A：Western Digital's third quarter of fiscal 2026 was marked by strong sequential and year-over-year revenue growth across its cloud, consumer, and client businesses, with a focus on execution. The company achieved nearly double the earnings per share (EPS) compared to the previous year, driven by a strong gross margin exceeding 50%, lower interest expense, efficient tax structure, and expansion of operating margins.

A：AI is anticipated to significantly increase the demand for data storage, driven by the rise of agent AI, which is expected to result in a step-function increase in capacity-oriented storage demand. This is due to the fact that every action taken by an AI agent creates data that must be stored. Additionally, the growth of AI is bolstered by synthetic data, with frameworks being designed to generate larger synthetic datasets from limited real-world inputs across various industries, further increasing data generation and storage needs.

A：Western Digital's technology roadmap is focused on meeting the growing demand for high capacity, reliable, and high-performance storage on hard disk drives (HDDs). Key developments include a roadmap for high capacity drives extending from 44 TB to beyond 100 TB, with current qualifications and development progress on 40 TB PMR and Ultra SMR drives. The company plans to have all major customers qualified on Ultra SMR technology by the end of calendar 2027. The roadmap also emphasizes performance innovation, with high bandwidth drives sampling with leading hyperscale customers and dual pivot technology tailored for new AI workloads.

A：Western Digital's financial results for the third quarter of fiscal 2026 included revenue of $3.3 billion, representing a 45% year-over-year growth, driven by strong demand across end markets and an improved pricing environment. Earnings per share were $2.72, nearly doubling compared to the same period last year, and all key financial metrics were above the high end of the guidance range provided by the company.

A：Western Digital's cloud segment grew 48% year over year, with total revenue at $3 billion. The consumer segment grew 20% year over year, with revenue at $106 million. The client segment grew 31% year over year, with revenue at $179 million. Both the client and consumer segments saw strong year over year exabyte growth and improved pricing.

A：Operating expenses were $397 million, or 11.9% of revenue, demonstrating a 40 basis point sequential improvement and further operating leverage in the model. The increase in operating expenses was attributed to the acceleration of research and development (RD) project expenses as the company expanded its Hammer qualifications with more customers.

A：Strong top line growth, expanding gross margin, and leverage in the model drove operating income to $1.3 billion, an increase of 116% year over year. This translated into a strong operating margin of 38.6%, an improvement of 1260 basis points year over year. The company significantly strengthened its balance sheet by monetizing 5.8 million shares of Sandisk, leading to a reduction in debt and a net positive cash position of $400 million. The company also generated strong free cash flow and returned $2.2 billion to shareholders through share repurchases and dividend payments.

A：The outlook for the fourth quarter is a revenue of $3.65 billion plus or minus $100 million at the midpoint, reflecting a growth of more than 25% year over year. The gross margin is expected to be in the range of 51% to 52%. Operating expenses are anticipated to be in the range of $385 million to $395 million, with interest and other expenses estimated at $145 million. The tax rate is expected to be 14%, resulting in an earnings per share of $3.25 plus or minus 15 cents based on a non-GAAP diluted share count of 385 million shares.

A：The three core drivers of HDD growth are: 1) ongoing storage requirements associated with trading and the reinforcement of AI models, 2) the rise of AGI and inferencing, generating new data that is stored for future inference references and model improvement, and 3) physical AI, where synthetic data generated is stored to further train and develop AI for autonomous vehicles, robotics, and other fields with limited data sets.

A：The strong gross margin performance in the third quarter and the expectation for further improvement are attributed to the strong pricing environment and a better product mix, specifically as the company moves to higher capacity drives with ePMs and later on to hammer drives. The adoption of Ultra SMR is also expected to provide further gross margin uplift. Additionally, the company's continued effective operations contribute to this positive trend.

A：The pricing increase of 9% year on year reflects the company's strategy to better enable Total Cost of Ownership (TCO) value for customers and share in the value creation through pricing. This increase is in line with the company's pricing philosophy and is anticipated to rise more towards the high single-digit range as new long-term agreements (LTAs) come on board. The pricing increase is also linked to the timing of new LTAs and the delivery of the next generation of ePM R in the second half of the calendar year, which will deliver more TCO value.

A：The 10% year-on-year cost decrease was primarily driven by a focus on delivering higher-density capacity, which is a major cost driver. The company plans to continue this focus by introducing and ramping up next-generation ePM Rs in the second half of the year, as well as increasing the uptake of Ultra SMR, which is a good cost driver. The company expects that by the end of fiscal year 27, close to 60% of all ePM Rs shipped will be on Ultra SMR. Ongoing efforts in product platforming, value engineering, and supply chain efficiency are also expected to contribute to maintaining the cost-decline trend.

A：At this point, the company does not see a need to increase unit capacity and has no plans to do so. Instead, the focus is on continuing to improve areal density. As the next-generation E PMR, which is a 40 TB drive, will represent a 25% step up from the current drives, and there is an opportunity to further mix up customers. The company expects to see an acceleration of this mix-up as high-capacity drives are introduced in the upcoming script quarters.

A：The company has a strong free cash flow and margin, with the latter being 29% in the last quarter. It aims to return all excess free cash flow to shareholders through a combination of a dividend program and a share buyback program. The company has increased the dividend and will continue executing on the share buyback program. There is no change in the company's policy or framework regarding capital allocation and return to shareholders.

A：The company's pricing strategy is aimed at reflecting the value proposition to customers and sharing in the value created, particularly with the pricing increase that has been implemented. The rationale behind the pricing increase is to better enable TCO value for customers and is in line with the company's philosophy. The company is aware of the increasing price gap between NAND and hard drives but is focusing on maintaining its pricing strategy to reflect the value it delivers. Long-term agreements with pre-arranged pricing are being considered, which could impact the industry's approach to pricing.

A：The company aims to ensure predictability in pricing to enable customers to make long-term architectural decisions. This predictability provides customers with the confidence to plan for the future and supports the structural changes in the hard drive industry.

A：Current yields for EMR products are in the 90% range, and quality remains very high, which is a hallmark of the company's commitment to quality. This consistency in yields and quality is expected to continue in both their EPMR products and Hammer products, influencing pricing and supporting long-term architectural decisions by customers.

A：The current pricing differential between hard disk drives and flash influences demand, as hard disk drives continue to be preferred for large scale object storage and workloads that require high IOPS and throughput. The company does not observe any major structural changes in architecture at this point, but the predictability in pricing is crucial for customers to make decisions about long-term architectural changes.

A：The company views hard disk drives and flash technology as complementary technologies that play different roles in the storage stack. Flash is well-suited for large-scale object storage and high IOPS workloads, while hard disk drives excel in scenarios requiring long-term retention and are often used for new data that's created through inferencing processes.

A：The stronger performance and gross margins in the quarter were attributed to three major drivers: strong pricing environment, favorable product mix (with more adoption of higher capacity drives and ultra SMR), and continued cost reduction across the supply chain.

A：The company expects cost per exabyte to decline as they start shipping higher capacity EPMR drives and eventually the Hammer Drive. They have confidence in their teams' ability to execute on pricing, product mix, and cost reduction strategies. Future product ramps such as the next generation EPMR and Hammer drives are expected to continue the cost reduction trend, although improvements will be phased in over the ramp period.

A：The ultra SMR JBOD platform is expected to broaden the company's reach, potentially expanding into Ti customers. The company anticipates that this platform could be material and impactful over the next few years as it is designed to support the broader adoption of their products.

A：By the end of the calendar year, the vast majority of key customers are expected to be on Ultra SMR, either fully adopted or materially underway in terms of qualification.

A：The pricing in the LTAs is tied to an exabyte volume and may include periods of pricing adjustment as new capacity points and capabilities are introduced, providing an opportunity to adjust pricing going forward.

A：The intention is to monetize the remaining 1.7 million Sandisk shares in an equity for equity transaction before the end of the calendar year in a tax-free manner.

A：While Western Digital is not making investments in unit capacity, they are investing in technology improvements for aerial density and are focused on increasing terabytes per drive to deliver incremental capacity cost-effectively. They are looking at adding hidden and media capacity investments if economic sense is made, but not unit capacity investments.

A：The manufacturing lead times are about a year, and most purchase orders are placed a year in advance. Beyond the first year, there is some variability as they go into LTA frameworks.

A：The demand profile is quite similar across the largest hyperscale customers. The demand for storage is increasing as data generated for inferencing is not recycled and needs to be stored persistently. This is consistent with the ongoing data storage requirements to support training improvements, inference demands, and synthetic data generation driven by physical AI.

A：There is no specific number provided for HAMR shipment coverage by the end of calendar year 27. However, Western Digital is focused on ensuring the transition of customers to HAMR and has a dual track process where they continue to deliver high capacity EPM R drives while introducing HAMR, aiming for mainstream adoption based on the achievement of certain criteria.

A：The HAMR development is going very well, with positive feedback from all customers. There is a Ford customer in qualification with HAMR and the development is somewhat ahead of schedule.