WDC FY2027 Q1 Earnings Call Transcript
Date: 2026-10-22
Source: Financial Modeling Prep

Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's First Quarter Fiscal 27 Conference Call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you would like to ask a question, you may press star and then 1 on your phones. As a reminder, this call is being recorded. Now I would like to turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin.
Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Tan Tiang Yew Irving, WD's chief executive officer, and Christopher Senesael, WD's chief financial officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations. Which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, business plans and performance, ongoing market trends and future financial results, We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10 k and other filings with the SEC for more information on the risks. And uncertainties that could cause actual results to differ materially from expectations. Unless stated otherwise, today's remarks reflect non GAAP results. Reconciliations to GAAP results are available in our press release and at investor.wdc.com. With that, I will now turn the call over to Tan Tiang Yew Irving.
Tan Tiang Yew Irving: Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Q1 marks a strong start to fiscal 27. Reflecting solid execution across the business and results ahead of our expectations. Revenue grew 55% year-over-year while gross and operating margins expanded meaningfully to 58%, 49%, respectively. EPS grew 161% year-over-year and we generated $1.4 billion in free cash flow. These results reflect ongoing robust customer demand operational discipline and successful execution of our product and technology road map. Demand remains strong across our customer base and end markets. Our visibility extending further And with it, our conviction in the durability of demand for data storage on HDDs. We are increasingly seeing storage demand grow beyond our core cloud and hyperscale customers. Customers. Into enterprise environments and into newer end markets such as neo-cloud and AI frontier labs. Resulting in a larger and more diversified customer base. Our customers are making longer term infrastructure investments. And continue to extend their planning horizons into the next decade. As the value of data is increasing, we are investing with confidence to support their growing needs for data storage. With the vast majority of the data being stored on HDDs. We see this firsthand in our customer conversations and in broader industry research. A recent IDC survey of more than 750 companies across several countries found that organizations are storing more data retaining it for longer periods, and increasingly putting archived data back to work. At the core of these trends is continued data growth. Fueled by the ongoing expansion of cloud environments and the increasing storage demands from AI. While much of the conversation around AI focuses on compute, we believe the more enduring opportunity is in data. AI is fundamentally a data system. Every workload creates more data. And that data must be stored managed, and accessed in a scalable and economical manner. As AI adoption continues to expand across industries worldwide, data creation and storage requirements, are expanding with it. Inference and agentic AI systems are generating significant volumes of logs, model outputs, and system performance data. They must be stored and retained. Physical AI applications such as robotics, factory automation, and autonomous vehicles are further accelerating this trend with AI generated content and video workloads. That are creating and retaining data at scale. Let me now turn to our industry leading technology and innovative products. We are executing well against our technology road map, and remain on track transitioning our customers to higher capacity drives. As we ramp production across our next generation ePMR, and HAMR platforms. We expect our exabyte shipments to continue to increase through fiscal 27 and beyond. Volume production of our latest ePMR platform delivering up to 40 TB of capacity is off to a strong start. Customer adoption is progressing ahead of prior transitions. And we expect this platform to represent close to 30% of our nearline shipments by the second quarter and 50% by the third quarter of fiscal 27. On our first generation HAMR product, we are on track to finish qualifications with 2 hyperscale customers in the first quarter of calendar year 27. And are on schedule to begin volume shipments in the first half of calendar year 27. Also expect to begin qualifications with 2 additional customers during the first half of calendar year 27. Further expanding customer validation and supporting broader adoption of our HAMR products. As AI workloads scale, customers not only need more capacity, but also greater performance from their storage infrastructure. We are expanding the role of HDDs within cloud and AI infrastructure. Through innovations such as our high bandwidth drive, dual pivot technology. By combining the economics of HDDs, with significantly higher levels of performance, we believe this technology can address a broader range of existing and emerging workloads. We are currently sampling a high bandwidth drives with multiple customers and the feedback has been positive. With clear use cases and value creation identified. In summary, WD is executing with momentum. We are deepening customer relationships, extending visibility, and broadening the customer base. While our product and technology road map delivers precisely what customers need. As data grows in volume, and value, across cloud, AI, and emerging workloads. We have high confidence in the durability of long term storage demand. With that, let me turn it over to Christopher.
Kris Sennesael: Thank you, Irving. Our first quarter results demonstrate ongoing strength of our business, in combination with outstanding execution on all fronts. Customer demand remains healthy and our visibility is extending further out. Our product transitions are progressing well, resulting in higher capacity products solid year-over-year growth in exabyte shipped, and improved pricing. All driving another quarter of strong financial performance. During the first quarter of fiscal year 27, revenue was $4.4 billion, up 55% year-over-year driven by strong exabyte growth and a favorable pricing environment. We delivered 248 exabytes in the quarter, up 22% year-over-year and up 8% sequentially. Nearline products continued to drive growth, as we execute on our product transitions. Starting with the ramp of our latest generation EPMR drives, with capacities up to 40 terabytes, and followed by the introduction of our HAMR technology in the first half of calendar year 27 setting us up for stronger year-over-year growth in exabyte shipments. Cloud revenue was $3.9 billion, representing 88% of total revenue, and increasing 54% year-over-year. Driven by durable demand for our high capacity nearline HDDs. Including the initial ramp of our latest EPMR platform. In addition, continued pricing strength reflects the value and TCO advantages we deliver to our customers. Client represented 7% of total revenue at $320 million, up 119% year-over-year. Consumer represented 5% of revenue, at $193 million, up 19% year-over-year. Gross margin expanded to 58.1% up 34 basis points year-over-year. With incremental year-over-year gross margin above 80%. Gross margin reflects a mix shift towards higher capacity drives, disciplined operational execution, and a favorable pricing environment across our portfolio. As we continue to deliver greater value to our customers. Year over year growth in average price per terabyte further increased to 28% versus the high teens we reported in the prior quarter. Operating expenses were $391 million or approximately 9% of revenue. A 130 basis point sequential improvement demonstrating continuing operating leverage in the model. Operating income of $2.2 billion, increased 152% year-over-year, driven by strong revenue growth, expanding gross margin and operating leverage. Operating margin expanded to 49.1% in the quarter. Demonstrating our ability to continue to drive sustainably higher levels of profitability in the business. Interest and other expenses were $10 million our effective tax rate was 17%. Taking into account, a diluted share count of 383 million shares EPS was $4.64. An increase of 161% year-over-year. We generated $1.4 billion in free cash flow during the quarter. And returned $1.1 billion to shareholders through share repurchases and dividends. Reflecting confidence in the durability of free cash flow generation and our ability to drive long term shareholder value. Supported by the strength of the free cash flow generation, and consistent with our capital allocation framework, The board has approved a 17% increase in the quarterly cash dividend. From $0.15 per share to $0.175 per share. Which will be paid on December 17, 2026, to shareholders of record as of December 4, 2026. Turning to the balance sheet. During the quarter, we took additional steps to simplify our capital structure by substantially reducing our remaining 28 convertible notes. Our balance sheet remains strong, and we ended the quarter with a net cash position of $500 million. Let me now turn to the outlook for the second quarter of fiscal 27. Continue to operate in an environment of strong demand and favorable pricing in all our end markets. For the second quarter of fiscal 27, we expect revenue to be $5.1 billion, plus or minus $100 million. At the midpoint, this reflects a 69% increase year-over-year. Gross margin is expected to be in the range of 60% to 61%. We continue to benefit from the shift to higher capacity drives along with a strong pricing environment. We anticipate operating expenses of $400 million to $410 million a sequential increase driven by the project expenses related to increased product qualification activities. Interest and other expenses are expected to be $15 million. The tax rate is expected to be 17%. As a result, we expect diluted earnings per share to be $5.80, plus or minus $0.20 based on a non GAAP diluted share count of 380 million shares. As we look ahead, demand remains robust, Customer engagements continue to deepen, and broaden. And our visibility continues to improve. And as we execute, on our technology and product transitions, we expect to accelerate exabyte supply growth throughout fiscal year 2027 and 2020. Our strong balance sheet and free cash flow generation give us the ability to make targeted investments that strengthen our technology leadership and support our customers' growing storage needs. While we expect capital expenditures to average 4% to 6% of revenue, over a 5 year period. We anticipate that CapEx as a percentage of revenue will be modestly above that range over the next 2 years. As we continue to invest in head and media technology and factory automation. Supporting our industry leading aerial density and higher capacity drives. Without having to spend CapEx to add unit capacity. In summary, accelerating exabyte growth technology leadership, expanding margins, and disciplined capital allocation. Provide a solid foundation for sustainable earnings free cash flow growth, and long term shareholder value creation. With that, let's now begin the Q&A. Ambrish.
Ambrish Srivastava: Thank you, Christopher. Operator, you can now open the line to questions, please. And to ensure that we hear from as many analysts as possible, please ask 1 question at a time. After we respond, we will give you an opportunity to ask 1 follow-up question. Operator?
Operator: We will now begin the question-and-answer session. You are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and 2. And as mentioned, we do ask that you please limit yourself to a single question and a follow-up. At this time, we will pause momentarily to assemble a roster. Our first question today comes from Amit Daryanani from Evercore. Please go ahead with your question.
Amit Daryanani: Yep. Thanks a lot. Good afternoon, everyone. Guess maybe to start with, Irving, there is always a lot of focus on HAMR. And you outlined sort of completing qualifications with 2 hyperscalers in March, volume shipments mid 27. Can you just talk about what are the remaining milestones between those 2 steps from your perspective? And then what determines how quickly you scale from there? Is it more by. Driven by customer deployment schedules? Or your manufacturing readiness? Just any help there.
Tan Tiang Yew Irving: Yeah. I mean, thanks for the question. First of all, would say I am very pleased with the progress that we are making with HAMR. As we have highlighted in the past, feedback from our customers have been very positive, particularly around the failure rates that we have seen in our drive performance vis a vis what they have seen with other players. Within the market. As a result of that, we are very confident in terms of finishing qualifications. with 2 customers that we have, our first generation HAMR products in Q1. We will be starting qualification with 2 additional customers in the first half of calendar year 27 as well We have not had any feedback that would give us any reason for pause in terms of us translating that call completion to volume shipments starting first half 27. Our. Both our customer technical support teams are working very closely with them to complete those call schedules and get them into production. Across our global operations teams. We are working closely with our own internal manufacturing assets and vendors to get the supply chain ready to support the ramp as well. And then starting in the second half of calendar year 27, we will also start qualification of our second generation. HAMR drives, and this will be at 5 terabytes per platter. on an 11-disk platform. So overall, very pleased with the progress. I think the engineering and operations teams across the company have done a great job in really helping us accelerate development of the products, the reliability, of it, and then we are focused very much on scaling it up and getting it into customers' hands.
Ambrish Srivastava: Do you have a follow-up, Amit?
Amit Daryanani: I do. Thanks a lot, Ambrish. And maybe just to follow-up on the cost per terabyte. You know, I realize you folks have talked about some of the input cost inflation, headwind. But I think cost per terabyte was down like 4% to 5% in September quarter. that is the lowest we have seen in a while. You can just touch on what is happening there and what is the right way to think about this longer term because do realize you are guiding for some really strong gross margins in December. So just a little bit on the cost per terabyte number would be helpful.
Kris Sennesael: Yeah. So as Irving just indicated, we continue to execute well on our technology road map and product transitions. Basically moving to higher capacity drives based on a better and higher areal density. And so we are well on track in the long run to reduce our cost per terabyte approximately 10% year-over-year. In the midterm, and I have indicated this before, this is not a surprise, we are facing some input cost increases As most of you know, we use some DRAM and some NAND, inside our hard disk drives. And the whole supply chain really operates in a very tight environment. And so we are seeing some of those input cost increases. We are addressing all of them, through value engineering initiatives that where we are seeing some good traction. It takes a little bit of time to implement and qualify those solutions. And so in the near term, our cost per terabyte will be less than 10% down year-over-year. Taking us all into account, as you indicated as well, we are delivering very strong free, gross margins. In the September quarter as well as strong guide for the December quarter. Our incremental gross margins continue to be very strong well above 80%. And so I think we are, we are very well set up to continue to increase our gross margins over time.
Ambrish Srivastava: Thank you, Amit.
Operator: Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question.
Wamsi Mohan: Yes. Thank you. Irving, I was wondering if you could just address this angst around incremental capacity ads from the smallest player in the market, and there is been some chatter around potential consolidation in the industry. Just would love to get your high level take on what you think could be if there is any potential impact from that at an industry level? And is that impacting any of your price negotiations with hyperscale customers in the out years?
Tan Tiang Yew Irving: Yeah. Wamsi, thanks for the question. I would say at a high level, we do not see any change in terms of the long term fundamentals of both the industry or our business specifically. Right? We continue to see demand continuing to be very strong, you know, 25%-plus CAGR as we have highlighted, consistently, in a very tight supply. Environment. And we remain committed to our strategy and our focus to meet that supply demand growth based on leading aerial densities, and that is delivered through technology particularly through our hidden media technology because that is the best way to deliver, the best TCO to our customers and to also drive greatest profitability of our business for our business as well. And that is know, you can see that focus in terms of the. Both know, the investments we are making, both into research and development and into capital investment into our head and media parts of the business. And I think the unique differentiation that we have with our own hidden media development the drive integration capability, that we have gives us that confidence to be able to meet that growth trajectory through Aerodensity, and therefore, remain committed to not investing any incremental unit capacity. You know, there may be some other players in the market who do not have that unique ability to build their own media, build out their own heads, drive that area density improvement, and they have to compensate that by potentially maybe increasing the number of units just to maintain their share. And position in the marketplace.
Ambrish Srivastava: Do you have a follow-up, Wamsi?
Wamsi Mohan: Yeah, I do, Ambrish. Thanks. So on the exabyte shipments, you grew 22%. And as I am hearing you, talk about sort of the trajectory here for the rest of the year, it looks like you expect that growth to improve as you execute on these product transitions. And then have HAMR in the mix. Could you just give us some sense of what it is at the high level? Like, is it right to think of fiscal 27 at roughly your longer term range for the year? Is that the right way to think about it? And maybe just if you think about unconstrained sort of demand, how much higher is that relative to where your supply is And do you see that widening because of just how strong the demand is over the next, you know, couple of years? Thank you.
Tan Tiang Yew Irving: Yeah. Thanks for the question, Wamsi. We sort of see the current quarter as being sort of the floor in terms of exabyte growth, and we see that accelerating through the rest of the fiscal year. And obviously, as Christopher highlighted in the script, to 2028 and beyond that, as well. that is really driven by the confidence that we have in the new platforms that will be introducing. Obviously, we have HAMMER coming out, in the first half of fiscal 27. And then as I highlighted, we have a second generation HAMR drives starting qualification in second half as well. So we are very quickly at the top end going from a 32 TB drive to a 44 TB drive to a 55 TB drive. And beyond. And that is the best way, the most economical way for both our customers and for us to be able to meet the demands that they have in terms of our products. To your question around the demand, as I said, we see that continuing to grow. We do see it being very durable. There has not been any diminishing in demand, and we do not see the gap in supply or demand that exist today is perishable in the near term as well. So we continue to focus on supporting our customers the best we can with the technology that we have.
Ambrish Srivastava: Thank you, Wamsi.
Operator: Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead with your question.
Erik Woodring: Super, guys. Thank you so much for taking my questions, and congrats on a quarter and a guide. Irving, can you maybe just share a bit more granular detail on your visibility comments, meaning how far out are we talking, how many-- how many customers are we talking. And for those customers that are planning that far out, just what are their exabyte needs today or in the future relative to 3 or 6 months ago? Do you do you see that demand kind of expanding relative to, again, 3 or 6 months ago? Thanks.
Tan Tiang Yew Irving: Yeah. Erik, thanks for the question. I think in terms of visibility outlook, if you take our top 7 customers as an example, we have good visibility up to 2020, 2030 for. Across all 7. Of them, and that is something that we have highlighted that we have always done so we can make sure we both deliver both the technology. And the supply to meet that growth in going forward. And so we have good visibility in that. In fact, we see quarter after quarter, the demand signal actually increasing over time. And as we move forward into the 2.83 thousand 2030 time frame, we see that demand continuing to be very durable.
Ambrish Srivastava: Do you have a follow-up, Erik?
Erik Woodring: Yeah. Thank you, Ambrish. And then just as a follow-up, you obviously just grew revenue 55% year-over-year. You are guiding to 69 year-over-year revenue growth at the midpoint in December. Incredibly strong. And obviously, you are referencing some exabyte growth acceleration. But that also then-- excuse me, that also implies that you are going to be accelerating price in the December quarter as well. So could you maybe just help us understand what is the source of that pricing acceleration? Is that coming from a non nearline side? Is that the nearline side? I assume probably both. But just any more granular color you can provide on why we are seeing that acceleration in pricing in the December quarter and how sustainable that is? Thank you.
Kris Sennesael: Yeah, Erik. We continue to operate in a very strong favorable pricing environment. You saw our blended average selling price per terabyte was up 28% on a year-over-year basis, and we saw that strength across the board in nearline and non nearline. Some of our consumer and client business as well. Pricing environment is strong, because we do execute on our technology and product roadmap, and we continue to deliver higher capacity drives to our customers that help our customers to reduce their total cost of ownership. Because you have better rack density, lower power consumption, and a lot of benefits for our customers. As we continue to execute, on that strategy and continue to deliver higher capacity drives, there is an opportunity to further enhance our price per terabyte over time. As you probably know, some of that business is under LTAs, Some of the LTAs are expiring and new agreements are being put in place. And in addition to that, of course, some of our exabytes are not under contract as well, and we do see a very strong price environment for those exabytes that are not under contract as well.
Ambrish Srivastava: Thank you, Erik.
Operator: Next question comes from CJ Muse from Cantor Fitzgerald. Please go ahead with your question.
Christopher Muse: Yeah. Good afternoon. Thank you for taking the question. I guess Irving, started the conversation talking about results ahead of expectations. And just to follow-up on the last question, for gross margins, you initially guided to kind of incremental 62%. And reported 80% and now guiding 75%. So really trying to drill down as to what is driving that incremental strength. Is it you know, more bits that are not under contract? Is it contracts that are under. Unwinding and repricing? And I guess, you know, as we think beyond the near term, you know, how should we think about the sustainability in 2027 and beyond?
Tan Tiang Yew Irving: Yeah. I think at a high level, CJ, first of all, we think the sustainability of gross margin expansion is absolutely there. There are 3 drivers of that. Obviously, pricing, as Christopher highlighted, we have a bunch of LTAs that have contractual price increases as we move into different periods as they reach sort of their anniversary, their price adjustments as we deliver higher capacity platforms to get better TCO values that we are able to share in that and drive higher pricing for those contracts that we have with customers with LTAs with. We are also been able to get better spot pricing with nearline customers who are not on LTAs given the tight supply environment and Christopher also highlighted, across the board, we are seeing better pricing environment in our client and consumer segments of the business as well. So pricing is 1 key element. Second, we have also been up mixing our customers to higher capacity drives. As we move them up to higher capacity drives, obviously, these are more profitable. For us because the ASPs per drive are much higher as well. So that is the second driver of gross margin expansion that we expect to remain over a longer term time period. As well. And third, obviously, we will be shipping more exabytes, right, through higher area density. And so we are able to deliver more exabytes to higher aerial density, you avoid the fixed cost having to produce more units, and that is another driver of gross margin expansion. So you put the combination of those 3 factors together, we feel very optimistic about ongoing gross margin. Expansion.
Ambrish Srivastava: Do you have a follow-up, C.J.?
Christopher Muse: I do. Thanks, Ambrish. I do. Thank you. You talked about a broadening breadth of customers including enterprise and NCPs. I am curious how is that perhaps changing the duration of LTAs' pricing? And deposits perhaps? Just would love to hear, you know, how your customer base is evolving and how that might impact kind of your contracts. Thank you.
Tan Tiang Yew Irving: Yeah. So we definitely see a I would say, a diversification of our customer base. Right? And it is something that we have communicated in the past where the sort of 3 tier architecture, the critical role that HDDs play both in terms of the scalability, reliability, and the economic value that it provides to customers is truly playing out. Right? And we definitely see that demand, happening from the Frontier AI labs from the new cloud players, and also hybrid cloud solution OEM providers as well. We are factoring in the demand signal as well as we look forward and how that is translating into the, expanding, demand signal that we have highlighted in my response to the earlier questions. And, again, we are we are delivering. We are building technology. We are making investments into head and media to be able to provide the areal density to support all our customers in this more diversified customer environment.
Operator: Next question comes from Asiya Merchant from Citigroup.
Asiya Merchant: Great. Thanks a lot. Irving, I think you talked about some of the high bandwidth drives as well. And opportunity there to grow. Maybe if you could just double click on how big is that opportunity today, how many of these are you shipping? If you can elaborate on that. And how big do you think that opportunity could be for you? Thank you.
Tan Tiang Yew Irving: Yeah. Thanks for the question, Asiya. Look, I think the opportunity is still somewhat nascent today. Our primary focus is obviously to get capacity into the hands of the customers. But as we move into latter part of calendar year 2027, 2028, and beyond, this becomes what we feel a big differentiator. For us because things like high bandwidth drives provide customers with an opportunity to use HDD for different workloads that they may have to use alternative storage media for, which will be much more costly. For example, KV cash workloads in AI inferencing and in video streaming as well. So we have been actually providing samples to many of our customers in terms of these products so that they can test out different use cases, and I highlighted that has been very positively received. And so we are working through sort of the commercial structure of how we would price those high bandwidth capabilities. To customers. But from a technical capability standpoint, very positive. We are working through the sort of commercial construct of how we would price that going forward.
Ambrish Srivastava: Do you have a follow-up, Asiya?
Asiya Merchant: Yep, I do. Thank you.  If I can if I can just ask about the physical AI as well. You know, I think you talked about that as well in your script You know, any early indications again of how big is that opportunity today? Are you shipping towards that? Probably still, you know, in the early innings now, but how do you think about it through calendar 27 and into calendar 28? Thank you.
Tan Tiang Yew Irving: Yeah. I think we. We are definitely seeing very promising signs from the physical AI segment of the market. For example, some of our customers in Asia who are in the autonomous vehicle space are definitely looking for increased demands, supply from us to be able to support their physical AI initiatives. A good data point is that, you know, NVIDIA themselves have just recently highlighted the opportunity in terms of their revenue from physical AI the $10 billion range. Right? So if you see that happening in compute, there is obviously the demand for storage to support that compute. As well. So we see it very positively. Obviously, autonomous vehicles will be 1 Robotics is also becoming a key area for us. A lot of it is actually happening out in Asia, but I anticipate that will happen throughout the rest of the world. Over the next 2 to 3 years as well.
Ambrish Srivastava: Thank you.
Operator: Our next question comes from Benjamin Ratzes from Melius Research. Please go ahead with your question.
Benjamin Reitzes: Yeah. Hey, guys. Thank you. I appreciate it. I wanted to go back to 1 of the earlier questions. On what the competitive aspect of adding capacity. You know, I think there is there is just some basics that would be helpful. You know, how can somebody go from 10 to 30% capacity share? Is there enough you know, materials to do media and heads to be able to do something like that. You know, maybe you can address the question from that. And what would be the is your view that somebody could do that? And, what would be the bottlenecks, in doing so?
Tan Tiang Yew Irving: Yeah, Benjamin. Thanks for the question. I cannot comment about somebody else doing it. I can share what we are doing to enable it. First and foremost, it all starts with technology. Our R&D teams do a great job in terms of designing, you know, head designs, media recipes to really enable high aerial density products. Obviously, we combine that with our firmware capabilities and drive servomechanics capabilities. So it is not only about the individual components, but when you integrate all of it together, do you get the optimum air density per drive? So that is really at the engineering level, and that is 1 of the big differentiators that we feel versus maybe 1 other player in the market who is dependent on third party suppliers, so they are not vertically integrated. Secondly, you know, as you have you have touched on, a key element of it is not so much the unit capacity that you have. it is the availability to produce at scale the needed media and heads to support the higher areal density in the drives as well. And, again, that is something we have been and will continue to make investments in. In WD, both in terms of our R&D capability, but also into our manufacturing assets, specifically to enable greater areal density through our head and media assets to drive that. So I think that is what we are doing, and we see the results of that. Other organizations that do not have that degree of vertical integration I would say, will have a harder time being able to reach the same levels of growth that we are seeing.
Ambrish Srivastava: Do you have a follow-up, Ben?
Benjamin Reitzes: Yeah. Thanks a lot, Ambrish. You know, there is there is obviously a lot of fear out there as you guys see and well know going into this call. I was just wondering if you could give more color around how big neo-clouds are for you now and in your 4 forecast and if there was a hiccup in demand there just due to timing of capital, how would we see it, how big a concern would that be for you? Thanks.
Tan Tiang Yew Irving: Yeah. I think first of all, you know, we need to take a step back. There are really 4 drivers of growth within the storage space. Right? 1 is the ongoing secular growth of the cloud. And the cloud itself has been around for close to 2 decades. it is still growing at a very healthy pace. In fact, accelerating really driven by a lot more storage being driven by video content. So a lot more demands because a lot of content being stored is video, and, obviously, a lot of the cloud based services are becoming AI enabled. So that is driving greater storage. So that is 1 key driver of growth that will continue over the foreseeable future. The second driver of growth has been model training and development, and we see that continuing to grow as new models get created, as reinforcement learning is happening, more data needs to be stored to support reinforcement learning of an existing models. As well, and that is where the new clouds do play a part in. But we do not see that being in any way a major hiccup if there is a bit of a slowdown in the neo-cloud segment. The third is around inferencing and agentic AI, and that is where we see a lot of opportunity going forward, and we are starting to see tremendous amount of growth coming from that area as customers need to store logs, checkpoints, and model outputs of that inferencing and sort of the agentic system decision points to support reinforcement learning as well. And then finally, physical AI that we have just touched on as well. So if you add those 4 things together, I think the demand remains very doable. Durable. Even if there may be a slight softness in 1 of the 4 segments the demand will be easily picked up by any 1 of the other 3. So all things added together, we see very positive outlook in terms the demand remaining strong and remaining durable. In terms of how we look at the neo-cloud Summit, obviously, we are very diligent in looking at the strategic neo-clouds that we wanna engage with, those that we think have a very strong balance sheet, have underpinned by a very good end customer base as well. And so we prioritize that over other players within the market.
Ambrish Srivastava: Thank you.
Operator: Next question comes from Tom O'Malley from Barclays. Please go ahead with your question.
Thomas O'Malley: Hey, guys. Thanks for taking my question. Appreciate it. So if I look at kind of the CAGR of total HDD exabyte shipments over the last couple of quarters. it is ranged from low-20s, kind of up to the mid-30s. And I plugged that in for your guide. It looks like your year-over-year pricing that is implied for the December quarter is above that 30% year-over-year mark. So you guys have historically kind of said, high teens is the sustainable growth rate. You are now well above that for a couple of quarters. Do you think you could give us an update about what the right way to look at that is in terms of sustainability of that pricing increases on a go forward basis?
Kris Sennesael: Yeah. Tom, I think the 10% or whatever number you were referencing, I think we are. We are operating well above that. Right? Just in the 1 quarter ago, we were already at 18% ASP increase on a ASP per terabyte basis. And so last quarter, we did 28. And as I indicated before, given the strong demand environment that we operate in, given the fact that we continue to move to higher capacity drives and continue to add more value to our customers, there is definitely further room for ASP per terabyte increases going forward. Over the next, call it, 3, 4 quarters. I would assume eventually that is going to slow down a little bit. But for the next 3, 4 quarters, there is definitely further room to expand our, ASP per terabyte year-over-year growth.
Ambrish Srivastava: Do you have a follow-up, Tom?
Thomas O'Malley: I do. Thank you. Just following up on the commentary, just the CapEx on average, 4% to 6% of revs over a 5 year period, but modestly ahead of that in the next 2 years. I think, like, the knee jerk reaction to that is making sure that it is just investing in heads, and this is not something about expanding capacity or feeling like you need to take advantage of a market as it is nearing a potential peak, not saying that, just outlining what you could hear. So maybe could you spend a little bit of time talking to us about you know, why the investment is needed in heads. Is this around diversification efforts because of what we have heard in the media lately? Or just a desire to get your internal efforts to a better spot? Would love just to hear your kind of thoughts on that. Thank you.
Kris Sennesael: Yeah. Yeah. And, Tom, just to be clear in the prepared remarks, we explicitly said that, the CapEx is going to head in media and factory automation and not to our unit capacity.
Tan Tiang Yew Irving: Yeah. So I think Christopher summarized it. really well. And obviously, as we look to transition to HAMR, obviously, there are longer cycle times in terms of the steps that are involved in terms of the heads that we need-- Head wafers that we need to produce and also the media products that we need to produce. So we are making the appropriate investments to support both the technology capabilities and at the same time to recognize that they are slightly longer cycle times because there are slightly more steps that are involved to produce the head and media components that is needed for HAMR.
Ambrish Srivastava: Thank you, Tom.
Operator: Next question comes from Timothy Arcuri from UBS. Please go ahead with your question.
Analyst: Thanks a lot. You guys talked about an acceleration in exabyte growth. You have been undershipping your peer by about 10 points. You are sort of mid twenties, and they are sort of mid thirties. So, Christopher, when you mentioned that, like, what is the target? Should we think that maybe over a multitude of quarters you could get to, like, the mid thirties is the goal to sort of close that gap?
Kris Sennesael: So, yeah, we did 22% last quarter, and we have talked about that. We are in between 2 product transitions. The last couple quarters, we executed really well. On our up to 32 TB EPMR transition. We are now started to execute on our up to 44 TB EPMR transition, and then we have our HAMR transitions first and second generation are coming up, and that is going to drive a meaningful increase in our areal density and a meaningful increase to higher capacity drives, and that will definitely accelerate our exabyte year-over-year supply growth over the next 6, 7, 8 quarters.
Ambrish Srivastava: Do you have a follow-up, Tim?
Analyst: I do. I do. Yeah. So just to just to kind of double click on that. So, Christopher, should we think of you in 6 quarters shipping, like, 35% exabyte growth? Is that the message?
Kris Sennesael: So we only guide 1 quarter at a time, but you are thinking about it in the in the right direction. Yes.
Tan Tiang Yew Irving: Okay.
Analyst: Thanks.
Ambrish Srivastava: Thank you, Tim.
Operator: Our next question comes from Kris Sankar from TD Cowen. Please go ahead with your question.
Sreekrishnan Sankarnarayanan: Yeah. Hi. Thank you for taking my question. I have to insist for the color on the pricing. I am just curious as your first set of HAMR customers ramp in the first half, will there be any impact on the ASP growth mainly because you are helping your early customers ramp HAMR, or it should not have any impact?
Tan Tiang Yew Irving: No. We are not discounting our HAMR products. In any way versus our EPMR products. So we price them on a dollar per terabyte basis, and we have LTAs that we. That I mentioned that have you know, appropriate price reviews, and periodically. And so whether we ship a HAMR bid or a ePMR bid, the price is the price.
Sreekrishnan Sankarnarayanan: Got it. Got it. Then as a quick follow-up, you know, I totally understand your argument about adding head capacity but not units. I am just gonna try to play the devil's advocate. By adding head capacity, you are, you know, increasing the capacity. Per unit. So I am just wondering does not that lead to the fact that you are actually adding capacity even though if it is not a unit, leading to more capacity increase. versus, you know, the minutiae between a unit or a head.
Tan Tiang Yew Irving: Yeah. I think there are 2 factors here. First of all, we say we are investing into head capacity. And part of it is, as I mentioned, for example, a HAMR head just requires more cycles to produce, so there is a bit of a throughput loss, so we need to offset. So we do need to put in more capacity. So that does not translate into more heads and therefore, more units. And we have also indicated at our innovation day back in February of this year we have a road map to deliver drives with up to 14 platters. As well. And therefore, you will need more heads within the existing number of drives that we have as well. So we are. We are making the investments to support that road map going forward as well.
Ambrish Srivastava: And, Kris, last quarter, we shared with you the platter count growth. On very minimal unit growth. Right? So that is 1 of the reasons we have to invest on the head side. Thank you very much.
Tan Tiang Yew Irving: Applies to media as well. Same thing.
Operator: The next caller, please. Our next question comes from Jim Schneider from Goldman Sachs. Please go ahead with your question.
James Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe just clarify with respect to your head strategy currently, whether you use external vendors for any of your products or for surge capacity? And to what extent the head investments beyond just the hammer items you mentioned before are meant to sort of eliminate the need for any potential vendors in the future and sort of take that external reliance off the table completely. Thank you.
Tan Tiang Yew Irving: Yeah. Thanks for the question. So we do use some external head capacity that we always have done. We do that for media as well. That is part of our sort of, innovation approach where we build and buy. So we are able to benchmark our performance of our components with our third-party suppliers as well as a great way for us to continue to drive innovation both internally and with our partners as well. Our focus on our investment is to continue to ensure that we have the latest technology internally to support our products. Going forward, what we do buy from third parties are typically used in our lower capacity drives. So all the high cap leading edge platforms that we introduce are all on our own internal heads.
Ambrish Srivastava: Do you have a follow-up, Jim?
James Schneider: Thank you. Yeah. Just as a follow-up, in a hypothetical situation where 1 of your competitors were to meaningfully expand unit capacity what hypothetically would be your response in that case?
Tan Tiang Yew Irving: Well, again, you know, you can. It boils down to not just unit capacity, but what, at what capacity point, is that unit shipping at as well. So, again, our focus is on delivering that capacity that customers need to higher capacity drive through aerial density. So, you know, our response is gonna be the same as we have communicated, over the last year. To continue to focus on the aerial density translate that into the highest capacity drives that we can bring into the market. that is the best TCO for our customers and drives the best economics for us as well.
Ambrish Srivastava: Thank you.
Operator: Next caller, please. Our next question comes from Karl Ackerman from Paribas. Please go ahead with your question.
Karl Ackerman: Yeah. Thanks for, squeezing me in. Irving and Christopher, you indicated that HAMR will ramp over the next couple of quarters. But do you expect non HAMR nearline drive capacity to also expand while HAMMER ramps as well?
Tan Tiang Yew Irving: So we expect. Obviously, we are we are to ramp HAMR in the first half of calendar year 27. In parallel, we will also continue to ramp and supply our latest EPMR platform. As we highlighted, it is making it is making a very successful transition. In fact, the fastest transition of any EPMR platform that we have seen, you know, in this quarter Q2, we expect 30% of all the nearline bits to be on that 40, up to 40 TB, platform by Q3 of calendar year. Of fiscal 27. We expect 50% of all the nearline bids that we ship will be on that 40 TB platform as well. And then, obviously, we will continue to scale. So I think we have 2 very strong horses in the mix to deliver high cap drives to support the demand that our customers need.
Ambrish Srivastava: Tiang thank you, Karl. We have time for 1 more caller. Operator, please.
Operator: Our next question comes from Mark Newman from Bernstein. Please go ahead with your question.
Analyst: Hi. Thanks for squeezing me in. it is Scott here with some numbers today. I wonder if I could ask a bit more on the pricing. Pricing continues to be extremely strong, and this last quarter, seems to be further accelerating. You talked about you have demand visibility all the way through 2030. 2031. I wonder if you could update us on how far out do you have price visibility such as in your purchase orders already signed or long term agreements, How far out should we expect this price to remain continuing at this, cadence? Or potentially, could we expect it to accelerate further from here? Any comments on price visibility here would be great. Thanks.
Kris Sennesael: Yeah. So the most important thing with LTAs and our customer engagements is to create that long term visibility and making sure we are aligned from a technology and product road map We are aligned on those product transitions that are being planned ahead for the next couple of quarters and years. And making sure that we put in place the necessary exabyte capacity to support the demand. that is the most important thing that we are trying to achieve here. In terms of pricing, in those LTAs, we do have some pricing components. Keep in mind that there is base volume. There is upside volume, so there is definitely some flex And keep in mind, of course, that not all our exabytes are covered by the LTAs. The further you go out, the less of it is covered under LTAs and for sure under pricing component of the LTAs. So we think in the current environment, it is the best way to approach it. And, again, as we for us, it is all about execution on our technology product road map. Get to the higher capacity drives, deliver more value to our customers, and that is a very favorable setup for pricing and further increases in our ASP per terabyte.
Ambrish Srivastava: Thank you, Mark.
Analyst: Great. Can I ask 1 quick follow-up? On the exabyte growth 22% year on year. Is your. I believe you guided long-term exabyte growth to nearline at 25%. I just wanted to clarify if that is still intact, which also your competitor had also outlined. Is that 25% a good guidance for long-term nearline exabyte growth?
Kris Sennesael: Yeah. We actually said greater than 25%. Right? And, again, we have indicated that currently, it is slightly below the 25% because we are in between those 2 product transitions. But as the product transitions are getting more traction, we will exceed that 25%.
Tan Tiang Yew Irving: Great. Thank you very much.
Operator: And at this time, we will conclude today's question-and-answer session. I would like to turn the floor back over to Irving Tan for closing remarks.
Tan Tiang Yew Irving: Thank you, operator. I would like to leave all of you with a few thoughts. The first phase of AI investment focus on building the infrastructure to train models. Even as that continues, the next phases are about deploying AI to work at scale from inference to agents to physical AI. That happens, data will continue to compound driving customers to plan further ahead adopt higher capacity products, and align their infrastructure road maps more closely with our technology road map. For WD, this creates an opportunity that extends well beyond the initial AI infrastructure build out. As AI scales, data creation, associated storage requirements will accelerate and compound. As always, my thanks to our customers, partners, and the entire WD team and for all of you for your interest and support of WD. Thank you.
Operator: The conference has concluded. We do thank you for attending today's presentation. You may now disconnect your lines. Good afternoon, and thank you for standing by. Welcome to Western Digital's First Quarter Fiscal 27 Conference Call. Later, we will conduct a question-and-answer session. At that time, if you would like to ask a question, you may press star and then 1 on your phones. As a reminder, this call is being recorded. Now I would like to turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin. Thank you, and good afternoon, everyone. Joining me today are Irving Tan, WD's chief executive officer, and Christopher Senesael, WD's chief financial officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations. Which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, business plans and performance, ongoing market trends and future financial results, We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10 k and other filings with the SEC for more information on the risks. And uncertainties that could cause actual results to differ materially from expectations. Unless stated otherwise, today's remarks reflect non GAAP results. Reconciliations to GAAP results are available in our press release and at investorwdc.com. With that, I will now turn the call over to Irving. Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Q1 marked a strong start to fiscal 27. Reflecting solid execution across the business and results ahead of our expectations. Revenue grew 55% year-over-year, while gross and operating margins expanded meaningfully to 58%, 49%, respectively. EPS grew 161% year-over-year and we generated $1.4 billion in free cash flow. These results reflect ongoing robust customer demand operational discipline and successful execution of our product and technology road map. Demand remains strong across our customer base and end markets. Our visibility extending further And with it, our conviction in the durability of demand for data storage on HDDs. We are increasingly seeing storage demand grow beyond our core cloud and hyperscale customers. Customers. Into enterprise environments and into newer end markets, such as neo-cloud and AI frontier labs. Resulting in a larger and more diversified customer base. Our customers are making longer term infrastructure investments. And continue to extend their planning horizons into the next decade. As the value of data is increasing, they are investing with confidence to support their growing needs for data storage. With the vast majority of the data being stored on HDDs. We see this firsthand in our customer conversations and in broader industry research. A recent IDC survey of more than 750 companies across several countries found that organizations are storing more data retaining it for longer periods, and increasingly putting archived data back to work. At the core of these trends is continued data growth. Fueled by the ongoing expansion of cloud environments and the increasing storage demands from AI. While much of the conversation around AI focuses on compute, we believe the more enduring opportunity is in data. AI is fundamentally a data system. Every workload creates more data. And that data must be stored, managed, and accessed in a scalable and economical manner. As AI adoption continues to expand across industries worldwide, data creation and storage requirements, are expanding with it. Inference and agentic AI systems are generating significant volumes of logs, model outputs, and system performance data. They must be stored and retained. Physical AI applications such as robotics, battery automation, and autonomous vehicles are further accelerating this trend. With AI generated content and video workloads. That are creating and retaining data at scale. Let me now turn to our industry leading technology innovative products. We are executing well against our technology road map, and remain on track transitioning our customers to higher capacity drives. As we ramp production across our next generation ePMR, and HAMR platforms. We expect our exabyte shipments to continue to increase through fiscal 27 and beyond. Volume production of our latest ePMR platform delivering up to 40 TB of capacity, is off to a strong start. Customer adoption is progressing ahead of prior transitions. And we expect this platform to represent close to 30% of our nearline shipments by the second quarter and 50% by the third quarter of fiscal 27. On our first generation HAMR product, we are on track to finish qualifications with 2 hyperscale customers in the first quarter of calendar year 27. And are on schedule to begin volume shipments in the first half of calendar year 27. We also expect to begin qualifications with 2 additional customers during the first half of calendar year 27. Further expanding customer validation and supporting broader adoption of our HAMR products. As AI workload scale, customers not only need more capacity, but also greater performance from their storage infrastructure. We are expanding the role of HDDs within cloud and AI infrastructure. Through innovations such as our high bandwidth drive, dual pivot technology. By combining the economics of HDDs, with significantly higher levels of performance, we believe this technology can address a broader range of existing and emerging workloads. We are currently sampling a high bandwidth drives with multiple customers and the feedback has been positive. With clear use cases, value creation identified. In summary, WD is executing with momentum. We are deepening customer relationships, extending visibility, and broadening the customer base. While our product and technology road map delivers precisely what customers need. As data grows in volume, and value, across cloud, AI, and emerging workloads. We have high confidence in the durability of long term storage demand. With that, let me turn it over to Christopher. Thank you, Irving. Our first quarter results demonstrate ongoing strength of our business, in combination with outstanding execution on all fronts. Customer demand remains healthy, and our visibility is extending further out. Our product transitions are progressing well, resulting in higher capacity products solid year-over-year growth in exabyte shipped and improved pricing. All driving another quarter of strong financial performance. During the first quarter of fiscal year 27, revenue was $4.4 billion, up 55% year-over-year driven by strong exabyte growth and a favorable pricing environment. We delivered 248 exabytes in the quarter, up 22% year-over-year and up 8% sequentially. Nearline products continued to drive growth. As we execute on our product transitions. Starting with the ramp of our latest generation EPMR drives with capacities up to 40 terabytes, and followed by the introduction of our HAMR technology in the first half of calendar year 27 setting us up for stronger year-over-year growth in exabyte shipments. Cloud revenue was $3.9 billion, representing 88% of total revenue, and increasing 54% year-over-year. Driven by durable demand for our high capacity nearline HDDs. Including the initial ramp of our latest EPMR platform. In addition, continued pricing strength reflects the value and TCO advantages we deliver to our customers. Client represented 7% of total revenue at $320 million, up 119% year-over-year. Consumer represented 5% of revenue, at $193 million, up 19% year-over-year. Gross margin expanded to 58.1% up 34 basis points year-over-year. With incremental year-over-year gross margin above 80%. Gross margin reflects a mix shift towards higher capacity drives, disciplined operational execution, and a favorable pricing environment across our portfolio. As we continue to deliver greater value to our customers. Year over year growth in average price per terabyte further increased to 28% versus the high teens we reported the prior quarter. Operating expenses were $391 million or approximately 9% of revenue. A 130 basis point sequential improvement demonstrating continuing operating leverage in the model. We Operating income of $2.2 billion, increased 152% year-over-year, driven by strong revenue growth, expanding gross margin and operating leverage. Operating margin expanded to 49.1% in the quarter. Demonstrating our ability to continue to drive sustainably higher levels of profitability in the business. Interest and other expenses were $10 million our effective tax rate was 17%. Taking into account a diluted share count of 383 million shares EPS was $4.64. An increase of 161% year-over-year. We generated $1.4 billion in free cash flow during the quarter. And returned $1.1 billion to shareholders through share repurchases and dividends. Reflecting confidence in the durability of free cash flow generation and our ability to drive long term shareholder value. Supported by the strength of the free cash flow generation, and consistent our capital allocation framework. The board has approved a 17% increase in the quarterly cash dividend. From $0.15 per share to $0.01 $75 per share. Which will be paid on December 17, 2026 to shareholders of record as of December 4, 2026. Turning to the balance sheet. During the quarter, we took additional steps to simplify our capital structure by substantially reducing our remaining 28 convertible notes. Our balance sheet remains strong, and we ended the quarter with a net cash position of $500 million. Let me now turn to the outlook for the second quarter of fiscal 27. We continue to operate in an environment of strong demand and favorable pricing in all our end markets. For the second quarter of fiscal 27, we expect revenue to be $5.1 billion, plus or minus $100 million. At the midpoint, this reflects a 69% increase year-over-year. Gross margin is expected to be in the range of 60% to 61%. We continue to benefit from the shift to higher capacity drives along with a strong pricing environment. We anticipate operating expenses of $400 million to $410 million a sequential increase driven by the project expenses related to increased product qualification activities. Interest and other expenses are expected to be $15 million. The tax rate is expected to be 17%. As a result, we expect diluted earnings per share to be $5.80, plus or minus $0.20 based on a non GAAP diluted share count of 380 million shares. As we look ahead, demand remains robust. Customer engagements continue to deepen, and broaden. And our visibility continues to improve. And as we execute, on our technology and product transitions, we expect to accelerate exabyte supply growth throughout fiscal year 2027 and 2020. Our strong balance sheet and free cash flow generation give us the ability to make targeted investments that strengthen our technology leadership and support our customers' growing storage needs. While we expect capital expenditures to average 4% to 6% of revenue, over a 5 year period. We anticipate that CapEx as a percentage of revenue will be modestly above that range over the next 2 years. As we continue to invest in heads and media technology and factory automation. Supporting our industry leading aerial density and higher capacity drives. Without having to spend CapEx to add unit capacity. In summary, accelerating exabyte growth technology leadership, expanding margins and disciplined capital allocation. Provide a solid foundation for sustainable earnings free cash flow growth, and long term shareholder value creation. With that, let's now begin the Q&A. Ambrish. Thank you, Christopher. Operator, you can now open the line to questions, please. And to ensure that we hear from as many analysts as possible, please ask 1 question at a time. After we respond, we will give you an opportunity to ask 1 follow-up question. Operator? We will now begin the question-and-answer session. You are using a speakerphone, we do ask you to please pick up the handset before pressing the keys. To withdraw your questions, you may press star and 2. And as mentioned, we do ask that you please limit yourselves to a single question and a follow-up. At this time, we will pause momentarily to assemble a roster. Our first question today comes from Amit Daryanani from Evercore. Please go ahead with your question. Yep. Thanks a lot. Good afternoon, everyone. I guess maybe to start with, Irving, there is always a lot of focus on HAMR. And you outlined sort of completing qualifications at 2 hyperscalers in March, volume shipments mid 27. Can you just talk about what are the remaining milestones between those 2 from your perspective? And then what determines how quickly you scale from there? Is it more by. Driven by customer deployment schedules your manufacturing readiness? Just any help there. Yeah. I mean, thanks for the question. First of all, was. I am very pleased with the progress that we are making with HAMR. As we have highlighted in the past, feedback from our customers have been very positive, particularly around the failure rates that we have seen in our drive performance vis a vis what they have seen with other players within the market. As a result of that, we are very confident in terms of finishing qualifications with the 2 customers that we have. Our first generation HAMR products in Q1. We will be starting qualification with 2 additional customers in the first half of calendar year 27 as well. We have not had any feedback that would give us any reason for pause in terms of us translating that call completion to volume shipments starting first half 27. Our. Both our customer technical support teams are working very closely with customers to complete those call schedules and get them into production across our global operations teams. We are working closely with our own internal manufacturing assets and vendors to get the supply chain ready to support the ramp as well. And then starting in the second half of calendar year 27, we will also start qualification of our second generation. HAMR drives, and this will be at 5 terabytes per platter. On 11 disk platform. So overall, very pleased with the progress. I think the engineering and operations teams across the company have done a great job in really helping us accelerate development of the products, the reliability, of it, and then we are focused very much on scaling it up and getting it into customers' hands. Do you have a follow-up, Amit? I do. Thanks a lot. I am reaching. Maybe just to follow-up on the cost per terabyte. You know, I realize you folks have talked about some of this input cost inflation, headwind. But I think cost per terabyte was down, like, 4, 5% in September quarter. that is the lowest we have seen in a while. You can just touch on what is happening there and what is the right way to think about this longer term because do realize you are guiding for some really strong gross margins in December. So just a little bit on the cost per terabyte number would be helpful. Yeah. So as Irving just indicated, we continue to execute well on our technology road map and product transitions. Basically moving to higher capacity drives based on a better and higher aerial density. And so we are well on track in the long run to reduce our cost per terabyte approximately 10% year-over-year in the near term. And I have indicated this before. This is not a surprise. We are facing some input cost increases As most of you know, we use some DRAM and some NAND inside our hard disk drives. And the whole supply chain really operates in a very tight environment. And so we are seeing some of those input cost increases. We are addressing all of them, through value engineering initiatives that where we are seeing some good traction. It takes a little bit of time to implement and qualify those solutions. And so in the near term, our cost per terabyte will be less than 10% down year-over-year. Taking us all into account, as you indicated as well, we are delivering very strong free, gross margins and in the sub. In the sub quarter as well as a strong guide for the December quarter. Our incremental gross margin continue to be very strong well above 80%. And so I think we are, we are very well set up to continue to increase our gross margins over time. Thank you, Amit. Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question. Yes. Thank you. Irving, I was wondering if you could just address this angst around incremental capacity ads from the smallest player in the market, and there is been some chatter around potential consolidation in the industry. Just would love to get your high level take on what you think could be if there is any potential impact from that at an industry level? And is that impacting any of your price negotiations with hyperscale customers in the out years? Yeah. Wamsi, thanks for the question. I would say at a high level, we do not see any change in terms of the long term fundamentals of both the industry or our business. Specifically. Right? We continue to see, demand continuing to be very strong. Oh, you know, 25%-plus CAGR as we have highlighted, consistently, in a very tight supply. Environment. And we remain committed to our strategy and our focus to meet that supply demand growth based on leading aerial density, and that is delivered through technology particularly through our hidden media technology because that is the best way to deliver, the best TCO to our customers and to also drive greater profitability of our business for our business as well. And that is you know, you can see that focus in terms of the. Both, you know, the investments we are making both into research and development and into capital investment into our head and media parts of the business. And I think the unique differentiation that we have with our own hidden media development the drive integration capability, that we have gives us that confidence to be able to meet that growth trajectory through Aerodensity, and therefore, remain committed to not investing in any incremental unit capacity. You know, there may be some other players in the market who do not have that unique ability to build their own media, build out their own heads, drive that area density improvement, and they have to compensate that by potentially maybe increasing the number of units just to maintain their share. And position in the marketplace. Do you have a follow-up, Wamsi? Yeah. Do not worry. Thanks. So on the exabyte shipment, you grew 22%. And as I am hearing you, talk about sort of the trajectory here for the rest of the year, it looks like you expect that growth to improve as you execute on these product transitions. And then have HAMR in the mix. Could you just give us some sense of what it is at the high level? Like, is it right to think of 2027 at roughly your longer term range for the year? Is that the right way to think about it? And, maybe just if you think about unconstrained sort of demand, how much higher is that relative to where your supply is and do you see that widening because of just how strong the demand is over the next, you know, couple of years? Thank you. Yeah. Thanks for the question, Wamsi. We sort of see the current quarter as being sort of the floor. In terms of exabyte growth, and we see that accelerating through the rest of the fiscal year. And, obviously, as Christopher highlighted in the script, to 2028 and beyond that, as well. that is really driven by know, the confidence that we have in the new platforms that we will be introducing. Obviously, we have HAMMER coming out in the first half of fiscal 27. And then as I highlighted, we have a second generation HAMR drive starting qualification in second half as well. So we are very quickly at the top end going from a 32 terabyte drive to a 44 terabyte drive. To a 55 terabyte drive and beyond. And that is the best way, the most economical way for both our customers and for us to be able to meet the demands that they have in terms of our products. To your question around the demand, as I said, we see that continuing to grow. We do see it being very durable. There has not been any diminishing in demand, and we do not see the gap in supply or demand that exist today is perishable in the near term as well. So continue to focus on supporting our customers the best we can with the technology that we have. Thank you, Wamsi. Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead with your question. Super, guys. Thank you so much for taking my questions, and congrats on a on a quarter and a guide. Irving, can you maybe just share a bit more granular detail on your visibility comments, meaning how far out are we talking, how many customers are we talking, And for those customers that are planning that far out, just what are their exabyte needs today or in the future relative to 3 or 6 months ago? Do you do you see that demand kind of expanding relative to, again, 3 or 6 months ago? Thanks. Yeah. Erik, thanks for the question. I think in terms of visibility outlook, if you take our top 7 customers as a as an example, we have good visibility up to 2020, 2030 for. Across all 7. Of them, and that is something that we have highlighted that we have always done so we can make sure we both deliver both the technology and the supply to meet that growth in demand going forward And so we have good visibility in that. In fact, we see a quarter after quarter, the demand signal actually increasing over time. And as we move forward into the 2.83 thousand 2030 time frame, we see that demand continuing to be very durable. Do you have a follow-up, Erik? Yeah. Thank you, Ambrish. And then just, as a follow-up, you obviously just grew revenue 55% year-over-year. You are guiding to 69 year-over-year revenue growth at the midpoint in December. Incredibly strong. And obviously, you are referencing some exabyte growth acceleration. But that also then excuse me, that also implies that you are going to be accelerating price in the December quarter as well. So could you maybe just help us understand what is the source of that pricing acceleration Is that coming from a non nearline side? Is that the nearline side? I assume it is probably both. But just any more granular color you can provide on why we are seeing that acceleration in pricing in the December quarter and how sustainable that is? Thank you. Yeah. Erik, we continue to operate in a very strong favorable pricing environment. You saw our blended average selling price per terabyte was up 28% on a year-over-year basis, and we saw that strength across the board in nearline and non nearline, some of our consumer and client business as well. Pricing environment is strong, because we do execute on our technology and product roadmap, and we continue to deliver higher capacity drives to our customers that help our customers to reduce their total cost of ownership. Because you have better rack density, lower power consumption, and a lot of benefits. For our customers. As we continue to execute on that strategy and continue to deliver higher capacity drives, there is an opportunity to further enhance our price per terabyte over time. As you probably know, some of that business is under LTAs, Some of the LTAs are expiring and new agreements are being put in place. And in addition to that, of course, some of our exabytes are not under contract as well, and we do see a very strong price environment for those exabytes that are not under contract as well.