Western Digital Corporation’s (WDC) CEO David Goeckeler Presents at Citi’s 2020 Global Technology Virtual Conference – Brokers Conference Transcript

Western Digital Corporation’s (WDC) CEO David Goeckeler Presents at Citi’s 2020 Global Technology Virtual Conference – Brokers Conference Transcript

Western Digital Corporation (NASDAQ:WDC) Citi’s 2020 Global Technology Virtual Conference September 10, 2020 3:20 PM ET

Company Participants

David Goeckeler – Chief Executive Officer

Bob Eulau – Chief Financial Officer

Conference Call Participants

Jim Suva – Citigroup

Jim Suva

Hello everyone, and thank you so much for joining us here at the Citi Investment Research Global Technology Conference. My name is Jim Suva. I’m the IT hardware and supply chain analyst here. I want to let you know a few housekeeping items.

First, Western Digital will be making forward-looking statements and we ask that you refer to the SEC filings for the risks associated with these statements. Western Digital will also be making references to non-GAAP financials and reconciliations of their non-GAAP and GAAP results can be found on their websites.

We also want to note also that Citigroup Investment Research has disclosures and if you are a Method 2 Subject Investor make sure you have those agreements in place. If you’re the media or press you are expected to disconnect. Media and press are not allowed on this call and we will disconnect you if you do appear as media or press. This is held for Citigroup institutional investors and not for the media or press.

We are very pleased to welcome Western Digital, stock ticker WDC. We have the CEO, David on the line as well as the CFO, Bob on the line. We’re going to talk and make this quite interactive, but to kick things off, first of I want to say, hey David, this is your first time attending a Citi conference as CEO. Normally, Bob and I are in New York on stage talking in front of an entire packed room of investors and this situation is all virtual and I see the list is quite large.

So may be David, you can take a few minutes since this is your first time and explain to us kind of what attracted you to Western Digital and now that it’s been your first six months that you’ve been there, kind of how should we think about what you’ve seen so far?

David Goeckeler

So first of all Jim, it’s fantastic to be here. Maybe at some point we will get back to being on stage, but I think this format, it’s amazing how the world has transitioned in the last six months. So I’m very happy to be here and I’m super happy to be at Western Digital.

What attracted me to Western Digital in the first place was, a lot of what we’re seeing in the world over the last five or six months, not the pandemic side of it, but the way we’ve all become much, much more dependent on technology, and I had a high degree of conviction. I’ve been in the technology business for quite some time. I’ve had roles were I have kind of global scope and can kind of see what’s going on and I’ve a lot of conviction in the architecture that we’re all using more and more every day.

It was really in the early innings of driving that architecture across all business, across all of our lives every day. I think the pandemic has shown that that’s accelerated. It is unfortunate it happened because of the pandemic, but I think we’re all more dependent on technology every day. We’re all finding more use cases for it every day and I think Western Digital is very, very well positioned as the storage infrastructure for all of the data that’s both generated by that technology and is leveraged in that architecture to deliver better experiences for all of us.

And we’re in it on the cloud side, which is we’re kind of the foundation of the storage in the cloud with both our hard drive business and our enterprise assist, emerging enterprise assist e-business and also on the device side of that and all the devices we use every day whether they are phones or tablets, or PCs, or gaming consoles. And I think Western Digital is very, very well positioned in that world, and I’m excited to be here.

Jim Suva

David, what’s interesting is, your background if I remember right is more of an engineering background, if my memory is correct and maybe I’m wrong on that. So how is that a little bit different than other CEOs, and not necessary to name them, but what’s going to be your area of focus since joining the company?

David Goeckeler

Yes, I am – I do have an engineering, I am an engineer by background. A software developer came up through the industry doing that. I’ve spent the last decade plus running all different kinds of technology businesses, whether they are silicon businesses to the more sophisticated SaaS franchises in the world and so I think when I come into Western Digital I bring a different lens of kind of understanding the intersection of technology and business model and having really run businesses at scale with like I said all the different kinds of technologies, all different kinds of business models and I think it has been fascinating to learn more about the HD business and the Flash business and all the technology that underlies those.

But also I’ve dealt with all customers in almost every segment in the world. And I think that’s one of the really fantastic things I’ve come to appreciate about Western Digital is just the visibility we have of what’s happening in the world anywhere, anybody that’s storing data is our customer, and so we have a strong position with all of the cloud providers. We clearly have a strong position with all of the OEM enterprise suppliers of devices in storage. We have a significant channel business with tens of thousands of distributors. And we have a multibillion dollar retail business as well with 350,000 points of presence. So it’s a broad business and it gives us a lot of visibility to what’s happening in the world and it gives us a lot of opportunity.

Jim Suva

You are starting a new fiscal year. What type of priorities or marching orders you are giving to the Western Digital team?

David Goeckeler

Yes, I think over the last six months we’ve really been digging into the business. We are getting the whole company aligned. There are some very key product transitions we have to drive this year. We are driving our 18 TB hard drive which is really important. It’s going well for us to get fully qualified and ramped up the production of that device. We think that’s going to be the emerging sweet spot in the market. Our enterprise SSD portfolio or NVMe product we’re getting good feedback on that. We’ve had some good results with it, but continue to drive that product into the market is super important for us this year.

And then I’ve got the whole organization focused on some key principles as we think about our business and where we’re focused. And the first one of those is getting everybody focused on gross margin improvement. I think it’s a big lever for us. Bob and I have talked about in past sessions like this is the two main things we’re looking at our gross margin and cash generation by the business by getting the whole company focused on gross margin. I think whatever part of the business you’re in you can drive gross margin improvement.

Get the company focused on profitable market share gains. Whatever markets we choose to play in we need to make sure we’re driving profitable market share gains, and then capital efficiency. We’ve talked a lot about our capital plans, but we’ve got a lot of opportunity. I think one of the — again, one of things I really like about the markets we’re in is there’s lots of demand for what we build. I mean we’re obviously in a global pandemic right now, we’re also in a recession.

So there’s clearly some near-term things to work through, but when we talk to our customers the demand for our products are significant. Looking years out that takes capital investment we need to do that the most efficient way possible. So and also keep an eye on expenses, be disciplined about OpEx expenses, as well. But it starts with the technology, drive the technology, drive the roadmap, deliver the best value proposition for our customers and then do it in a way that drives value for us as well.

Jim Suva

And switching over to the operations of your joint venture, whether you or Bob want to answer that it’s fine. Can you kind of give us an overview of it and how it all works and the kind of financials and the flows of that agreement and that partnership?

David Goeckeler

Yes, let me just say a few words and then I’ll turn it over to Bob. I mean, again coming into the company six months ago and really digging in, it’s been really, really good to understand the joint venture, the detailed working level of how it works on a day-to-day basis. I think it’s a tremendous strength of the company for both of us who are involved, it’s been around for 20 years, very, very successful.

I think it is talked about most and kind of the scale around manufacturing in the Fab, which is certainly very, very, very important and something we both continue. It is very important to both of our businesses, but also we collaborate on R&D as well, and so the nodal transitions and Flash are extremely important for us to continue to drive that forward. It’s how we get to cost improvements in the portfolio which are extremely important and the fact that we have scale and R&D scale on that through our partnership with Kioxia is extremely important.

And finally before I turn it over to Bob I’ll just, I want to publicly congratulate our partners on their pending IPO. It is fantastic, we’re super happy for them and they’ve been a great partner and we look forward to a very, very, continued long and productive collaboration with Kioxia.

Bob Eulau

Okay, I think that will be good overview. I mean it’s obviously been a very successful JV and we made tremendous number of very important joint decisions every day and in terms of R&D roadmap and in terms of capital deployments. I think when you’re asking about Jim is kind of how the financial flows were with the joint venture. And we both make investments in R&D and then we both make investments in CapEx that flow into the JV and then we both take wafers out of the JV at cost plus a small margin.

In terms of CapEx, we funded really two, three different ways. One is, some of the capital that is deployed, we both guarantee leases on behalf of the JV. The second thing that happens is, when we buy wafers from the JV there is a depreciation charge embedded in there, so the JV actually generates cash based on the depreciation and that cash is then used to invest in capital. And then finally, to the extent there is a difference we will end up more and we will loan the JV more money or as was the case last year, the JV will actually return the cash to us, so paid back some of the loans that we’ve made. So it’s I think, it is really efficient joint venture. I think it is tremendously valuable to both the partners.

Jim Suva

And Bob the contributions there, are they equal or there is something different about the CapEx or the R&D, the contributions scan or the risk or the loans coming out, how should we think about that?

Bob Eulau

No, it’s very comparable. It is basically a 50-50 arrangement in the JV. I think we might have 49.9%. They run the day-to-day operations, Kioxia does. They run the operations for the joint venture. But in terms of the financial relationship we both take wafers back out at cost plus a small margin like I said.

Jim Suva

Got you. Shifting over to also the business trends, given the breadth that you both mentioned, about the breadth of your business, can you talk about the demand trends in the near-term say 6 to 12 months? And how have these changed versus when we entered 2020 the pandemic has spread globally, but now many of your plants are open back up in your own business and things like that, how should think about demand trends?

David Goeckeler

Yes, I mean it’s certainly been an unusual time that we’re all working through. I mean, I think you’re starting point is a good one, at the beginning of the year, I mean when we saw, I mean I came into the company on March 9th and I think the WHO declared the pandemic two days later, so it’s been something that’s been top of mind. At that time we had kind of a demand side shock and a supply side shock at the same time. So we had customers take retail out of it for a minute and we’ll come back and talk about that. But we had customers have an increase in demand right at the time where there were questions about the supply chain. So I think that led to a lot of consumption.

I think as the supply chain has normalized and things have gotten back to predictable performance, now we have customers working through all of the things that they had accumulated, and I think that we’re driving through that. I mean when is it? How long is that going to last? I mean, I don’t know, a couple of quarters, one or two quarters maybe, but it depends on different parts of the market. We can go through all of them. We talked about it on our call. In the cloud we’re seeing some digestion in the cloud.

Clearly, when you start talking about 6 to 12 months out, I mean we see, we are all, it is where I started, we’re all more dependent on this technology every day. So, the underlying demand trends have not changed and so we see the cloud continuing to win and demand coming back there even in spite of COVID and the recession we’re going to see that come back when we get through kind of the disruption that we saw in the first half of the year.

We talked about on our call last time, the channel business, which is kind of maybe more through thousands of distributors more into midsized businesses that’s been pretty consistent. It’s been — was a bit of a slob last quarter, but it’s playing out as we thought when we went into this quarter. On the consumer side, we talked about it on our call, we saw retail that had some momentum in June, in the last month of our last quarter. And it certainly seems like the retailers have dialed it in around either pickup at the curb or shifting to online buying. So that’s continued to show some strength. Now then Bob, do you want to add anything to that?

Bob Eulau

No, I think that’s a good summary.

David Goeckeler

Okay.

Jim Suva

Gentlemen, a question I had is, a lot of industry forecasts are pointing to annual data growth, ballpark around 30% per year. Are you seeing that? Is that in your type of a forecast or a downshift given the pandemic? And is there going to be enough supply to meet this demand or are we going to face some component shortages?

David Goeckeler

Yes, I think, we certainly — I mean if you look at both sides of our business, and if you look at the flat side of the business, I think, people are — the industry and we agree is centered on 30% year-over-year on the demand side, we see investment in the industry and we’re their 25% to 30% supply. So keeping those in line is very, very important and something I think the industry has been pretty rational about, and we have as well. On the drive side of the business, we’ve seen about 35% CAGR exabyte growth in that business.

We’re coming off of a year of 60% exabyte growth, so that’s why you’re seeing this. Sometimes you are above the trend line, sometimes you’re below it, but we don’t see, we see that trend being pretty solid for quite some time, and certainly we talked to our customers in the drive business and they are — the cloud is continuing to expand and we expect continued growth there. In fact, when we talk about investing in the business on our capital allocation strategy, that’s what we’re talking about. We see long-term growth there that we need to invest in to build the capacity, so that we can continue to fuel the growth of where our customers want to go.

Jim Suva

Let me dive a little bit deeper, let’s talk maybe about the HDD part of your business first. You talked about the 18 terabytes ramp, can you update us on where we are in that ramp? And why being first 18 is so important for Western Digital?

David Goeckeler

Yes, I think at any technology business, kind of leading from a technology point of view, I mean, technology businesses are rewarded on innovation. I think innovation is the hallmark in the businesses and so the 18 terabyte drive allows us to give our customers a better TCO proposition.

There’s a lot of power and space and everything required to fuel growth in the cloud. And if we can give them a denser solution, that’s it. That allows them to get better top total cost of ownership of their infrastructure, that’s somewhere they want to go. So it’s very important. This is an important transition for us because we are leading the 18 terabyte transition, we feel very good about the product.

We are going through the ramp this quarter, as we’ve talked about, and we’re in qualification with a very, very large customer. And that’s something we’ve got to drive through over the next several months. But we feel you know, it’s on plan and we feel good about where we’re at.

Jim Suva

And then still on HDD energy assistance, whether it be made MAMR or HAMR? Can you talk about customer preferences? Do they really want this, the qualification process? How should we think about energy assistance?

David Goeckeler

I think you should think of energy assist as a tool in the toolbox to build a better product. So, and you want to use those tools in your toolbox when you need them. And so we’re introducing energy assist in our 18 terabyte drive, it’s around on the head. It allows us to get some advantages. And, we thought it was the right time to introduce the technology to drive it forward.

We have clear line of sight on our portfolio for many, many generations to come. Specifically on HAMR and MAMR, we’re working on both of those technologies. We learned from memory and we incorporate the technology at the appropriate time into the roadmap and you want to be very disciplined about how we do that, so that we can get predictability of product delivery and we can control the costs.

We don’t want to put too much costs in the product until you have to have it. So we feel really good about the line of sight we have on our roadmap, we feel very good about our R&D on all of the technology is going to take to drive that roadmap. It’s not just those technologies, there’s actuator technology, there’s firmware, there’s a number of different levers we have to drive density.

Now, why is it important to our customers, because it changes the total cost of ownership equation. You can deliver more in the same space and that allows them to continue to fuel their growth without having to invest more. So, storage, this gets back to your first question, why did I come to WD? I mean, storage is the fundamental underpinnings of the digital economy we live in and continuing to drive the roadmap of hard drives is extremely important, because it is the storage of the public cloud and it’s going to be for a long time to come. There’s very good underpinnings technologically and economically on why that’s going to continue. And it’s important for us to drive the roadmap forward.

Jim Suva

So we spoke about H, our hard drives when we shift over now to Flash or NAND. How should we think about your position there and your views of maintaining share outperformance relative to peers or where are you at in your cycle for flash?

David Goeckeler

Well, there’s a whole bunch of different – there’s a whole bunch of levers in Flash. So we’ll kind of walk through some of them and where we are, but it starts with the fundamental technology where I talked about before with our JV with Kioxia and making sure that we’re driving if you will productivity improvements in the development of flash and that’s as we move from BiCS4 to BiCS5, make sure we make the right choices, so that we continue to drive the cost down on a predictable.

We’re come very comfortable with the 15% a year cost reductions. And we’re seeing that in the portfolio. So we’ve talked about our BiCS5 yields are ahead of plan. We feel very good about the node we chose for the future. We’re obviously working on BiCS6 but that’s a couple years out but for BiCS5 will be the underpinning of the portfolio for a while take us a while to move the portfolio for that, where the predominance of BiCS on that part of the portfolio is going to be you know, a year from now maybe.

So that’s why it’s so important to continue to drive that technology forward. Once we have the technology underpinnings in place, then it’s what markets we choose to participate in where we want to put that supply. We feel very good about our position and client SSD. And this is an area where I think Western Digital as I’ve come into the company and been focused on, where is the synergy, where are the synergies, the leverage between the drive portfolio and the flash portfolio because we believe Flash’s, the drive portfolio is super important.

A lot of growth in the cloud there flash’s, the biggest opportunity for the company going forward. We’ve said that, and so but there is a synergy in the go-to-market. And I think we’ve seen that if you look at our client SSD share is around 25%. The fact that, we understand the client very well have a heritage of providing storage and the client. Now we’re providing storage in the client on an SSD, and the customer relationships that we have and the depth of our relationship with those customers because we can bring them up larger portfolio and help them manage that transition. We think that same thing will play out in enterprise SSD. And that’s one of the reasons we’re so focused on, on driving that portfolio as well. So and Bob, anything to say or add to that on the flash portfolio?

Bob Eulau

No, I think that’s good. I mean, we’re also excited about retail, where we’re doing really well. In most of the markets around the world we saw yes strength in June and it continued into July and we’re progressing this quarter well on retail.

Jim Suva

Okay, maybe could you update us a little bit on, the production, whether it be in the K1 Fab, or 64 to 96 layers? How should we think about the price declines in the production?

Bob Eulau

Yes, so I mean, Dave talked a little bit about BiCS5, which we’re very excited about, but that won’t be at dominant node for us till – the end of next year. Right now we’re producing over 60% of our BiCS – BiCS4 which is our 96 layer product. We’ve had a number of quarters where we’ve been able to demonstrate 15% year-over-year cost declines.

We think we can do that as we continue to shift to BiCS5 over time. So I think we’re in a good place, in terms of the cost structure for our products. And it’s also BiCS5 in particular is a very capital efficient node for us. And that’s part of why we chose 112 layers versus 128 layers and we’re converting a lot of equipment and we’re able to do that very, very efficiently. So we get good cost benefit and good capital benefit as we move to BiCS5.

Jim Suva

Before David joined the company, Bob, you actually suspended your dividend. Can you talk to us a little bit about that around the decisions? And then your outlook suffice it to say wasn’t overly encouraging. I don’t know if they’re related to each other or not, and how should we think about the dividend? And what are you looking at to potentially reinstate it? Is it like some ratios of debt to EBITDA or how should we think about that in the dividend?

Bob Eulau

Yes, so I’ll give you some background on it. It was something I’ve been discussed quite a while. I think Dave actually came in at the end of those discussions. So it was through the whole trough. It was something that, that we had talked to the board about. So it wasn’t a hasty decision. Then we got into the pandemic, and the board decided it was the right point in time to re-emphasize our desire to deliver the company.

And so that’s why they elected to suspend the dividend and I think it’s going to prove to be a very prudent decision, where we’re going to really accelerate our ability to de-lever, we’re going to invest in the business first. We’ve said that all along and whether it’s R&D or whether it’s CapEx, and we’re going to make sure that we’re investing for the long-term health of the business.

And we’re very excited about the future growth that we have in the markets that we’re participating in. So I think in terms of what’s our goal, it’s really to get down to the point where we have a gross debt of around $6 billion, and net debt of $3 billion. And we derive those goals by really looking at our gross leverage through the cycle. So if you go and you look at our PG bid on a trailing 12-month basis, it was about $6.3 billion.

And at the peak, we then have our gross leverage a little below one, and then if you look at our trans EBITDA on a trailing 12-month basis, it was around $1.7 billion. And so if you look at that on a gross leverage basis it implies about 3.5. So, I think we’ve got the right plan. I don’t know how long it’ll take. I mean, it’s, it really depends on how our cash generation goes, we’ve had some years where we’ve generated a tremendous amount of cash. And we’ve had other years have been more lean, but we’re very committed to delivering.

Jim Suva

So Bob, with that, the question I get asked a lot about as well, that makes sense, but your biggest competitor didn’t change their dividend. So therefore, on a relative basis, that makes your strong cash flow, not quite looking strong, it makes your capital allocation looks like, you’re trading your competitor, how should we respond to that?

Bob Eulau

But we actually have competitors that pay dividends; we have competitors that don’t pay dividends. So it really varies. And right now, I think given our balance sheet, it’s the prudent thing for us to be doing and, and competitors will make different decisions based on the markets they’re in and what their, their business requirements are. But I think for us at this point in time, we made the right decision.

Jim Suva

Okay. A couple more questions, the US and China, tensions have kind of escalated. First it was tariffs. Now it’s kind of don’t ship to certain entities. Whether it’s Huawei or potentially even some more, how should we think about, is Huawei a customer for you, big customer? Can you still keep shipping to them under these current rules or do you have to seek some type of license? How should we think about that because it’s pretty complicated from an investor to understand?

David Goeckeler

Yes, I mean, this has been an evolving situation. I think we even called this out in our last call that the geopolitical consideration’s is something we always have a very sharp eye on. There was an executive order specifically around Huawei. They are a customer, we don’t break out the size of our customers, but and certainly we’re deep in the analysis the executive order about how it applies to our portfolio.

It’s pretty straightforward, quite frankly, about how it applies, but we’re working through all the details with outside counsel, and we will be in full compliance with the order there. There’s absolutely no issue with that. I think as far as its impact on the business, I mean, obviously Huawei is a customer and has been, but it doesn’t change the underlying supply dynamics of the market. And, we again, one of the things about that I really appreciate about Western Digital is our reach and our breath.

And we play in a lot of markets. Again, anybody that’s storing data is our customer. I think, somewhere north of 40% of the data in the world is stored on a Western Digital device. So really, our teams are focused on, any particular customer specific impact of any reason. And they happen from time-to-time, whether it’s a business reason or whether it’s a, in this case, a legislative or executive order. It’s the team’s job is to adjust to that and go move the, go find where the demand is moving in the market and that’s the process we’re going through.

Jim Suva

And so, David, is it clear? Do we know, do you need a license to ship? Do you not need a license to ship or you’re able to ship or not?

David Goeckeler

Well, certainly on the flash side of the business is very clear. We would need a license to ship. We have applied for a license. We had a license in the past, but this is a different situation. On the HDD side of the business, we’re still doing the final bit of analysis, but it certainly; it certainly looks like it applies to the HDD side of the business as well.

Jim Suva

Okay. And then how should we think about protecting your intellectual property from making its way into China or competitors who are trying to catch up? There is the concern that some Chinese providers are going to enter this market and aggressively go after pricing and share. How should we think about that?

David Goeckeler

Well, I mean, first on the intellectual property question, I wouldn’t peg that to any particular country or company. I think it’s anytime you run a technology company, as what I said earlier technology, I think innovation is the key variable there. And if you have innovation, you have intellectual property, and it’s your responsibility to protect it. And so we take that very, very seriously.

And in everything we do, and how we run the company, specifically about another entrance into the market. That’s clearly something we watch closely. We have not seen much of an impact at this point. One thing we do know, is it the memory technology business is a highly complicated Business Technology is very, very sophisticated. And even if you get the underlying technology right, then you’ve got all the controllers and all the kind of work to build products out of it. So we’re very confident with where we are in the portfolio and were kind of how the market is structured.

Jim Suva

Got you, and I don’t know if this is a question for David or Bob, but with your joint venture partner, is there a duration to the sourcing of wafers that has a certain year thing? Or is it like automatically reviewed redo or anything’s we should think about durations of that.

Bob Eulau

Get it. There are actually several joint venture agreements and one of them was renewed last year for another 15 years. So you’re going to assume we have in the neighborhood of 14 years under the existing agreements, and my guess is we’ll renew again between here and there. But right now, it’s there’s nothing in the short-term horizon, I guess to be renewed.

Jim Suva

A question that I get also a little bit is, is there a reason that the gross margins between you or the profitability between you and your partnership should materially be different, or I guess you be pay a little bit. My understanding is a little bit of a premium to kind of cover their costs. Is that how it works?

Bob Eulau

Yes, sure. Now from the in terms of that costs coming out of the Fabs through the JV, we both have the same cost structure, and we pay a slight margin to cover some of their administrative costs. But I think the cost is the same. I think the difference in gross margin is really going to be more on the go-to-market strategy and market segments that each of us chooses to participate in. So, we have a different mix, and they have I think, I think we talked about it already.

I mean, we’re, we tend to under index on mobile, we focus more on client SSC, enterprise, SSC and retail, and I don’t want to really get into their mix. I mean, that’s a question for them, but I think that’s probably where you’re seeing the difference if there isos any in terms of gross margin.

Jim Suva

Okay, that makes sense. Before we wrap it up here, have you been seeing any reoccurring investor questions or an opportunity for Bob or David for you guys to kind of with the hundreds of people connected here on this, clear that air or get something across that may be misperceived or something about your company or its recent outlook, which was lower than many expected?

David Goeckeler

You want to start?

Bob Eulau

Yes. Well, I think one of the questions we get from a lot of investors, which I appreciate at some level you didn’t ask Jim, but we get questions about pricing. And, it’s obviously we were really pleased about how last quarter went; we’ve been through a couple quarters of an improving environment. We had our gross margins on the flat side up about 30%. And now this quarter, we’re facing more price headwinds. So, I think we’re seeing different dynamics and in different markets, and we get asked that question a lot.

On the retail side, we are seeing some short-term stabilization in terms of pricing over the last couple of weeks. On the OEM side, we still have to negotiate contracts for next quarter, so we’ll, see how that all goes as we move forward. But I’d say that’s kind of one big question we often get from investors.

Jim Suva

Now if there’s something else?

David Goeckeler

And I think that, the other thing is where you were around the underlying demand trends. And again, I’ll just go back to where I started, which is, I came to Western Digital because I have a high degree of good conviction in the technology that underpins the world today is going to continue to grow and grow. I think the company is very well positioned as a diversified storage vendor for that world, where that we’re a foundational element of the economy.

And I think the portfolio, where the portfolio is driving towards leading products, both in flash and in the drive business. I think, as we, as we work through the issues of all of the consumption in the first half of the year, that works its way through the system. I think we are very, very well positioned in the flash business and the drive business.

And from a raw technology point of view, I think, where we are in the roadmap of our flash technology and the cost reductions, we’re going to drive on that, on the drive side of the business where we are on leading 18 and the roadmap we have for many, many generations. I feel very good about where we’re positioned. We’ll work through the pandemic and we’ll work through the recession that it drove but the underlying demand trends for our business are very strong.

Jim Suva

One question I get asked a lot about David and it’s probably more appropriate for Bob is, Bob. There’s a lot of cost headwinds are burdens right now on your company, whether it be the K1 fab, ramping, the volumes getting to feasibility to where then you can go from expensing to capitalizing some costs, whether it be the Coronavirus, additional temperature checks and additional costs associated with that. Can you walk us through those costs maybe on an EPS basis or dollar basis that we should think about? And looking forward some of these things seem like what time they should turn from a negative to actually a positive for your earnings?

Bob Eulau

Yes, I mean, there’s no doubt we faced headwinds, particularly in two areas that you mentioned. On COVID-19 we think that total incremental costs last quarter was the neighborhood of $96 million. Some of that was related to an absorption variance, because we couldn’t fully utilize one of the factories in April. But the other part of it was really logistics costs and then incremental costs on testing and disinfection in all our sites around the world.

So the absorption costs are going to go away. We don’t expect to have those going forward and hopefully we don’t get surprised. The logistics costs are going to persist for a while. And there are a lot fewer commercial flights coming out Asia, now there’s just less cargo capacity coming out Asia. And so we are seeing upward pressure in terms of air freight rates, and we’re managing that in real time, so we’ll have that issue. And of course, we’ll continue to have the costs associated keeping our people safe and all our sites around the world. So, we’ll I think we’ll have at least a couple more quarters of those kinds of costs.

And then on the K1 side, which is our fab you’re referring to Kitakami in Japan we’re in the process of ramping with our partner, a Greenfield facility there, and there’s a lot of new equipment going into that facility. We’re just getting the assets in place and now we’ll start to ramp the production. The peak costs, we think are going to be in this quarter, in the September quarter and we got it to around $80 million in period expenses quarter associated with Kitakami.

And then we think over the next couple quarters, those costs will come down pretty quickly, as we, as you noted, can start the inventory those costs and we get the production volume, and we get a lot more efficient in terms of the overall structure there.

Jim Suva

And to clarify, Bob, that $80 million is not related at all you mentioned to the COVID $96 million, those are completely separate. So we probably have, in total $170 ish million of quarterly costs in at some point should alleviate or get better, right?

Bob Eulau

Yes, but they’re in two different quarters, right? So $96 million was in the June quarter. The $80 million is in the September quarter, but you’re right over time, they’ll both go down.

Jim Suva

Okay, as we wrap things up, Bob, maybe a minute or a couple minutes for you and David to take turn to answering the same question. What do you want investors to leave this meeting knowing about why they should be investors in WDC, Western Digital stock?

Bob Eulau

Yes, I think Dave touched on a lot of this already. I mean, we’re in fantastic markets. There aren’t that many markets that have the kind of long-term growth rates that our markets have. We’ve got a terrific product portfolio that we’re just in the process of taking to market right now and I actually think it’s a very good entry point for our stock. So it’s, I think one of the better opportunities out there. How about you Dave?

David Goeckeler

Yes, I’ll — a little bit what I said earlier. As Bob said, we’re in good markets, right? The demand is there. We are global presence, global footprint, as I talked about earlier for all the different markets we serve from retail to the cloud. As I said, anybody that’s storing data is going to be a customer of ours and almost anybody. And then we have a diversified portfolio and we are driving towards market leading products in both of those portfolios from as we talked about the 18 terabyte drive will lead the market there. Our BiCS5 transition is giving us great foundation in the flash business, our position and client SSC, our emerging position in enterprise SSD.

And then finally, our ability to have a very, very substantial relationship with our customers because we can provide them a very diversified portfolio for their storage needs, across drives, and flash and many, many different devices on flash. So I think it gives us a position with our customers that is quite unique. So we’re very, very excited about where the portfolio is headed. I mean, clearly we’re in a global pandemic and a global recession, but we will work through those things. And if anything, those have driven more demand for technology.

And as you started out, Jim, this conference, we normally would be sitting on a stage, and we all would have flown to the same city. Here we are using all the technology that drives demand for our product. And I think that scenario is happening over and over and over again in every single industry. And it’s going to continue to happen for a long time to come and we are very well positioned to capitalize on that transition.

Jim Suva

Great, ladies and gentlemen, I want to thank Western Digital for sending their CEO and CFO, virtually to our conference and we certainly hope next year and in the future, we can meet in person. This now concludes this fireside chat. Thank you ladies and gentlemen.

Bob Eulau

Thanks, Jim.

David Goeckeler

Thank you.

Question-and-Answer Session

Q –

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