Western Digital's Q1 2026: Contradictions Emerge on Supply/Demand, HAMR Timelines, and Pricing

Date of Call: October 30, 2025

Financials Results

• Revenue: $2.8 billion, up 27% YOY
• EPS: $1.78 per diluted share (non-GAAP)
• Gross Margin: 43.9%, improved 660 basis points YOY and 260 basis points sequentially
• Operating Margin: 30.4%

Guidance:

• Revenue for Q2 FY2026 expected to be $2.9B +/- $100M (midpoint ~20% YOY growth)
• Gross margin expected 44%–45% (midpoint 44.5%)
• Operating expenses expected $365M–$375M (sequential decline)
• Interest & other expenses ~ $50M; tax rate ~ 17%
• Non-GAAP diluted EPS expected $1.88 +/- $0.15 (approx. 375M shares)

Business Commentary:

• Strong Demand for Data Center Products:
• Western Digital reported revenue of $2.8 billion for the fiscal Q1 2026, up 27% year-over-year, driven by strong demand for its nearline drives.

• The demand was particularly robust among cloud customers, with cloud representing 89% of total revenue.

• Exabyte Growth and AI Impact:

• The company delivered 204 exabytes to its customers in the first fiscal quarter, representing a 23% year-over-year increase.

• This growth was largely driven by the rapid adoption of AI across various industries, leading to increased demand for data infrastructure capable of supporting and storing large volumes of data.

• Gross Margin Improvement:

• Western Digital achieved a non-GAAP gross margin of 43.9%, marking an improvement of 660 basis points year-over-year and 260 basis points sequentially.

• The improvement was primarily due to a shift towards higher capacity drives and effective cost control measures throughout the manufacturing supply chain.

• Outlook and Investments:

• For the fiscal second quarter of 2026, Western Digital expects continued revenue growth driven by data center demand, with guidance for revenue to be between $2.9 billion, reflecting a growth of approximately 20% year-over-year.
• This optimistic outlook is supported by the company's strategy to increase its manufacturing throughput and invest in head wafer and media technology to drive areal density higher.

Sentiment Analysis:

Overall Tone: Positive

• Company beat guidance: revenue $2.8B (up 27% YOY), non-GAAP gross margin 43.9% (up 660 bps YOY), EPS $1.78, free cash flow $599M; increased share repurchases and 25% dividend raise; Q2 guide implies further margin improvement (44%–45%) and revenue growth.

Q&A:

• Question from Christopher Muse (Cantor Fitzgerald & Co.): How do you plan to meet rising customer demand while keeping supply/demand in balance given rising SSD adoption for some AI workloads?
  Response: Ramp higher-capacity ePMR/UltraSMR drives, increase throughput via automation/AI and test-lab acceleration; not adding unit capacity now.

• Question from Christopher Muse (Cantor Fitzgerald & Co.): How should we think about incremental gross margins from here? Is there a framework?
  Response: Q1 incremental gross margin ~75% sequentially; Q2 guide midpoint implies ~65% incremental flow; management is comfortable targeting ~50% incremental gross margin going forward.

• Question from Aaron Rakers (Wells Fargo Securities): Is there room above 36TB for UltraSMR before HAMR and potential for larger platter stacks?
  Response: Next-gen ePMR road map targets 28TB CMR and 36TB UltraSMR; engineers may push capacity higher before production; HAMR qualification timeline pulled into H1 CY26.

• Question from Aaron Rakers (Wells Fargo Securities): Given you appear stocked out through CY26, how should we think about seasonality into the March quarter?
  Response: Business is now ~89% data center so material seasonality is limited; any seasonality mainly affects the small channel/client/consumer portion.

• Question from Erik Woodring (Morgan Stanley): Any update on exabyte growth and price-per-terabyte deflation assumptions since Analyst Day?
  Response: Base-case 15% exabyte CAGR; AI-upside ~23% — demand is trending toward the 23% case; cost/price per TB declines still expected mid- to high-single-digits.

• Question from Erik Woodring (Morgan Stanley): How short is supply vs demand today and when will supply materially expand?
  Response: Supply remains constrained through CY26; more meaningful exabyte supply expected to ramp in H2 CY27 as ePMR and HAMR capacity comes online.

• Question from Amit Daryanani (Evercore ISI): How long from HAMR qualification to deployment — could it be quicker than normal?
  Response: Using ePMR as a proxy, qualification to ramp typically 2–3 quarters; targeting HAMR volume ramp in H1 CY27 while emphasizing reliability and yields.

• Question from Amit Daryanani (Evercore ISI): What productivity savings does internal AI deliver and implications for OpEx as revenue grows?
  Response: Early AI use cases show ~10% productivity gains in manufacturing and ~20% in firmware work; opportunities are meaningful but early.

• Question from Joseph Leeman (BofA Securities): For the 2.2M ePMR drives (~70 exabytes), does mix change quarter-to-quarter or trend higher once next qualification comes through?
  Response: Average capacity (~31TB) and mix are expected to remain broadly consistent; shipments planned to exceed 3M units next quarter.

• Question from Karl Ackerman (BNP Paribas): How broad/sticky is the September price increase and does it affect LTAs or only channel volumes?
  Response: The letter targeted channel customers (client/consumer and lower-end nearline, ~10–15% of revenue); hyperscaler POs and LTAs were not affected.

• Question from Karl Ackerman (BNP Paribas): Plans to divest remaining SanDisk stake and potential uses of proceeds?
  Response: Hold 7.5M shares; intend to monetize prior to the February anniversary; may use a similar debt-for-equity structured transaction but final plan undecided.

• Question from Thomas O'Malley (Barclays): How are your long-term agreements structured — are they take-or-pay and how do you ensure value over the agreement length?
  Response: Many customers provided firm POs (not just LTAs); agreements include commercial terms/teeth and protections to address forecast adjustments.

• Question from Thomas O'Malley (Barclays): How should we view HDD share of AI spend (e.g., from $100B AI spend) relative to other components?
  Response: More nuanced view: HDD portion of AI CapEx has risen from low single digits toward roughly 4%–5%.

• Question from Harlan Sur (JPMorgan): Does forward exabyte demand suggest normalization to 23% CAGR or is demand actually trending above that?
  Response: Demand is trending toward the 23% CAGR case and could increase further into '27/'28; working with customers to deliver areal density improvements to support growth.

• Question from Harlan Sur (JPMorgan): Given order book and POs, what is the UltraSMR mix trend into 2026 and its impact on incremental gross margin?
  Response: UltraSMR adoption is increasing (mix ~50/50 CMR/UltraSMR this quarter) with additional customer qualifications underway; transition to higher-capacity UltraSMR supports better gross margins and feeds into HAMR roadmap.

• Question from Asiya Merchant (Citigroup): What drove the upside vs guide — pricing, extra drives, mix or manufacturing?
  Response: Upside driven mainly by manufacturing execution (better yields/throughput), modest low-single-digit ASP per TB increases, mix shift to higher-capacity drives and cost reductions across the supply chain.

• Question from Asiya Merchant (Citigroup): How should we think about future cost declines given productivity initiatives and faster-than-expected ramps?
  Response: Expect mid- to high-single-digit cost-per-terabyte reductions via higher-capacity transitions, productivity gains, yield improvements and test-time reductions.

• Question from Steven Fox (Fox Advisors): Q1 free cash flow was very strong versus net income; how should we think about FCF sustainability?
  Response: Q1 FCF benefited from major working capital reductions (billing linearity, lower DSOs, higher DPO); while some benefits are one-time, management is comfortable targeting FCF margin in the plus-20% range.

• Question from Steven Fox (Fox Advisors): Are customers pushing you to develop higher-capacity products or is WD driving the push — is it chicken-and-egg?
  Response: It's mutual: customers want higher capacity for TCO benefits and WD is enabling it; close collaboration accelerates adoption and supports growth.

• Question from Hadi Orabi (TD Cowen): How do you balance disciplined capacity additions with the risk of pushing customers to SSDs and expanding NAND supply?
  Response: AI generates more data so all storage types grow; HDDs expected to remain ~80% of data-center bits due to TCO and reliability, so SSD substitution risk is limited.

• Question from Hadi Orabi (TD Cowen): Has the risk from a peer's Intevac acquisition been fully mitigated for your HAMR supply chain?
  Response: Yes — WD has mitigated that risk; HAMR development uses ANELVA equipment provided by Canon rather than the Intevac-supplied systems.

Contradiction Point 1

Supply and Demand Dynamics

It involves the company's approach to balancing supply and demand, which directly impacts revenue and investor expectations.

How do you plan to meet rising customer demand while maintaining supply-demand balance? - Christopher Muse(Cantor Fitzgerald & Co., Research Division)

2026Q1: Our focus is on reliably delivering higher capacity drives, such as the current PMR product with over 3 million units expected to ship this quarter. We're leveraging UltraSMR for a 20% capacity uplift and working to improve areal density. We are not adding any unit capacity currently and are increasing manufacturing throughput using automation and AI tools. - Tiang Yew Tan(CEO)

What were the ASPs for the June quarter? Does capacity growth require support from technology transitions? - Tom O'Malley(Barclays Bank PLC, Research Division)

2025Q4: We have capacity to produce high yields and capacity at scale, so no need for incremental investments in capacity. - Tiang Yew Tan(CEO)

Contradiction Point 2

HAMR Development Timeline

It involves the expected timeline for a critical technology upgrade, which affects product roadmaps and competitive positioning.

Is there potential for UltraSMR to exceed 36TB, and how soon will HAMR be available? - Aaron Rakers(Wells Fargo Securities, LLC, Research Division)

2026Q1: Our next-generation ePMR product will start qualification in Q1 2026 with capacity points at 28 terabytes CMR and 36 terabytes UltraSMR. Our innovative engineers are exploring further capacity increases. We have pulled forward HAMR qualification to the first half of 2026. Our focus is ensuring high reliability as we ramp up HAMR. - Tiang Yew Tan(CEO)

Can you outline the roadmap for aerial density up to HAMR and your expected progress with HAMR? - Ananda Baruah(Loop Capital)

2025Q4: Current products are 26TB CMR, 32TB UltraSMR. Next is 28TB CMR, 36TB UltraSMR, and then 38TB CMR, 44TB UltraSMR with HAMR in 2027. - Tiang Yew Tan(CEO)

Contradiction Point 3

Capacity Expansion and Manufacturing Strategy

It directly impacts expectations regarding the company's ability to meet rising customer demand and supply-demand balance, which are crucial for revenue and growth projections.

How do you plan to balance rising customer demand with supply? - Christopher Muse(Cantor Fitzgerald & Co., Research Division)

2026Q1: Our focus is on reliably delivering higher capacity drives, such as the current PMR product with over 3 million units expected to ship this quarter. We're leveraging UltraSMR for a 20% capacity uplift and working to improve areal density. We are not adding any unit capacity currently and are increasing manufacturing throughput using automation and AI tools. - Tiang Yew Tan(CEO)

What are the hurdles to expanding manufacturing capacity, and how do LTAs impact growth for private cloud and SMB customers? - Karl Ackerman(BNP Paribas)

2025Q3: Our growth is driven by technology improvements, not capacity. LTAs provide visibility, and there's no pull-forward demand. We're seeing consistent linearity in demand for private cloud and SMB. We're not seeing any change in demand patterns. - Irving Tan(CEO)

Contradiction Point 4

Impact of Tariffs on Supply Chain and Orders

It involves the impact of tariffs on the company's supply chain and order patterns, which are critical for understanding potential revenue and operational challenges.

Is there growth potential beyond 36 terabytes for UltraSMR, and how long until HAMR? - Aaron Rakers(Wells Fargo Securities, LLC, Research Division)

2026Q1: We don't anticipate any tariff impact on supply chain in Q4. There's uncertainty in enterprise distribution and retail due to tariffs. We're working closely with customers to mitigate impacts, and we're also considering multiple alternatives. Our production isn't subject to tariffs now, but we monitor the evolving situation. - Irving Tan(CEO)

Have tariffs affected your order patterns, indicating a slowdown in enterprise activity? - Wamsi Mohan(Bank of America)

2025Q3: We haven't seen any slowdown, but there's demand uncertainty due to tariffs. We've factored this into our guide, and our growth is driven by robust data center demand. - Irving Tan(CEO)

Contradiction Point 5

Price Increases and Customer Behavior

It highlights varying statements about the company's approach to price increases and customer behavior, which could impact investor expectations and market perception.

Can you explain the breadth and stickiness of the September price increase? - Karl Ackerman(BNP Paribas, Research Division)

2026Q1: The price increase was mostly targeted at channel customers, affecting about 10%-15% of our business. Long-term agreements with hyperscale customers were not affected. - Tiang Yew Tan(CEO)

What is the current HDD cycle status, and how should we view pricing in 2025? - Wamsi Mohan(Bank of America)

2025Q2: We're seeing a healthy demand picture and more demand than can be supplied consistently here. You've seen our pricing go up. We think we can maintain that pricing for the rest of the year. - David Goeckeler(CEO)