Western Digital triples profit as revenues ratchet up above guidance

Disk drive maker Western Digital beat the $3 billion high end of its guidance with a highly-profitable second fiscal 2026 quarter as nearline data center drive demand stayed strong and is set to continue.

Revenues were $3.02 billion, a 25 percent Y/Y rise with a GAAP profit of $1.84 billion, up 210 percent Y/Y. Every customer dollar generated 61 cents of profit, demonstrating the pricing strength of an oligopolist supplier in a market showing sustained demand for its under-supplied products.

CEO Irving Tan said: “Western Digital’s strong performance this quarter reflects our disciplined execution to meet demand in the AI-driven data economy, … In our fiscal second quarter, we delivered strong revenue growth and gross margin expansion. During the quarter, free cash flow generation continued to be strong, and we returned over 100 percent of our free cash flow to shareholders in the form of share repurchases and dividend payments.”

Financial summary:

• Gross margin: 45.7% vs 43.5% in prior quarter
• Operating cash flow: $745 million vs $672 million in prior quarter
• Free cash flow: $653 million vs last quarter’s $599 million
• Cash and cash equivalents: $1.98 billion vs prior quarter’s $2.05 billion
• Diluted EPS: $4.73 vs last quarter’s $3.07

Tan commented on profitability in the earnings call, referring to the benign pricing environment, and saying: “We see a stable pricing environment with prices on a price per terabyte kind of flattish to slightly up … 2, 3 percent on an ASP per TB basis. … And on the cost front … the cost per TB was coming down on or about 10 percent on a year-over-year basis.”

WD produced 215 EB of capacity, split into 192 EB of nearline (mass capacity) disk drives and 23 EB of non-nearline drives. Half of the nearline drives were in the UltraSMR format and it expects the proportion to increase. This is good for profit as the CMR and UltraSMR drives are physically the same, UltraSMR being a SW function. The cost of producing an UltraSMR drive is the same as a CMR drive, but its 20 percent higher capacity means it can be sold at a higher price.

A chart showing WD’s revenues and profits per exabyte shipped illustrates this;

WD ships drives into three market segments and their revenues were:

• Cloud (nearline drives): $2.8 billion; up 27.5% Y/Y and 89% of total revenues
• Client: $176 million; up 25.7% and 6% of revenue
• Consumer: $168 million; down 2.9% and 5% of revenue

Client (notebook computer type drives) revenues were surprisingly strong. WD shipped over 3.5 million units (103 EB) of its latest generation ePMR drives, with up to 26 TB CMR and 32 TB UltraSMR capacities, but doesn’t supply an overall drive unit ship total.

It is widening the revenue gap with rival Seagate, which reported $2.8 billion revenues in its latest quarter compared to WD’s $3.02 billion;

Tan opened the earnings call with comments about the surge in AI demand being sustained and strong, and how AI inferencing will become more important.

This is good news. Tan said: “As the AI value changes from model training to inference, more data is going to get created as a result in order to enable the inference delivery, more data needs to get stored as a result of that data getting generated as well. … and that’s really positive for HDDs going forward.”

He said WD has “started qualification of our HAMR and next-generation ePMR products, each with a different hyperscale customer.” It expects to start HAMR qualification with a second customer “imminently.”

WD has more drive developments coming to support AI workload needs, with Tan saying: “We are hosting an Innovation Day on February 3rd in New York next week, where we will share updated road maps for our HAMR and ePMR products as well as further details on core innovations that we are developing to improve our drives’ performance, energy efficiency and throughput.”

What does improvements in performance and throughput mean? It suggests more I/O per drive. Tan later said: “We are working on … interesting innovations to improve both our bandwidth and throughput of our drives.” He did separate bandwidth from throughput.

Future drive demand visibility is looking good. Tan revealed:”We have firm purchase orders with our top seven customers through calendar year 2026. We also have in place robust commercial agreements with three of our top five customers, two through calendar year 2027 and one through calendar year 2028.”

CFO Kris Sennesael said: “Our business continues to strengthen. We expect strong revenue growth and improved profitability driven by continued data center demand and by the adoption of our high-capacity drives.’ The revenue outlook for next quarter is an approximate 40 percent midpoint Y/Y increase to $3.2 billion +/- $100 million. Expect a commensurately higher profit as well.

Bootnote

Bandwidth refers to the maximum theoretical data transfer rate that the disk drive’s interface, or the storage channel, can support. Throughput is the actual, measured amount of data that the disk drive transfers per unit of time under real conditions.