revenue), with Sennesael noting the sequential increase was driven by accelerated R&D projects as the company expands HAMR qualifications.

Operating income was $1.3 billion, up 116% year-over-year, for an operating margin of 38.6%. Interest and other expenses were $24 million, and the effective tax rate was 16%.

In Q&A, Sennesael told J.P. Morgan’s Samik Chatterjee that the quarter’s gross margin outperformance reflected pricing that was “a little bit better during the quarter than we expected,” continued mix improvement toward higher capacity drives and UltraSMR, and “great execution” on cost reductions across the supply chain.

On manufacturing metrics, Tan told Citi’s Michael Cadiz that yields for current EPMR products and expected next-generation EPMR volume ramps remain “in the 90% range,” and he said the company sees no current changes in yields or quality. He added that HAMR qualification remains focused on reliability, quality, and manufacturing yields.

Balance sheet, capital return, and dividend increase

Sennesael said the company strengthened its balance sheet during the quarter by monetizing 5.8 million shares of SanDisk, which reduced debt by $3.1 billion. He said $1.6 billion of convertible debt remains outstanding, and with $2.0 billion in cash and cash equivalents, Western Digital ended the quarter with a net positive cash position of $450 million. The company still owned 1.7 million shares of SanDisk at quarter end.

Sennesael also noted that Standard & Poor’s and Fitch upgraded the company to investment grade during the quarter. Operating cash flow was $1.1 billion, capital expenditures were $145 million, and free cash flow was $978 million, representing a free cash flow margin of 29%.

Western Digital paid $43 million in dividends and increased share repurchases to $752 million, buying back 2.9 million shares. Since launching its capital return program in the fourth quarter of fiscal 2025, Sennesael said the company has returned $2.2 billion to shareholders via dividends and repurchases.

The board approved a 20% increase in the quarterly cash dividend to $0.15 per share from $0.125, payable June 17, 2026 to shareholders of record as of June 5, 2026. Asked by Wells Fargo’s Aaron Rakers about capital allocation, Sennesael said the company is not changing its framework and intends to return “all the excess free cash flow back to the shareholders” through dividends and buybacks.

Regarding the remaining SanDisk stake, Sennesael told Cantor Fitzgerald’s CJ Muse that the company intends to monetize the remaining 1.7 million shares in an equity-for-equity transaction before the end of calendar 2026 “in a tax-free manner.”

Outlook: Q4 guidance points to further margin expansion

For the fiscal fourth quarter of 2026, Sennesael guided for revenue of $3.65 billion plus or minus $100 million, which he said would represent 40% year-over-year growth at the midpoint. Gross margin is expected in the range of 51% to 52%, with operating expenses of $385 million to $395 million. The company expects interest and other expenses of $10 million and a tax rate of 16%.

Based on a non-GAAP diluted share count of 385 million, Western Digital expects diluted earnings per share of $3.25 plus or minus $0.15.

In discussing pricing dynamics, Tan said per-terabyte pricing was up 9% year-over-year, reflecting value delivered through better total cost of ownership (TCO) and the timing of new long-term agreements (LTAs). He also emphasized predictability in pricing, telling Barclays’ Thomas O’Malley that customers “appreciate and want to avoid” pricing volatility and that predictable pricing supports longer-term architectural decisions.

On capacity investments, Tan told Wells Fargo that the company does not see a need to increase “unit capacity” and has “no plans for that,” instead focusing on areal density improvements and higher-capacity drives, including the planned move to a 40-terabyte EPMR drive, which he described as a 25% step up from current 32-terabyte products.

Tan closed the call by reiterating confidence in the company’s roadmap and positioning to meet customer demand, while thanking employees and partners for their work supporting customers.

About Western Digital NASDAQ: WDC

Western Digital Corporation is a global data storage company that designs, manufactures and sells a broad range of storage devices and systems for personal, enterprise and cloud applications. Headquartered in San Jose, California, the company develops hard disk drives (HDDs), solid-state drives (SSDs), NAND flash components and finished storage products used in PCs, external storage, servers, network-attached storage (NAS) and embedded systems.

Its product portfolio spans consumer and commercial markets, including internal and external HDDs and SSDs, removable flash memory products and storage platforms for data center and enterprise environments.

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