Western Digital outlines $2.9B Q2 revenue target as AI demand drives long-term agreements and capacity ramp

Earnings Call Insights: Western Digital Corporation (WDC) Q1 2026

MANAGEMENT VIEW

* CEO Tiang Yew Tan highlighted the accelerating adoption of AI across industries, stating, "As agentic AI begins to scale at several industries and multimodal LLM become the norm, we are seeing a steady acceleration of AI use cases and applications, driving robust ongoing demand for the data infrastructure that enables this growth." He emphasized that "shipments of our latest ePMR products offering up to 26 terabytes CMR and 32-terabyte UltraSMR capacities continue to grow at an impressive pace, surpassing 2.2 million units in the September quarter."
* Tan announced strengthened customer partnerships, noting, "Our top 7 customers have now provided purchase orders extending throughout the first half of calendar year 2026. And 5 of them have provided purchase orders covering all of calendar year 2026... 1 of our largest hyperscale customers has signed an agreement covering all of calendar year 2027."
* Tan also revealed, "We are making rapid progress in our HAMR development and are on track to start HAMR qualification for 1 hyperscale customer in the first half of calendar year 2026."
* CFO Kris Sennesael stated, "During the first quarter of fiscal 2026, revenue was $2.8 billion, up 27% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $1.78. Both revenue and EPS were above the high end of the guidance range."
* Sennesael added, "We delivered 204 exabytes to our customers, up 23% year-over-year. This includes 2.2 million drives of our latest generation ePMR... Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year."
* Sennesael announced, "We will increase our dividend per share by 25% to $0.125 per share."

OUTLOOK

* Sennesael provided guidance for the next quarter: "We anticipate revenue to be $2.9 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 20% year-over-year. Gross margin is expected to be between 44% and 45%. We expect operating expenses to decrease on a sequential basis to a range of $365 million to $375 million."
* Sennesael stated, "We expect diluted earnings per share to be $1.88 plus/minus $0.15 based on a non-GAAP diluted share count of approximately 375 million shares."
* Tan commented, "For the fiscal second quarter of 2026, we expect continued revenue growth driven by data center demand and improved profitability led by the adoption of higher capacity drives."

FINANCIAL RESULTS

* Western Digital reported quarterly revenue of $2.8 billion, non-GAAP gross margin of 43.9%, and non-GAAP EPS of $1.78.
* Free cash flow for the quarter was $599 million, with operating cash flow of $672 million and capital expenditures of $73 million.
* Sennesael stated, "Operating income was $856 million, translating into an operating margin of 30.4%."
* The company increased share repurchases to 6.4 million shares for $553 million and paid $39 million in dividends.
* Debt outstanding was $4.7 billion, with a net leverage EBITDA ratio of just below 1 turn.

Q&A

* Christopher Muse, Cantor Fitzgerald: "How do you plan to meet rising customer demand while keeping supply/demand in balance?" Tan responded, "Our focus is really to... ensure that we continue to quickly and reliably deliver increasing higher capacity drives... we are not adding any unit capacity to our portfolio right now."
* Muse follow-up: "How should we think about incremental gross margins from here?" Sennesael: "Even when you look at the incremental gross margin in the quarter on a sequential basis was approximately 75%... I'm comfortable to have incremental gross margins on a sequential basis of approximately 50%."
* Aaron Rakers, Wells Fargo: "Is there further room above and beyond the 36 terabytes that you see for UltraSMR...?" Tan: "We have very innovative and creative engineers... they'll continue to push the capacity points, and we'll see where we get to by time we actually get to production ramp and qualification completeness."
* Erik Woodring, Morgan Stanley: "How should we be, maybe thinking about the growth of these 2 metrics [exabyte growth and price per terabyte] over the next few years?" Tan: "We're definitely seeing exabyte growth trend more towards that 23% growth rate."
* Karl Ackerman, BNP Paribas: "Could you discuss the breadth and stickiness of the announced price increase...?" Tan: "The letter that we sent out... was predominantly to our channel customers... that's really roughly only about 10% to 15% of our business."

SENTIMENT ANALYSIS

* Analysts pressed on long-term supply constraints, gross margin sustainability, and the impact of AI demand, with a neutral to slightly positive tone, seeking clarity on future growth and operational execution.
* Management maintained a confident and constructive tone, repeatedly emphasizing strong execution, robust demand, and careful cost control. Sennesael used phrases such as "I'm comfortable to have incremental gross margins..." and Tan stated, "We remain confident in the long-term strength of the business and our balance sheet."
* Compared to the previous quarter, management's tone shifted further into confidence, particularly around long-term agreements, HAMR progress, and robust free cash flow. Analyst tone remained inquisitive but less skeptical, given the company’s visible order book and performance.

QUARTER-OVER-QUARTER COMPARISON

* Revenue increased from $2.6 billion in Q4 2025 to $2.8 billion in Q1 2026, with gross margin rising from 41.3% to 43.9%.
* Guidance for the next quarter is higher: Q1 guided for $2.7 billion revenue midpoint, Q2 now guided at $2.9 billion midpoint.
* Company signaled further improvement in gross margin (Q4 2025: 41.3%; Q1 2026: 43.9%; Q2 2026 guidance midpoint: 44.5%).
* Management’s tone has grown more assertive and positive, reflecting increased customer commitments and product roadmap confidence, while analysts’ concerns shifted from uncertainty around demand to questions about capacity and supply balance.
* Strategic focus evolved from ramping ePMR and initial HAMR qualification to multi-year purchase orders and expanded AI-driven use cases and internal productivity gains.

RISKS AND CONCERNS

* Tan addressed the challenge of balancing supply and demand: "We are not adding any unit capacity to our portfolio right now."
* Management noted the complexity and longer lead times associated with higher capacity drives, citing greater manufacturing challenges.
* Sennesael mentioned ongoing macroeconomic uncertainties and tariff-related impacts are factored into guidance.
* Analysts raised concerns about potential customer migration to SSDs if supply remains constrained, but Tan stated, "We anticipate that HDDs will continue to remain roughly about 80% of the bits that start within the data center."
* The company confirmed risks from a competitor’s acquisition of Intevac have been fully mitigated, with Tan stating, "We have fully mitigated the risks related to Intevac."

FINAL TAKEAWAY

Western Digital’s management emphasized that accelerating AI deployment is driving robust demand for high-capacity data storage, resulting in record shipments, improved gross margins, and multi-year customer commitments. With continued innovation in ePMR and HAMR technologies and an expanded order book through 2027, the company expects to sustain strong revenue growth, operational efficiency, and shareholder returns, while closely managing capacity and navigating industry risks.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/wdc/earnings/transcripts]

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