The Zhitong Finance App learned that Western Digital (WDC.US) announced the results for the first quarter of the 2027 fiscal year and held a performance conference call.
Management pointed out that the 2027 fiscal year started strongly, with revenue of 4.4 billion US dollars, up 55% year on year, shipment 248EB, up 22% year on year, up 8% month on month; non-GAAP gross profit margin of 58.1%, up 1,420 basis points year on year, operating profit margin of 49.1%, earnings per share of 4.64 US dollars, up 161% year on year, free cash flow of 1.4 billion US dollars, and return of $1.1 billion to shareholders through repurchases and dividends during the quarter. By business, cloud revenue was US$3.9 billion, accounting for 88%, up 54% year on year, client side was US$320 million (accounting for 7%, up 119% year on year), and consumer side was 193 million US dollars (accounting for 5%, up 19% year on year). The average blended price per TB rose 28% year over year, further accelerating from the previous quarter's high double digits. The second quarter guided revenue of US$5.1 billion ± 100 million (median increase of 69% year over year), gross profit margin of 60% — 61%, and earnings per share of 5.80 USD ± 0.20. The board approved a 17% increase in the quarterly dividend to $0.175 per share, to be distributed on December 17. The five-year average capital expenditure guideline is 4% to 6% of revenue. The next two years will be slightly higher than this range, and it is clear that it will only invest in magnetic heads, media, and factory automation, and will not be used to increase unit production capacity.
Key elements of the Q&A: Management spent a lot of time responding to three things. The first is the HAMR rhythm — the two hyperscale customers will complete certification in the first quarter of the 2027 calendar year, begin mass production and shipment in the first half of the year, start certification for two customers during the same period, and launch second-generation HAMR (5TB per disk, 11-disk platform) certification in the second half of 2027; the company claims that customer feedback focuses on the failure rate superior to peers, and there is no sign that it needs to be suspended. The second is cost and gross profit — the company admits that investment costs such as DRAM and NAND are rising, and that the short-term cost reduction per TB will fall below the long-term target of 10%, but through value engineering hedging, incremental gross margin is still above 80%, and attributes the gross margin expansion to the three legs of dilution of fixed costs brought about by pricing, product structure changes, and surface density. The third is production capacity discipline — in the face of questions about possible expansion of production in the industry, management repeatedly emphasized surface density rather than unit production capacity to meet demand, based on vertically integrated magnetic head and media capabilities; for neo-cloud customers, they emphasized selecting only those with better balance sheets and end customer quality, and said that even if this segment slows down, the three drivers of cloud, model training, inference, and agent AI are sufficient to absorb.
Market focus: The core question of the conference call was “how long can the strength of storage last?” The management's answer fell on visibility and pricing structure — the visibility of the needs of the top seven customers has been extended to 2030 and 2031, long-term agreements have been re-signed one after another, spot pricing for non-contract parts is just as strong, and there is still room for the average price per TB to rise in the next three to four quarters. Corresponding to this are three unsolved points: the EB growth rate of 22% this season is significantly lower than 30% of its peers. The company explained that the long-term growth rate was “higher than 25%”; the cost reduction per TB fell by 10% in the short term, which meant that the continued expansion of gross margin depended more on price than on cost; HAMR certification and mass production, and the implementation of the second-generation HAMR and 14-channel roadmap are the keys to whether the 2027-2028 supply can be delivered. The management also pushed the narrative from “computing power” to “data,” saying that AI is essentially a data system. This is the most important qualitative statement at this conference call.
Presentation session
presenter
Good afternoon, and thank you all for your patience. Welcome to Western Digital's FY2027 first quarter results conference call. [Host Reminder] As a reminder, this meeting is being recorded. I now entrust the meeting to Mr. Ambrish Srivastava, VP of Investor Relations, please begin.
Ambrish Srivastava - Vice President of Investor Relations
Thank you and good afternoon everyone. At the same time as me, Western Digital CEO Irving Tan (Irving Tan) and Chief Financial Officer Kris Sennesael are attending today.
Before we begin, please note that today's discussion will include forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. Forward-looking statements include our product portfolio, business plans and performance, ongoing market trends, and expectations for future financial results. We are under no obligation to update these statements. For more information on the risks and uncertainties that may cause actual results to differ materially from expectations, please refer to our latest 10-K Annual Report and other documents submitted to the U.S. Securities and Exchange Commission. Unless otherwise stated, all of today's statements reflect non-GAAP results, and the reconciliation to GAAP results can be found in our press release and on investor.wdc.com.
Next, I'll leave the meeting to Irving.
Irving Tan - Chief Executive Officer and Director
Thanks Ambrish. Good afternoon, and thank you all for attending. The first quarter marked a strong start to the 2027 fiscal year, reflecting the solid execution of the entire business, and the results exceeded our expectations. Revenue increased 55% year over year, and gross margin and operating margin expanded significantly to 58% and 49%, respectively. Earnings per share increased 161% year over year, and we generated $1.4 billion in free cash flow.
These results reflect continued strong customer demand, operational discipline, and successful execution of product and technology roadmaps. Demand is generally strong in our customer base and end markets. Our visibility is expanding further, and with it comes confidence that hard drive (HDD) data storage needs will last. We are increasingly seeing storage requirements expanding from core cloud and hyperscale customers to enterprise environments, as well as newer terminal markets such as neo-cloud and AI cutting-edge laboratories, thus forming a larger and more diverse customer base. The customer is making long-term infrastructure investments and continuing to extend the planning cycle into the next decade.
As the value of data rises, customers are investing with confidence to support their growing storage requirements, and the vast majority of data is stored on hard drives. We've seen this firsthand in our conversations with customers and more extensive industry research. A recent IDC survey of more than 750 companies in multiple countries found that agencies are storing more data, retaining it for longer, and increasingly putting archived data back into use. At the core of these trends is continued data growth, driven by the continued expansion of cloud environments and growing storage requirements for AI. Much of the discussion around AI has focused on computing power, but we think a more enduring opportunity lies in data.
AI is essentially a data system. Each workload produces more data, which must be stored, managed, and accessed in a scalable and cost-effective manner. As AI continues to spread across all industries, data creation and storage requirements have also expanded. Inference and proxy AI systems are generating massive amounts of logs, model output, and system performance data that must be stored and retained. Physical AI applications such as robotics, factory automation, and autonomous driving are further accelerating this trend — AI-generated content and video workloads are creating and retaining data on a large scale.
Let's talk about our industry-leading technology and innovative products. We are well executing the technology roadmap and maintaining the established pace in driving customers to higher capacity hard drives. As the next generation ePMR and HAMR platforms are gradually rolled out, we expect EB shipments to continue to grow in fiscal year 2027 and beyond. Our newest ePMR platform offers up to 40TB of capacity, and mass production is off to a strong start. Customer adoption is progressing faster than any previous generation. We expect the platform to account for close to 30% of near-line shipments by the second quarter of FY2027 and 50% by the third quarter.
For first-generation HAMR products, we expect to complete certification with two hyperscale customers in the first quarter of the 2027 calendar year, and begin mass production shipments in the first half of the 2027 calendar year as planned. We also expect to launch certification for two more customers in the first half of the 2027 calendar year to further expand the scope of customer verification and support wider adoption of HAMR products. As AI workloads expand, customers need not only more capacity, but also higher performance from storage infrastructure. We are expanding the role of hard drives in cloud and AI infrastructure through innovations such as high-bandwidth hard drives and dual pivot (dual pivot) technology.
By combining the economics of hard drives with significantly higher performance, we believe this technology can cover a wider range of existing and emerging workloads. We are currently sending samples of high-bandwidth hard drives to a number of customers. The feedback is positive, and we have clearly identified use cases and value creation points. In short, Western Digital is implementing with momentum: we are deepening customer relationships, extending visibility, and broadening our customer base, and the product and technology roadmap is delivering exactly what our customers need. As data continues to grow in scale and value in the cloud, AI, and emerging workloads, we have high confidence in the durability of our long-term storage needs.
I'll hand it over to Kris.
Kris Sennesael - Executive Vice President and Chief Financial Officer
Thanks Irving. Our first quarter results showed the continued strength of the business and excellent execution in all areas. Customer demand remains healthy, and our visibility is expanding further. The product transformation progressed smoothly, bringing higher volume products, steady year-over-year growth in EB shipments, and improved pricing, all driving another strong financial quarter.
In the first quarter of fiscal year 2027, revenue was $4.4 billion, up 55% year over year, driven by strong EB growth and a favorable pricing environment. We shipped 248EB during the quarter, up 22% year over year and 8% month on month. Short-line products continue to drive growth, and we are promoting product upgrades — starting with the latest generation ePMR hard drives with a maximum capacity of 40TB, then introducing HAMR technology in the first half of the 2027 calendar year, which lays the foundation for stronger year-on-year growth in EB shipments.
Cloud revenue of $3.9 billion, accounting for 88% of total revenue, up 54% year over year, was driven by continued demand for high-capacity near-line hard drives, including the initial volume of the latest ePMR platform. Furthermore, our continued strong pricing reflects the value and total cost of ownership (TCO) advantage we bring to our customers. Clients accounted for 7% of total revenue to $320 million, up 119 percent year over year. The consumer side accounted for 5% of revenue to USD 193 million, an increase of 19% year over year.
Gross margin expanded to 58.1%, up 1,420 basis points year over year, and increased gross margin by more than 80% year over year. The gross margin reflects a structural shift to higher capacity hard drives, strict operational execution, and a favorable pricing environment across our entire product portfolio, and we continue to deliver greater value to our customers. The average price per TB rose further to 28% year over year, higher than the high double digits reported last quarter.
Operating expenses of US$391 million, accounting for about 9% of revenue, an improvement of 130 basis points over the previous month, indicate that the operating leverage in the model continues to be released. Operating profit of $2.2 billion, up 152% year over year, was driven by strong revenue growth, gross margin expansion and operating leverage. Our operating margin expanded to 49.1% for the quarter, demonstrating our ability to continue to push our business profitability to the next level.
Interest and other charges were $10 million, and the actual tax rate was 17%. Taking into account the 383 million diluted shares, earnings per share were $4.64, up 161% year over year. We generated $1.4 billion in free cash flow during the quarter and returned $1.1 billion to shareholders through share repurchases and dividends, reflecting our confidence in the sustainability of free cash flow generation and its ability to drive long-term shareholder value. Supported by strong free cash flow and in line with our capital allocation framework, the Board has approved a 17% increase in the quarterly cash dividend from $0.15 to $0.175 per share to be distributed to shareholders registered on December 4, 2026.
Move to balance sheets. We took further steps to simplify our capital structure during the quarter and drastically cut our remaining 2028 convertible bonds. Our balance sheet remains strong, with net cash of $500 million at the end of the quarter. Let's talk about the outlook for the second quarter of fiscal year 2027. We continue to be in an environment of strong demand and favorable pricing in all end markets.
For the second quarter of fiscal year 2027, we expect revenue of $5.1 billion, fluctuating up and down to $100 million; the median value corresponds to a 69% year-on-year increase. The gross margin is expected to be in the 60% — 61% range, and we will continue to benefit from the shift to higher capacity hard drives and a strong pricing environment. Operating expenses are estimated at $40,000—410 million, up month-on-month due to increased project costs associated with increased product certification activities. Interest and other expenses are estimated at $15 million. The tax rate is estimated at 17%. Based on this, we expect earnings per diluted share of $5.80, fluctuating up and down $0.20, based on 380 million non-GAAP diluted shares.
Looking ahead, demand remains strong. Customer cooperation continues to deepen and broaden, and our visibility continues to improve. As technology and product transitions advance, we expect EB supply growth to accelerate throughout the 2027 and 2028 fiscal years. Strong balance sheets and free cash flow generation capabilities enable us to make targeted investments, strengthen technology leadership, and support customers' growing storage needs. Although we expect capital expenditure to account for an average of 4% to 6% of revenue over a five-year period, we expect capital expenditure to account for slightly higher revenue in the next two years, as we will continue to invest in magnetic head and media technology and factory automation to support our industry-leading surface density and higher capacity hard drives without increasing unit production capacity through capital expenditure.
In short, accelerated EB growth, leading technology, gross margin expansion, and disciplined capital allocation provide a solid foundation for sustainable profits, free cash flow growth, and long-term shareholder value creation.
Let's move on to the question and answer session. Ambrish?
Ambrish Srivastava - Vice President of Investor Relations
Thanks Kris. Moderator, it's time to ask questions. [Host Tips] Host?
Q&A session
presenter
[Moderator Tip] Today's first question comes from Evercore's Amit Daryanani.
Amit Daryanani - Evercore ISI Institutional Equity Research Division
I'd like to ask HAMR first. The market has always been very concerned. You mentioned the completion of certification with two hyperscale customers in March and mass production shipments in 2027. Can you talk about what you think are the milestones between these two steps? What determines the speed of deployment afterwards — more on the customer's deployment pace, or your manufacturing readiness?
Irving Tan - Chief Executive Officer and Director
OK Amit, thanks for asking. Let me start by saying that I am very satisfied with HAMR's progress. As we've emphasized in the past, customer feedback has been very positive, particularly the performance of our hard drives in terms of failure rate compared to what they have seen with other vendors in the market. Therefore, we are very confident that we will complete the certification of two customers of our first-generation HAMR products in the first quarter.
We will also commence certification for two more customers in the first half of the 2027 calendar year. We have not received any feedback at this time, which would give us reason to suspend the conversion of certification completion into mass production shipments beginning in the first half of 2027. Our customer technical support team is working closely with customers to complete certification programs and move products into production. On the global operations team side, we are working closely with our in-house manufacturing assets and suppliers to prepare the supply chain for volume.
Thereafter, starting in the second half of the 2027 calendar year, we will also begin certification for second-generation HAMR hard drives, using a 5TB per disk, 11-drive platform. Overall, I'm very happy with the progress. I think the engineering and operation teams at the top and bottom of the company have done a great job, helping us speed up product development and reliability verification, and now we are very focused on scaling up and delivering products to customers.
Ambrish Srivastava - Vice President of Investor Relations
Amit, any further questions?
Amit Daryanani - Evercore ISI Institutional Equity Research Division
Yes. I want to ask about the cost per TB. I know you've talked about some headwinds of rising investment costs in the past. But my impression is that the cost per TB dropped by about 4% — 5% in the September quarter, the lowest drop we've seen in a while. Can you talk about what happened there and how to understand it in the long term — because I noticed your gross margin guidance for the December quarter was very strong.
Kris Sennesael - Executive Vice President and Chief Financial Officer
OK. As Irving mentioned earlier, we continue to execute well on our technology roadmap and product modernization, basically by moving to higher capacity hard drives through better and higher surface density. So over the long term, we're fully capable of reducing the cost per TB by about 10% per year. In the short term, as I've mentioned before, it's not surprising — we're facing some rising investment costs.
As most of you know, we use some DRAM and NAND in our hard drives, and the entire supply chain does operate in a very tight environment. As a result, we are seeing some investment costs increase. We are responding through value engineering measures and have seen some good progress. The implementation and verification of these schemes will take some time. So in the short term, our cost per TB will drop less than 10% year over year. Taking this into account, as you also mentioned, we delivered a very strong gross margin in the September quarter, and the guidance for the December quarter was also strong. Our incremental gross margin continues to be very strong, well above 80%. So I think we are fully prepared for a continued increase in gross margin.
presenter
The next question comes from Bank of America's Wamsi Mohan.
Wamsi Mohan - Bank of America Securities Research Division
Irving, I'd like to ask you to respond to the market's anxiety about the smallest players in the market increasing incremental production capacity. Recently, there has also been some discussion about the potential consolidation of the industry. Want to hear what you think of the potential impact of this incident on an industry level? And does this affect your price negotiations with hyperscale customers in future years?
Irving Tan - Chief Executive Officer and Director
OK Wamsi, thanks for asking. At a high level, we haven't seen any change in the long-term fundamentals of the industry or our own business. We continue to see very strong demand, and as we have always emphasized, maintaining compound annual growth of more than 25% in a very tight supply environment. We adhere to established strategies and priorities to meet the growth of supply and demand by delivering surface density, which comes from technology — particularly magnetic head and media technology — because this is the best way to provide customers with the best TCO while bringing the best profitability to our business. This can be seen from our focus on R&D and capital investment in the magnetic head and media business.
I think our unique differentiation in developing our own magnetic heads and media, as well as our ability to integrate hard drives, gave us confidence that we could meet this growth trajectory through surface density, so we insisted on not investing in any incremental unit of production capacity. Other players in the market may not have the unique ability to build their own media, build their own magnetic heads, and drive increased surface density; they must make up for it by possibly increasing the number of units to maintain their market share and position.
Ambrish Srivastava - Vice President of Investor Relations
Wamsi, any questions?
Wamsi Mohan - Bank of America Securities Research Division
Yes, Ambrish. Regarding EB shipments, you have increased 22%. I've heard you talk about the trajectory for the rest of the year. It seems that as product upgrades advance and HAMR enters the product portfolio, you expect this growth rate to improve. Can you give me a feeling at a high level — is it correct to think of FY2027 roughly as the level of your long-term range? Also, if you consider unfettered demand, how much higher than your current supply? With demand so strong, will this gap widen in the next few years?
Irving Tan - Chief Executive Officer and Director
OK, thanks for asking Wamsi. We broadly view the current quarter as the low point of EB growth and expect it to accelerate for the rest of the fiscal year. Obviously, as Kris mentioned in his presentation, the same will be true for 2028 and beyond. It really comes from our confidence in the new platform that will be launched soon. Apparently, HAMR will launch in the first half of fiscal year 2027. And as I mentioned, certification of second-generation HAMR hard drives will also begin in the second half of the year.
So we quickly moved from 32TB hard drives to 44TB to 55TB and above in high-end products. It's the best and most economical way for our customers and ourselves to meet their product needs.
On the question of demand, as I said, we've seen it continue to grow, and it's very long-lasting. There has been no weakening in demand, and we don't think the current gap between supply and demand will disappear anytime soon. That's why we continue to focus on supporting our customers as best as possible with our current technology.
presenter
The next question comes from Morgan Stanley's Erik Woodring.
Erik Woodring - Morgan Stanley Research Division
Congratulations on this quarter and guidance. Irving, can you give me more details about the visibility you mentioned — exactly how far? How many customers are involved? For customers who have planned this far, how are their current or future EB requirements compared to three or six months ago? Are you seeing demand expand compared to three or six months ago?
Irving Tan - Chief Executive Officer and Director
OK Erik, thanks for asking. As far as visibility is concerned, in the case of our top seven customers, we have good visibility into 2030 and 2031 for each of them, which we have always valued, because it allows us to ensure simultaneous delivery of technology and supply to meet future demand growth. So we have great visibility in this area. In fact, we're seeing quarter after quarter, and demand signals actually increase over time. As we move into the 2028, 2029, and 2030 timeframes, we see that demand continues to be very persistent.
Ambrish Srivastava - Vice President of Investor Relations
Erik, any further questions?
Erik Woodring - Morgan Stanley Research Division
Yes. As a question, your revenue increased 55% year over year, and your median guidance for the December quarter increased 69% year over year, which is very strong. Obviously you mentioned that EB growth is accelerating, but this also means that pricing for the December quarter is accelerating. Can you help us understand where the pricing acceleration is coming from? Is it from a non-near-line business or a near-line business? I'm guessing it's probably both. But can you give more details as to why pricing is accelerating in the December quarter and how sustainable this acceleration is?
Kris Sennesael - Executive Vice President and Chief Financial Officer
OK Erik, we continue to be in a very strong, favorable pricing environment. As you can see, our average blended selling price per TB increased 28% year over year. We have seen this strength in near-line and non-near-line, as well as in some consumer and client businesses. The reason why the pricing environment is strong is because we are actually implementing the technology and product roadmap and continuing to deliver higher capacity hard drives to our customers to help them reduce their total cost of ownership — because of better rack density and lower power consumption, which has many benefits for customers.
As we continue to implement this strategy and continue to deliver higher capacity hard drives, there is an opportunity for the price per TB to increase further over time. As you probably know, some of these businesses are under long-term agreements. Some long-term agreements are expiring, and new ones are being signed. Also, of course, we have some EB's that we haven't signed up for, and we've seen a very strong pricing environment for these unsigned EBs.
presenter
The next question comes from Cantor Fitzgerald's C.J. Muse.
C.J. Muse (Christopher Muse) - Cantor Fitzgerald Research Division
Irving, when you opened the game, you said the results exceeded expectations. Next to the previous question, on gross profit margin: You initially indicated an incremental gross margin of about 62%, actually achieved 80%; now you are pointing at 75%. I'd like to learn more about what's driving this incremental strength — more unsigned bits? Is the contract repriced when it expires? Also, looking back, how should sustainability be understood in 2027 and beyond?
Irving Tan - Chief Executive Officer and Director
OK. C.J., First, at a high level, we believe that gross margin expansion is absolutely sustainable. This has three drivers. The first is pricing. As Kris said, we have a number of long-term agreements with contract price increase clauses. As we enter different periods, reach the annual price adjustment point, and we deliver higher capacity platforms to bring better TCO value, we are able to share this part of the value and drive higher pricing for customers with long-term agreements.
In an environment where supply is tight, we have also secured better spot prices for near-line customers who have not signed long-term agreements. As Kris also mentioned, in the client-side and consumer-side businesses, we are also seeing an overall better pricing environment. So pricing is a key element. Second, we are also encouraging customers to upgrade to higher capacity hard drives. As we moved them to higher capacity drives, these products were clearly more profitable for us because the average price of each drive was much higher.
So this is the second driver of gross margin expansion, and we expect it to continue for a longer period of time. Third, apparently we'll be shipping more EB with higher surface densities. When we can deliver more EB through surface density, we avoid the fixed costs of producing more units, which is another driver of gross margin expansion. Combining these three factors, we are very optimistic about the continued expansion of gross margin.
Ambrish Srivastava - Vice President of Investor Relations
C.J., any further questions?
C.J. Muse (Christopher Muse) - Cantor Fitzgerald Research Division
Yes, Ambrish. You mentioned that the customer base is growing, including enterprise and MCP customers. I'm curious if this is changing the term, pricing, and deposit of long-term agreements? Want to hear how your customer base is evolving and how this might impact your contracts?
Irving Tan - Chief Executive Officer and Director
OK. We're really seeing a diverse customer base. This is what we've talked about in the past: the three-tier architecture and the key role hard drives play in it — whether in terms of scalability, reliability, or economic value to customers — is actually being realized. We're really seeing demand from cutting-edge AI labs, neo-cloud players, and hybrid cloud solution OEMs.
Therefore, we took these demand signals into account in our outlook, and this also translated into the expanding demand signals I mentioned in response to the previous question. Once again, we are investing in delivery technology and magnetic heads and media to provide surface density and capacity to support all customers in this more diverse customer environment.
presenter
The next question comes from Citigroup's Asiya Merchant.
Asiya Merchant - Citigroup Research Division
OK. Irving, you talked about high-bandwidth hard drives and the growth opportunities there. Can you elaborate on how great this opportunity is today? How much do you ship? If so, please expand, how big do you think this opportunity could be?
Irving Tan - Chief Executive Officer and Director
OK, thanks for asking Asiya. I think this opportunity is still relatively early. Our main focus today is clearly putting capacity in the hands of our customers. But as we enter the second half of the 2027 calendar year, 2028, and beyond, this will be a major differentiator in our eyes, as products such as high-bandwidth hard drives give customers the opportunity to use hard drives for workloads that would otherwise have had to use more expensive alternatives to storage media.
Examples include KV caching workloads in AI inference, and video streaming. We've been providing samples of this product to many customers so they can test different use cases. As I said, the feedback has been very positive. We're sorting out the commercial structure of how to price high-bandwidth capabilities. But from a technical capability perspective, it's very positive. We're designing the future of business architecture and pricing.
Ambrish Srivastava - Vice President of Investor Relations
Asiya, any further questions? Yes, please tell me.
Asiya Merchant - Citigroup Research Division
OK. Can we also talk about physical AI? You mentioned it in your speech too. How big of an early sign is this opportunity today? Are you shipping for this? It's probably still early days, but what do you think of the 2027 calendar year and the development going into 2028?
Irving Tan - Chief Executive Officer and Director
OK. We're really seeing very promising signs from the physical AI segment. For example, some of our autonomous driving customers in Asia are actually asking us to increase supply to support their physical AI plans. A good data point is that Nvidia itself recently highlighted its revenue opportunities from physical AI in the $10 billion range.
So, if you see this situation on the computing power side, then the storage requirements that support this computing power will obviously follow. So we're very optimistic. Autonomous driving would be one of them. Robotics is also becoming a key area for us. Much of this actually happened in Asia, but I expect it to happen in other parts of the world in the next two to three years.
presenter
The next question comes from Ben Reitzes of Melius Research.
Benjamin Reitzes - Melius Research
I want to go back to the previous question about competitive expansion of production. Some basic questions will help: Can a company increase its share of production capacity from 10% to 30%? Is there enough material to make the medium and magnetic head? Can you respond from this perspective? Do you think anyone can do that? What would be the bottlenecks?
Irving Tan - Chief Executive Officer and Director
OK Ben, thanks for asking. I can't comment on how others are doing it, but I can share what we've done to have this ability. First and foremost, it all starts with technology. Our R&D team has done an excellent job in magnetic head design and medium formulation, and has truly achieved a high surface density product. Obviously, we're combining this with the power of the firmware and the servomechanical power of the hard disk.
So it's not just a matter of individual components, but when you combine all of this, you can get the optimal surface density of each hard drive. This is indeed an engineering level, and one of our major differentiators compared to another player in the market that relies on a third party vendor — they are not vertically integrated.
Second, as you mentioned, a key factor is not so much the unit production capacity you have, but rather whether you can scale the media and magnetic heads required for large-scale production to support the higher surface density of the hard drive. This is also something we have been doing and will continue to invest in at Western Digital, including both R&D capabilities and manufacturing assets, specifically designed to achieve higher surface density of our magnetic head and media assets.
So that's what we're doing, and we're seeing results. Other organizations that don't have this level of vertical integration, I think it would be more difficult to achieve the same level of growth we're seeing.
Benjamin Reitzes - Melius Research
Obviously, the market had a lot of concerns when entering this call. Would you like to talk more about how big neo-cloud is currently for you and how much is it accounting for in predictions? If there were ups and downs in demand due to the timing of funding, how would we see it, and how much of a concern would it be for you?
Irving Tan - Chief Executive Officer and Director
First, we need to take a step back. There are actually four growth drivers in the storage space. The first is the long-term structural growth of the cloud. The cloud itself has been around for almost 20 years, and is still growing at a very healthy rate. In fact, it is still accelerating. The impetus comes from more storage brought by video content. A large amount of stored content is video, and many cloud services are being AI-based, which brings about greater storage requirements. So this is a key growth driver that will continue for the foreseeable future.
The second growth driver is model training and development. We're seeing this continue to grow as new models are created and reinforcement learning is underway — supporting reinforcement learning with existing models requires storing more data, and neo-cloud does play a role in this regard. But even if neo-cloud segmentation slows down, we don't think this will present any major twists and turns.
Third is inference and proxy AI, where we're seeing lots of opportunities. We're starting to see huge growth in this area as customers need to store logs, checkpoints, more inference output, and proxy system decision points to support reinforcement learning. Finally, the physical AI we just mentioned.
So when you add these four items together, demand is still very persistent. Even if one of the four segments is slightly weak, demand is easily absorbed by any of the other three. Taken together, we are very optimistic that demand will remain strong and enduring.
As for how we view the neo-cloud segment, we are obviously very careful in choosing strategic neo-clouds we want to cooperate with, and choose those that we think have a very strong balance sheet and are supported by a high-quality end customer base. That's why we prefer them over other players in the market.
presenter
The next question comes from Barclays Tom O'Malley.
Thomas O'Malley - Barclays Research Division
If you look at the compound annual growth rate of total EB hard drive shipments over the past few quarters, it's probably around 20% to the middle of 30%. Applying that to your guidelines, it looks like the implied YoY pricing for the December quarter was above 30%. You have historically said that high double digits are a sustainable growth rate, and now it has been much higher than this for the past few quarters. Can you update me on how we view the sustainability of this price increase in the future?
Kris Sennesael - Executive Vice President and Chief Financial Officer
OK Tom. I think the 10% you mentioned, or whatever number, we're running at a much higher level right now. Just a quarter ago, we had an 18% increase in average price per TB. We achieved 28% last quarter. As I said before, given the strong demand environment we are in, and considering our continued shift to higher capacity hard drives and continuing to add value to our customers, there is indeed room for the average price per TB to rise further over the next three to four quarters.
I'm guessing it will slow down eventually. However, over the next three to four quarters, the year-on-year increase in the average price per TB does have room for further expansion.
presenter
Any further questions, Tom?
Thomas O'Malley - Barclays Research Division
Continuing with the comments above, capital expenditure is an average of 4% to 6% of revenue over a five-year period, but the next two years will be slightly higher than that level. I guess the market's first reaction is to confirm that this is just investing in magnetic heads, not to expand production capacity or to seize opportunities when the market is close to its potential peak — I'm not saying that; I'm just listing possible interpretations. Can you take a moment to talk about why magnetic heads need this investment? Are you diversifying because of recent media news, or are you hoping to take your internal capabilities to a better position?
Kris Sennesael - Executive Vice President and Chief Financial Officer
Tom, just to be clear, in the prepared speech, we made it clear that capital expenditure will be invested in heads, media, and factory automation rather than increasing unit capacity.
Irving Tan - Chief Executive Officer and Director
I think Kris sums it up very well. Obviously, as we transition to HAMR, the production steps for the required head wafers and media products involve longer cycle times. Therefore, we are making appropriate investments to support both technical capabilities and take into account the slightly more steps and longer cycle times involved in producing the magnetic heads and media components required for HAMR.
presenter
The next question comes from UBS's Timothy Arcuri.
Timothy Arcuri - UBS Investment Banking Research Division
You talked about the acceleration of EB growth. You've always been about 10 percentage points lower than your peers in shipping — you're in the middle of 20%, and they're in the middle of 30%. Kris, what was your goal when you mentioned this? Should we think that after many quarters you might reach the midpoint of 30% to close this gap?
Kris Sennesael - Executive Vice President and Chief Financial Officer
Yes, we did 22% last quarter, and we talked about it. We are in the middle of switching between two generations of products. Over the past few quarters, we've performed very well on ePMR upgrades of up to 32TB. We have now begun implementing ePMR upgrades of up to 44TB.
Then we have the first and second generation HAMR upgrades, which will bring about a significant increase in area density and a significant increase in higher capacity hard drives, which will definitely accelerate our EB year-on-year supply growth over the next six to eight quarters.
presenter
Any further questions, Tim?
Timothy Arcuri - UBS Investment Banking Research Division
Yes. On this point, let's ask again: Kris, should we expect your shipments to increase by about 35% after six quarters? Is this the message you want to convey?
Kris Sennesael - Executive Vice President and Chief Financial Officer
We're only pointing one quarter at a time, but you're thinking in the right direction.
presenter
The next question comes from Krish Sankar by TD Cowen.
Krish Sankar (Sreekrishnan Sankarnarayanan) - TD Cowen Research Division
I have two questions. Thanks for the clarification on pricing. I'm curious, as your first batch of HAMR customers launched in the first half of the year, did this have any impact on average price growth — mainly because you're helping early customers scale HAMR, or should there be no impact?
Irving Tan - Chief Executive Officer and Director
No, we don't discount HAMR products at all compared to ePMR products. We're pricing in dollars per TB, and we have long-term agreements, and we've mentioned that we regularly review the proper pricing. So whether we ship HAMR bits or ePMR bits, the price is the price.
Krish Sankar (Sreekrishnan Sankarnarayanan) - TD Cowen Research Division
Quick question: I fully understand your arguments about increasing head production capacity without increasing unit capacity. I'm just trying to play the opposite - by increasing head production capacity, you're actually increasing the capacity per unit. So I'm curious, does this mean you're actually increasing production capacity, even if you're adding heads rather than units, causing the capacity to grow more than the slight difference between units and heads?
Irving Tan - Chief Executive Officer and Director
I think there are two factors here. First, we said we are investing in magnetic head production capacity. Part of the reason is that, as I mentioned, HAMR head production does require more cycles, so there will be a certain loss of production capacity, which we need to offset. So we really need to invest more production capacity, and this doesn't translate into more heads, and therefore more units.
Additionally, we stated at Innovation Day in February of this year that we have a roadmap to deliver up to 14-bay hard drives. As a result, more heads are also needed in the number of existing hard drives. So we're investing to support that road map.
Ambrish Srivastava - Vice President of Investor Relations
Krish, we shared with you last quarter that the number of units increased and the unit growth was extremely small, which is one of the reasons we have to invest on the magnetic head side.
Irving Tan - Chief Executive Officer and Director
The same goes for media.
presenter
The next question comes from James Schneider of Goldman Sachs.
James Schneider - Goldman Sachs Group Research Division
I would like to ask you to clarify your current magnetic head strategy: do you use external suppliers for certain products or peak production capacity? In addition to the HAMR-related investments you mentioned, to what extent are magnetic head investments aimed at eliminating future needs for any potential suppliers and completely eliminating external dependencies?
Irving Tan - Chief Executive Officer and Director
Thanks for asking. We do use some external head production capacity, and we've always done that, and the same goes for media. This is our innovative “build and buy” (build and buy) approach, which allows us to benchmark the performance of our components with third party suppliers, and is also a great way for us to continue to drive internal and partner innovation.
Our investment is focused on continuing to ensure that we have the latest in-house technology to support future products. We usually use lower capacity hard drives that we buy from third parties. All of our high-capacity leading-edge platforms use our own internal magnetic heads.
presenter
James, any more questions?
James Schneider - Goldman Sachs Group Research Division
Yes. As a question, in a hypothetical situation, how would you respond in theory if one of your competitors drastically increased production capacity per unit?
Irving Tan - Chief Executive Officer and Director
Also, at the end of the day, it's not just about unit production capacity, but also about what capacity point a unit of shipment is at. Our focus has always been on delivering higher capacity hard drives through higher surface density to meet the capacity customers require. So our response will be consistent with what we've communicated over the past year: continue to focus on surface density and turn it into the highest capacity hard drive we can bring to market. This is the best TCO for our customers and the best economics for us.
presenter
The next question comes from BNP Paribas's Karl Ackerman.
Karl Ackerman - BNP Paribas Research Division
Irving and Kris, you said HAMR will be released in the next few quarters. But while HAMR is being amplified, do you also expect the capacity of non-HAMR near-line hard drives to expand?
Irving Tan - Chief Executive Officer and Director
We anticipate — apparently we want to launch HAMR in the first half of the 2027 calendar year. At the same time, we will continue to scale and supply the latest ePMR platforms. As we've emphasized, this transition was very successful and was actually the fastest of all ePMR platforms we've seen. In this quarter (Q2), we expect 30% of all near-line bits to come from platforms up to 40TB.
By the third quarter of calendar fiscal year 2027, we expect 50% of all near-line bits shipped will come from 40TB platforms. It is clear that it will continue to expand thereafter. So I think we have two very strong horses to deliver high-capacity hard drives and support customer needs.
presenter
The next question comes from Bernstein's Mark Newman.
Mark Newman - Bernstein Research Division
Congratulations on today's numbers. I'd like to ask more about pricing. Pricing continues to be extremely strong and appears to have accelerated further in the last quarter. You talked about demand visibility until 2030 and 2031. Can you update how far the price is visible, such as a signed purchase order or long-term agreement?
Kris Sennesael - Executive Vice President and Chief Financial Officer
The most important thing about long-term agreements working with our customers is to establish long-term visibility, ensure that we are aligned on our technology and product roadmap, stay consistent with planned product upgrades over the next few quarters and years, and ensure that we invest the necessary EB capacity to support demand. This is the most important thing we are working to achieve.
As far as pricing is concerned, these long-term agreements do have some price components. Keep in mind that there is a base volume and an upward volume, so there is definitely some flexibility. Of course, keep in mind that not all of our EBs are covered by long-term agreements. The farther you go, the lower the proportion covered by long-term agreements, and of course the lower the proportion covered by the price terms in them.
So I think in the current environment, this is the best approach. For us, it's all about implementing the technology product roadmap, moving towards higher capacity hard drives, and delivering more value to customers, which is a very favorable pattern for pricing and further increases in average price per TB.
Mark Newman - Bernstein Research Division
Can you quickly ask about EB growth? 22% YoY. I remember your long-term guidance for near-line EB growth was 25%. Just wanted to confirm if this still works - your competitor has suggested this too. Is 25% an appropriate long-term guide for near-line EB growth?
Kris Sennesael - Executive Vice President and Chief Financial Officer
Yes. What we're actually saying is “more than 25%.” We also point out that it is currently slightly less than 25% because we are in the middle of switching between two generations of products. But as products get more momentum from generation to generation, we'll exceed 25%.
presenter
This concludes this Q&A session. I handed the microphone back to Irving Tan (Irving Tan) to finish.
Irving Tan - Chief Executive Officer and Director
Thank you to the host. I'd like to leave you with a few thoughts. The first phase of AI investment focused on building infrastructure for training models. Even if this phase continues, the next phase is putting AI into practical use on a large scale — from inference to agents to physical AI. As all of this happens, data will continue to compound its growth, driving customers to plan earlier, adopt higher volume products, and align their infrastructure roadmap more closely with our technology roadmap.
For Western Digital, this created an opportunity far beyond the initial AI infrastructure construction period. As AI scales, data creation and associated storage requirements will accelerate and compound growth. As always, thank our customers, partners and the entire Western Digital team, and thank you for your attention and support to Western Digital. Thank you.
presenter
This concludes this meeting. Thank you all for attending today's demo. The line can now be disconnected.