Executive Summary / Key Takeaways

• Western Digital, now a pure-play HDD company post-separation, is capitalizing on robust demand from hyperscale customers and the accelerating AI Data Cycle, driving significant revenue growth and margin expansion.
• The company's differentiated technology, particularly UltraSMR and its 11-disk platforms (26TB CMR, 32TB Ultra SMR), provides a competitive advantage by delivering superior Total Cost of Ownership (TCO) and enabling margin-accretive pricing.
• Operational improvements, including a focus on 52-week customer visibility and build-to-order, are enhancing supply-demand balance and predictability, structurally improving through-cycle profitability.
• Financial performance in the nine months ended March 28, 2025, shows strong top-line growth (+60% YoY), significant gross margin improvement (up 13 percentage points), and positive operating cash flow, supporting a shareholder-friendly capital allocation strategy.
• Strategic initiatives like debt reduction ($1.8B redeemed post-Q3), planned monetization of the Sandisk stake, initiation of a quarterly dividend ($0.10/share), and a new share repurchase program signal confidence in future cash generation and a commitment to returning value to shareholders.

The Dawn of a New Era: Western Digital's HDD Focus

Western Digital Corporation (WDC) stands at a pivotal juncture, having recently completed the strategic separation of its Flash business to become a focused leader in Hard Disk Drive (HDD) technology. This transformation, initiated following a comprehensive strategic review announced in October 2023 and finalized on February 21, 2025, is designed to unlock value by allowing each entity to pursue distinct strategies, optimize operations, and tailor capital structures to their respective markets. For the remaining Western Digital, this means doubling down on its core strength: providing the foundational mass data storage solutions essential to the digital age, particularly as the artificial intelligence (AI) Data Cycle accelerates.

Historically operating across both volatile Flash and more stable HDD markets, Western Digital's journey has been marked by significant acquisitions and technological evolution. The decision to separate was a direct response to market dynamics and a strategic imperative to enhance agility and focus. Now, as a pure-play HDD company, Western Digital addresses three primary end markets: Cloud, Client, and Consumer. The Cloud segment, serving public and private cloud environments and enterprise customers, has emerged as the dominant force, reflecting the insatiable demand for data storage driven by digital transformation and AI workloads.

The investment thesis for the new Western Digital is fundamentally tied to the structural improvements in the HDD market, the company's differentiated technology, and a disciplined operational and financial strategy aimed at sustained profitability and shareholder returns.

Technological Bedrock: The Power of Density and TCO

At the heart of Western Digital's competitive strategy is its differentiated HDD technology, which provides a significant moat in the market. The company's focus on increasing aerial density and delivering higher capacity drives is paramount, directly translating into a lower Total Cost of Ownership (TCO) for its customers, particularly the large hyperscalers.

A key differentiator is Western Digital's UltraSMR technology. This innovation enables a 20% capacity uplift over standard recording media, allowing the company to deliver incremental exabytes without requiring commensurate capital expenditure in additional production units. This capability is a direct driver of both exabyte growth and margin expansion. The company's industry-leading 11-disk platforms, including the 26TB CMR and 32TB Ultra SMR drives, are ramping rapidly, with over 800,000 units shipped in the quarter ended March 28, 2025, and projected shipments exceeding 1 million units in the subsequent quarter. The swift qualification and adoption cycle of these drives underscore their reliability, ease of implementation, and the fastest time to value for customers.

Beyond current offerings, Western Digital is actively developing future technologies. The HAMR (Heat-Assisted Magnetic Recording) roadmap remains on track, with the company working closely with two hyperscale customers and receiving encouraging feedback. Qualification for HAMR is expected to begin in the second half of calendar year 2026, with high-volume production ramping in the first half of calendar year 2027. Additionally, new 28TB and 36TB ePMR platforms are slated for introduction in the coming months, further extending the capacity roadmap.

This continuous technological innovation is crucial in the competitive landscape. While rivals like Seagate Technology (STX) also pursue advanced recording technologies like HAMR and offer competing HDD products, Western Digital's current lead in UltraSMR adoption and its rapid ramp of 11-disk drives provide a tangible advantage in delivering immediate TCO benefits. In the Flash market (now Sandisk), Western Digital's historical focus on technologies like BiCS NAND and enterprise SSDs (including PCIe Gen 5 and high-capacity drives) positioned it against competitors like Micron Technology (MU), which excels in memory and flash fabrication. However, post-separation, Western Digital's competitive focus is squarely on the HDD market dynamics and maintaining its technological edge in density, reliability, and TCO against its primary HDD peer. Against enterprise storage solution providers like NetApp (NTAP), Western Digital competes by offering cost-effective, high-density hardware that forms the foundation of data center infrastructure, contrasting with NetApp's software-defined and cloud-centric approach.

The "so what" for investors is clear: Western Digital's technological prowess in HDDs is not merely about pushing capacity limits; it's about enabling a value-based pricing strategy. By delivering superior TCO through higher density and operational efficiency, the company can command better average selling prices per unit, directly contributing to the significant gross margin expansion observed recently.

Operational Discipline and Financial Performance

The strategic pivot to a pure-play HDD model is underpinned by a renewed focus on operational discipline and structural cost improvements. The company has restructured its manufacturing footprint and optimized its cost structure, contributing meaningfully to increased profitability.

A key operational shift is the move towards greater customer visibility and build-to-order (BTO) practices. Recognizing the complexity and long lead times (approximately 50 weeks) in HDD manufacturing, Western Digital is actively seeking 52-week visibility into customer demand. This enhanced predictability is crucial for aligning investments and production, dampening historical volatility, and ensuring a better supply-demand balance. Long-term agreements (LTAs) extending through the first half of calendar year 2026 with two of its largest customers provide concrete evidence of this improved visibility and partnership.

Financially, the results for the nine months ended March 28, 2025, reflect the early success of this focused strategy. Net revenue from continuing operations (HDD) surged to $6,915 million, a remarkable 60% increase compared to the $4,313 million in the prior year period. This growth was fueled by an 18% increase in units sold and a substantial 35% increase in average selling price per unit, driven by the favorable mix shift towards larger capacity drives, particularly in the Cloud segment. Cloud revenue alone grew 80% year-over-year for the nine-month period, reaching $6,012 million.

Gross profit saw an even more dramatic increase, rising 144% to $2,625 million for the nine months ended March 28, 2025, compared to $1,076 million in the prior year. This translated into a gross margin of 38.0%, a significant 13 percentage point improvement from 24.9%. The improvement was driven by higher volume, improved pricing, favorable product mix, and the absence of charges for unabsorbed manufacturing overhead costs that impacted the prior year ($148 million for the nine months ended March 29, 2024). Operating income reached $1,654 million (23.9% margin) for the nine-month period, a substantial increase from $312 million (7.2% margin) in the prior year.

The balance sheet reflects changes related to the separation and ongoing financial management. Cash and cash equivalents increased significantly to $3,477 million by March 28, 2025. Total debt stood at $7,380 million. The company generated $945 million in net cash from operating activities during the nine-month period. Key working capital metrics showed a 7-day increase in DSO (partially due to lower factoring), a 24-day decrease in DIO (reflecting higher inventory consumption), and a 10-day increase in DPO (due to more favorable terms and timing).

Capital Allocation and Shareholder Returns

With improving financial performance and a strengthened balance sheet, Western Digital is executing a shareholder-friendly capital allocation strategy. The goal is to reduce net leverage to a target range of 1.0x to 1.5x. As of March 28, 2025, the net leverage ratio was 1.7x, but subsequent actions have further improved this. Post-quarter end, the company redeemed $1.8 billion aggregate principal amount of its 4.75% senior unsecured notes due 2026, reducing gross debt and bringing net debt below $4 billion.

The planned monetization of the retained 19.9% stake in Sandisk within one year of the separation date is expected to provide additional proceeds for debt reduction.

Reflecting confidence in the business's cash-generating ability, the company's Board of Directors authorized the adoption of a quarterly cash dividend program on April 29, 2025, declaring a first dividend of $0.10 per share payable in June 2025. Furthermore, a new $2.0 billion share repurchase program was authorized effective May 13, 2025. The stated intention is to return 100% of excess cash to shareholders through dividends and buybacks once the net leverage target is achieved.

Outlook and Risks

Looking ahead, Western Digital anticipates continued momentum. For the fiscal fourth quarter ending June 28, 2025, the company guided for sequential revenue growth, projecting revenue between $2.30 billion and $2.60 billion (midpoint $2.45 billion). This growth is expected to be driven by sustained strength in data center demand. Gross margin is projected to be between 40% and 41%, signaling continued profitability improvement. Operating expenses are expected to increase slightly to $330 million to $340 million, reflecting variable compensation and investments. EPS is guided to be between $1.25 and $1.65 (midpoint $1.45). The tax rate is expected to be between 8% and 10%, benefiting from prior period tax items.

Management commentary emphasizes the robust demand from hyperscalers and the visibility provided by LTAs into calendar year 2026. The ramp of new, higher-capacity drives is expected to continue driving favorable pricing and mix. While the Cloud segment remains strong, the company acknowledges potential demand uncertainty in the enterprise, distribution, and retail segments, partly influenced by the current tariff environment and broader macroeconomic caution.

Key risks for Western Digital include the potential impact of adverse global conditions, including tariffs and trade restrictions, which could affect demand and costs. Supply chain disruptions, dependence on key suppliers, and the inherent cyclicality of the storage market remain factors. While the separation is complete, risks associated with establishing two independent companies and executing transition service agreements persist. Competition from other HDD manufacturers and alternative storage technologies (like SSDs and cloud storage) continues to exert pressure on pricing and market share. The company's level of debt, although decreasing, still represents a financial obligation.

Despite these risks, the company's focus on technological leadership, operational efficiency, securing long-term customer commitments, and a disciplined capital allocation strategy positions it to capitalize on the long-term growth trends in data storage, particularly those fueled by the AI Data Cycle.

Conclusion

Western Digital has undergone a significant transformation, emerging as a focused HDD company poised to benefit from the foundational role of mass data storage in the age of AI. The investment thesis is grounded in the company's technological leadership, particularly its ability to deliver cost-effective, high-density drives through innovations like UltraSMR. This technological edge, combined with operational improvements aimed at enhancing predictability and efficiency, is driving substantial improvements in financial performance, marked by strong revenue growth and expanding gross margins. With a clear strategy for debt reduction and a commitment to returning capital to shareholders through dividends and buybacks, Western Digital is signaling confidence in its future cash flow generation. While macroeconomic uncertainties and competitive pressures remain, the company's strategic focus and execution provide a compelling narrative for investors looking for exposure to the essential infrastructure powering the digital economy.