WDC Q1 Earnings Call: Storage Demand and Margin Expansion Offset Market Uncertainty

Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 33.6% year on year to $2.29 billion. The company expects next quarter’s revenue to be around $2.45 billion, close to analysts’ estimates. Its non-GAAP profit of $1.36 per share was 22.7% above analysts’ consensus estimates.

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StockStory’s Take

Western Digital’s first quarter was marked by resilient performance in the face of year-on-year sales declines, driven by ongoing strength in data center storage demand and operational discipline. CEO Irving Tan attributed the quarter’s results to rapid adoption of high-capacity hard drives and successful management of the complex business separation, highlighting collaboration with hyperscale customers and the company’s ability to deliver technology upgrades without major new capital investment.

Looking ahead, management’s guidance reflects confidence in continued sequential growth, underpinned by long-term customer agreements and ongoing innovation in storage technology. Tan acknowledged persistent risks from tariffs and global trade tensions, but emphasized visibility into customer demand through 2026 and the ramp-up of new products. As Tan stated, “We see demand continuing to be strong and robust throughout the calendar year '25 and into the middle of calendar year '26 as well.”

Key Insights from Management’s Remarks

Management focused on product innovation and operational efficiency as the main forces behind the quarter’s results and upcoming strategy.

• High-capacity drive adoption: Western Digital’s 11-disk drives, offering up to 32 terabytes of storage, have seen significant uptake, with over 800,000 units shipped in the quarter and plans to exceed 1 million next quarter. This rapid adoption supports exabyte growth without requiring major new capital expenditures.
• Data center and hyperscale focus: The bulk of revenue was driven by strong demand from hyperscale data center customers, supported by long-term agreements extending through the first half of 2026. These agreements provide visibility and stability in planning supply and production.
• Operational discipline post-separation: The company completed the separation of its Flash business and maintained cost discipline during the transition, resulting in improved operating margins and free cash flow.
• Tariff and trade mitigation: Cross-functional teams have been set up to manage evolving tariff risks and global supply chain shifts, aiming to minimize disruptions and prepare for potential changes in trade policy.
• Leadership and product strategy: The addition of Chief Product Officer Ahmed Shihab, with experience at major cloud providers, signals a continued emphasis on aligning product development with large-scale customer requirements.

Drivers of Future Performance

Management’s outlook for the next quarter and year centers on ongoing strength in data center demand, further product innovation, and prudent navigation of external risks.

• Hyperscale customer agreements: Long-term contracts with major data center customers are expected to underpin stable demand and support sequential growth through 2026, reducing exposure to sudden market swings.
• Product innovation roadmap: The introduction of higher-capacity drives, including upcoming 28TB and 36TB platforms, as well as ongoing work on HAMR (Heat-Assisted Magnetic Recording) technology, is expected to sustain pricing power and margin expansion.
• Tariff and supply chain risks: Management identified tariffs and global trade policy as ongoing risks, noting that cross-functional teams are in place to adapt to changing conditions and maintain operational resilience.

Top Analyst Questions

• Erik Woodring (Morgan Stanley): Asked about the company’s approach to dividends and share buybacks; management reiterated plans to increase shareholder returns as leverage targets are met.
• Aaron Rakers (Wells Fargo): Inquired about the impact of tariffs on guidance; management explained that current guidance accounts for known tariff risks and that most production is outside China, limiting direct exposure.
• Karl Ackerman (BNP Paribas): Questioned capacity additions and demand from non-hyperscale customers; management emphasized that technology improvements, not new factories, will drive exabyte growth, and noted steady demand trends across customer segments.
• Asiya Merchant (Citigroup): Probed for signs of double-ordering by hyperscale customers; management stated that order patterns align with long-term agreements and do not indicate excess inventory buildup.
• Mehdi Hosseini (SIG): Asked about component sourcing and the impact of industry M&A; management described a diversified supplier base and ongoing efforts to vertically integrate when advantageous.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the continued adoption of high-capacity drives amid shifting data center demand, (2) the company’s ability to sustain strong operating margins despite external cost pressures like tariffs, and (3) progress on product innovation milestones, including the development and qualification of HAMR technology. Updates on the disposition of the retained ScanDisk stake and success in managing inventory levels will also be important indicators.

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