Western Digital (WDC) Earnings Call Highlights Cloud Power

Western Digital Corp. ((WDC)) has held its Q2 earnings call. Read on for the main highlights of the call.

Western Digital’s Earnings Call Signals Strong Momentum Despite Concentration Risks

Western Digital Corp.’s latest earnings call painted a decidedly upbeat picture, with management highlighting a quarter of strong operational and financial performance. Revenue and earnings per share surged well past guidance, propelled by rapid exabyte growth, expanding gross margins and robust cash generation. The tone on the call was confident and growth-focused, with executives emphasizing rapid adoption of its latest hard drive technologies and deepening cloud customer relationships. While management acknowledged risks around the timing of its next-generation HAMR technology ramp, its heavy reliance on cloud customers, and remaining balance-sheet items, they argued that current profitability and cash flow more than offset these concerns.

Revenue and EPS Surge Past Expectations

Western Digital delivered revenue of $3.0 billion for the quarter, a 25% increase year-over-year, as demand for high-capacity storage continued to accelerate. Non-GAAP diluted EPS jumped 78% year-over-year to $2.13, with both revenue and earnings finishing above the high end of the company’s prior guidance range. Management attributed the outperformance to stronger-than-expected demand from cloud customers and the ramp of its newest high-capacity drives, underscoring a favorable mix shift toward more profitable products.

Exabyte Shipments and ePMR Adoption Power Growth

A key operational highlight was Western Digital’s ability to move massive amounts of storage capacity. The company shipped 215 exabytes in the quarter, up 22% versus a year ago. A major driver was the rapid uptake of its latest-generation energy-assisted PMR (ePMR) drives, with more than 3.5 million units shipped, totaling about 103 exabytes. These drives now reach capacity points up to 32 TB with UltraSMR technology, signaling broad customer acceptance of the company’s densest products and reinforcing its positioning in the high-capacity nearline market.

Cloud Revenue Dominates the Business Mix

Cloud customers remain the core engine of Western Digital’s growth story. Cloud revenue reached $2.7 billion, up 28% year-over-year, and accounted for a striking 89% of total company revenue. This segment drove the majority of bit growth and dollar growth for the quarter as hyperscale and large cloud providers continue expanding their storage footprints. The call underscored how central cloud has become to the company’s strategy, even as management acknowledged the inherent concentration risk that comes with such heavy dependence on a relatively small set of hyperscale buyers.

Margin Expansion and Ongoing Cost Efficiencies

Profitability showed meaningful improvement, fueled by both higher volumes and disciplined cost management. Gross margin reached 46.1%, improving by 770 basis points from a year earlier and 220 basis points sequentially. Management highlighted roughly 75% incremental gross margin on additional revenue and a roughly 10% year-over-year decline in cost per terabyte, showcasing the leverage in its manufacturing and technology roadmaps. Looking ahead, the company guided to further gross margin expansion in the next quarter, targeting 47%–48%, signaling confidence that the current product and customer mix can sustain elevated profitability levels.

Operating Leverage and Strong Free Cash Flow

Western Digital’s improved revenue and margin profile translated directly into stronger operating and free cash flow metrics. Operating income came in just above $1.0 billion, representing an operating margin of 33.8%, a level that underscores significant operating leverage as volumes rise. Operating cash flow was $745 million, while capital expenditures were kept modest at $92 million, yielding free cash flow of $653 million and a free cash flow margin of 21.6%. This cash generation gives the company greater flexibility for debt reduction, capital returns, and ongoing investment in next-generation technologies.

Balance Sheet Strength and Capital Returns to Shareholders

The company exited the quarter with $2.0 billion in cash and cash equivalents and total liquidity of $3.2 billion. Debt outstanding stood at $4.7 billion, translating to net debt of $2.7 billion and net leverage described by management as well below 1x. Western Digital has been actively returning capital to shareholders, having distributed $1.4 billion through buybacks and dividends since launching its current program. In the latest quarter, the company repurchased $615 million of stock, or 3.8 million shares, and the Board approved a quarterly dividend of $0.125 per share, underscoring management’s confidence in the strength and durability of the business.

Deep Contract Visibility with Major Customers

One of the more reassuring elements for investors was the visibility Western Digital has into future demand. Management noted firm purchase orders with its top seven customers running through calendar 2026. In addition, the company has robust commercial and long-term agreements in place with three of its top five customers—two extending through 2027 and one through 2028. These contracts provide line of sight into exabyte demand over several years, reducing near-term volume uncertainty and supporting ongoing investments in manufacturing capacity and technology.

Technology Roadmap: HAMR, ePMR and UltraSMR

The call placed heavy emphasis on Western Digital’s technology roadmap as a key competitive differentiator. The company has begun qualification of its HAMR (heat-assisted magnetic recording) and next-generation ePMR drives with hyperscale customers, with HAMR qualification formally initiated this month. Its nearline portfolio has now crossed a 50% mix of UltraSMR, a technology that offers about 20% higher capacity than conventional CMR drives and roughly 10% more than industry-standard SMR. Western Digital also launched UltraSMR-enabled JBOD platforms and acquired intellectual property and talent to develop internal laser capabilities critical for HAMR. While some details of these strategic moves remain confidential, management positioned them as central to sustaining a capacity and cost-per-terabyte advantage over time.

Q3 Guidance Points to Continued Strength

Looking to the next quarter, Western Digital issued guidance that suggests strong momentum will continue. The company expects fiscal Q3 revenue of $3.2 billion, plus or minus $100 million, with the midpoint implying around 40% year-over-year growth. Gross margin is forecast between 47% and 48%, with operating expenses in the $380–$390 million range. Interest and other expense is expected to be about $50 million and the effective tax rate around 16%. Non-GAAP diluted EPS is projected at $2.30, plus or minus $0.15, based on roughly 385 million diluted shares. Management reiterated expectations for the HAMR ramp beginning in calendar 2027, affirmed a run-rate capital expenditure range of approximately 4%–6% of revenue, and committed to ongoing shareholder returns under its existing repurchase program and quarterly dividend.

In summary, Western Digital’s earnings call showcased a company benefiting from powerful cloud demand, successful adoption of its latest high-capacity drives and improving margins that are translating into robust free cash flow. While there are notable risks—particularly the heavy concentration in cloud customers, the still-to-ramp HAMR program, and remaining debt and SanDisk-related balance-sheet items—the overall tone was confident. Management emphasized strong contractual visibility with major customers and a clear technology roadmap aimed at sustaining growth. For investors, the key takeaway is that Western Digital is executing well in the current cycle while positioning itself for the next wave of cloud and storage demand.