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    WDC
    Earnings call· Sep 2025(Q1 FY26)

    WESTERN DIGITAL CORP WDC

    Oct 30, 2025 Source

    Executive summary

    Western Digital Q1 FY26 — AI-Driven Demand Fuels Strong Performance and Capital Returns

    Western Digital delivered a strong quarter, driven by robust AI-fueled demand for high-capacity hard disk drives, leading to significant revenue growth and margin expansion. The company is securing long-term customer commitments and accelerating its HAMR technology roadmap, while also returning capital to shareholders through increased dividends and share repurchases. Management anticipates continued tailwinds and strong free cash flow generation.

    Highlights

    5

    • Revenue of $2.8 billion, up 27% year-over-year, exceeding the high end of guidance.

    • Non-GAAP gross margin of 43.9%, an improvement of 660 basis points year-over-year and 260 basis points sequentially.

    • Diluted non-GAAP EPS of $1.78, above the high end of guidance.

    • Strong free cash flow generation of $599 million for the quarter.

    • Increased quarterly cash dividend by 25% to $0.125 per share, demonstrating confidence in the business.

    Concerns

    1

    • Operating expenses slightly exceeded guidance at $381 million due to higher variable compensation.

    Guidance & targets

    11
    CategoryTargetConfidence
    Revenue
    $2.9 billion +/- $100 million
    high materiality
    High
    Gross margin
    44% to 45%
    high materiality
    High
    Operating expenses
    $365 million to $375 million
    medium materiality
    High
    Interest and other expenses
    approximately $50 million
    low materiality
    High
    Tax rate
    approximately 17%
    low materiality
    High
    Diluted EPS
    $1.88 +/- $0.15
    high materiality
    High
    Non-GAAP diluted share count
    approximately 375 million shares
    low materiality
    High
    Exabyte growth CAGR
    trending more towards 23%
    high materiality
    Medium
    Cost per terabyte reductions
    mid- to high single-digit
    medium materiality
    High
    Incremental gross margin
    approximately 50%
    medium materiality
    High
    Free cash flow margin
    plus 20% range
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Cloud
    Represented 89% of total revenue, driven by strong demand for higher capacity nearline product portfolio.
    		$2.5 billion31%——
    Client
    Represented 5% of total revenue.
    		$146 million5%——
    Consumer
    Represented 6% of total revenue.
    		$162 million-1%——

    Operational metrics

    27
    Non-GAAP gross margin
    43.9%up 660 bps YoY, up 260 bps QoQ
    Q1 FY26

    Reflects continuous mix shift towards higher capacity drives and tight cost control.

    Non-GAAP operating expenses
    $381 million
    Q1 FY26

    Slightly exceeded guidance due to higher variable compensation on stronger-than-expected results.

    Non-GAAP operating income
    $856 million
    Q1 FY26

    Translates into an operating margin of 30.4%.

    Interest and other expenses
    $44 million
    Q1 FY26

    Reported for the fiscal first quarter.

    Effective tax rate
    17%
    Q1 FY26

    Used in EPS calculation.

    Diluted share count
    369 million shares
    Q1 FY26

    Used for non-GAAP EPS calculation.

    Cash and cash equivalents balance
    $2 billion
    Q1 FY26

    Balance at the end of the fiscal first quarter.

    Total liquidity
    $3.3 billion
    Q1 FY26

    Total liquidity at the end of the fiscal first quarter.

    Debt outstanding
    $4.7 billion
    Q1 FY26

    Total debt outstanding at the end of the fiscal first quarter.

    Net debt position
    $2.7 billion
    Q1 FY26

    Calculated as debt outstanding minus cash and cash equivalents.

    Net leverage EBITDA ratio
    just below 1 turn
    Q1 FY26

    Net debt to EBITDA ratio.

    Capital expenditures
    $73 million
    Q1 FY26

    Capital expenditures for the fiscal first quarter.

    Repatriation tax payment
    $331 million
    Q1 FY26

    Final repatriation tax payment made during the quarter.

    Share repurchases
    $553 million
    Q1 FY26

    Amount spent on share repurchases during the quarter.

    Dividend payments
    $39 million
    Q1 FY26

    Total dividend payments made during the quarter.

    Total capital returned to shareholders
    $785 million
    Since Q4 FY25

    Cumulative capital returned since the launch of the capital return program.

    Quarterly cash dividend per share
    $0.12525% increase
    Q2 FY26

    Approved by the Board, payable to shareholders of record as of December 4, 2025.

    Exabytes delivered
    204 exabytesup 23% YoY
    Q1 FY26

    Total exabytes delivered to customers.

    ePMR drive shipments
    2.2 million units
    Q1 FY26

    Shipments of latest generation ePMR products.

    ePMR drive shipment forecast
    well north of 3 million units
    Q2 FY26

    Expected shipments for the next quarter.

    UltraSMR and CMR mix
    roughly 50-50
    Q1 FY26

    Mix of UltraSMR and CMR in current product shipments.

    Average capacity for top 7 hyperscale customers
    increased 21%YoY
    YoY

    Increase in average capacity of drives shipped to key customers.

    Productivity gains from internal AI
    up to 10%
    Q1 FY26

    Productivity gains in select AI use cases in factories (yield, defect detection, test optimization).

    Productivity gains from internal AI
    about 20%
    Q1 FY26

    Productivity gains from using AI to modernize firmware.

    SanDisk remaining stake
    7.5 million shares
    Q1 FY26

    Remaining shares of SanDisk held by Western Digital.

    ASP per terabyte increases
    modest low single-digitssequential and YoY
    Q1 FY26

    Reflects a strong price environment.

    HDD CapEx share of AI spend
    4% to 5%up from low single digits
    Current

    Percentage of CapEx for HDDs within total AI infrastructure spend.

    Industry KPIs

    9
    MetricValueDetails
    Capital return FCF$599 millionUSD
    Unit shipments ASP2.2 million unitsunits
    Gross margin drivers43.9%%
    Exabyte bit shipments204 exabytesexabytes
    Long term supply agreements7 customerscustomers
    Component supply constraintssupply constrained
    Capacity roadmap qualificationH1 CY26
    Revenue mix by end market segment89% Cloud, 5% Client, 6% Consumer%
    Revenue per terabyte cost per exabytemodest low single-digits%

    Product announcements

    3
    ProductTypeDetails
    HAMR technologymilestone
    Next-generation ePMR drivesroadmap
    System Integration and Test Lablaunch

    Deals & partnerships

    3
    Top 7 hyperscale customersPurchase orders for high-capacity drivesthroughout H1 CY26

    Top 7 customers have provided purchase orders extending throughout the first half of calendar year 2026.

    5 of top 7 hyperscale customersPurchase orders for high-capacity drivesall of CY26

    5 of the top 7 customers have provided purchase orders covering all of calendar year 2026.

    One of largest hyperscale customersAgreement for high-capacity drivesall of CY27

    One of the largest hyperscale customers has signed an agreement covering all of calendar year 2027, with significant commercial teeth.

    Risks & headwinds

    2
    Macroeconomic uncertaintiesongoing

    unquantified

    Mitigation: Focus on AI opportunities and strong execution.

    Supply constraints for high-capacity drivescalendar year 2026

    supply constrained

    Mitigation: Focus on increasing areal density, manufacturing throughput, AI tools, and accelerating qualification of new technologies (ePMR, HAMR) without adding unit capacity.

    What to watch in Q2 FY26

    5

    Revenue growth

    Q2 FY26
    Current$2.8B (up 27% YoY)
    Target$2.9B +/- $100M (up ~20% YoY at midpoint)

    Why it matters

    Verifies continued strong demand and execution in the AI-driven market, aligning with guidance.

    We anticipate revenue to be $2.9 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 20% year-over-year.

    Q&A highlights

    6

    How does Western Digital plan to meet rising demand while maintaining supply/demand balance, and what is the outlook for incremental gross margins?

    Management stated they are not adding unit capacity but focusing on delivering higher capacity drives (ePMR, UltraSMR), investing in areal density, and increasing manufacturing throughput via automation and AI. They expect incremental gross margins of approximately 50% going forward, driven by mix shift and cost control.

    “we are not adding any unit capacity to our portfolio right now.”

    asked by Christopher Muse · answered by Tiang Yew Tan

    2 min read6 chapters

    Detailed Narrative

    01

    AI as a Core Growth Driver

    AI is expanding across industries, fueling innovation and driving robust demand for data infrastructure. Western Digital highlights AI as both a consumer and prolific creator of data, reshaping how data is generated, scaled, stored, and monetized. HDDs play a vital role in storing the increasing zettabytes of data created by the AI-driven economy, with management noting a trend towards the higher end of their exabyte growth CAGR projections (23%).

    02

    High-Capacity Drive Leadership and Roadmap Acceleration

    The company is seeing strong demand for its latest ePMR products, shipping over 2.2 million units (70 exabytes) in Q1 FY26, with expectations to ship over 3 million units in Q2 FY26. The UltraSMR technology provides a 20% capacity uplift over CMR. Western Digital is accelerating its HAMR technology roadmap, with qualification for one hyperscale customer in H1 CY26 and expansion to up to three customers by year-end CY26, targeting volume production in H1 CY27. Next-generation ePMR drives will also begin qualification in Q1 CY26.

    03

    Strengthened Customer Commitments and Supply Discipline

    Customers are providing greater visibility into long-term needs due to the increased complexity and longer lead times for high-capacity drives. The top 7 customers have provided purchase orders extending through H1 CY26, with 5 covering all of CY26. One large hyperscale customer has signed an agreement covering all of CY27. Management emphasized that these are firm purchase orders or agreements with significant commercial terms, not just LTAs, and that the company is not adding any unit capacity, maintaining supply discipline.

    04

    Internal AI Adoption and Productivity Gains

    Western Digital is leveraging AI internally to enhance productivity and accelerate innovation. Examples include productivity gains of up to 10% in manufacturing through improved yields and optimized test processes, and approximately 20% productivity gains in firmware modernization. AI tools are also being used to up-level technician capabilities and streamline corporate workflows, contributing to operational efficiencies.

    05

    Strong Financial Performance and Capital Allocation

    The company delivered Q1 FY26 revenue of $2.8 billion, non-GAAP gross margin of 43.9%, and non-GAAP EPS of $1.78, all exceeding guidance. Free cash flow was robust at $599 million, despite a $331 million repatriation tax payment. The Board approved a 25% increase in the quarterly dividend to $0.125 per share, and the company repurchased $553 million in shares during the quarter, bringing total capital returned to shareholders to $785 million since Q4 FY25.

    06

    SanDisk Monetization and Future Plans

    Western Digital still holds 7.5 million shares of SanDisk. The company intends to monetize this remaining stake before the February 21 deadline, which marks the one-year anniversary of the separation. Management indicated that the monetization could potentially involve a debt-for-equity exchange, similar to the previous transaction.

    AI-generated summary of the company’s earnings call. Not investment advice.