Thank you for standing by, and welcome to the Western Digital's First Quarter Fiscal Year 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker, Mr. Peter Andrew. Thank you. Please go ahead. T. Peter Andrew: Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Bob Eulau, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including product portfolio expectations, business plans and performance, trends and financial outlook based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to David for his introductory remarks.

Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our first quarter of fiscal year 2022 results. We reported revenue of $5.1 billion, non-GAAP gross margin of 33.9% and non-GAAP earnings per share of $2.49, all within the guidance ranges we provided in August. This marks the sixth quarter in a row of meeting or exceeding guidance, a point that we are particularly proud of as we continue to navigate uncertainty and volatility in the market. Strong demand across diverse end markets, particularly for our cloud products, combined with Western Digital's strong innovation, broad routes to market and sharpened execution enabled us to deliver results within our guidance range despite significant COVID impacts and supply chain disruptions. While these disruptions are transitory, the long-term opportunities for Western Digital remain unchanged as the world's digital transformation continues to accelerate. During the quarter, we shipped a record level of exabytes, while also improving non-GAAP gross margins across both flash and HDD and generating profitable growth. We saw strong demand for our latest generation hard drives and flash products in the cloud end market as well as strong consumer demand for new 5G-based mobile phones incorporating our latest BiCS5 flash solutions. The strong demand for these products were partially offset by pressure in the commercial channel within the client end market and certain portions of the consumer end market, particularly retail. This was attributable to component issues impacting our customers' ability to ship products, greater component sourcing constraints within our own operations and uneven geographic demand due to COVID lockdowns. Our continued focus on innovation and a more agile business unit structure enabled us to quickly adapt to these dynamics. When combined with an industry-leading portfolio and a strong go-to-market operation, I'm confident in Western Digital's ability to continue to generate improved operational performance for all of our stakeholders. Before I get into the business trends, I want to highlight a few changes we made to our end market breakdown, which, we believe, will help you understand why Western Digital is well positioned to capitalize on the opportunity presented by the increasing value and importance of data. We now split our end markets into cloud, client and consumer. The cloud represents an incredibly large and growing end market for Western Digital, and we are uniquely positioned to address customer storage needs as the only provider of both hard drive and flash products. During the first quarter, cloud represented a record 44% of total revenue, led by record capacity enterprise hard drive revenue and nearly 30% sequential growth in enterprise SSD revenue. We believe the accelerated digital transformation will continue to drive growth in this end market and continue to shift our business mix towards the cloud. As we ramp our new innovative products and continue leveraging the benefits of the organization structure we put into place last September, I am confident we will capture opportunities to achieve a more stable and profitable growth profile over the long term. The client end market represented 37% of revenue in the first quarter. Here, we are providing a broad array of high-performance flash and hard drive solutions to our OEM and channel customers across PC, mobile, gaming, automotive, VR headsets, at-home entertainment devices and industrial spaces. Lastly, the consumer end market accounted for 19% of revenue in the first quarter. The highlight of this end market is the strength of our SanDisk brand of retail products and the WD_BLACK brand of storage products for gaming enthusiasts, which is strong and growing. The brand recognition and infinity, combined with our unmatched reach with nearly 400,000 points of presence across the world is a great setup for Western Digital as we enter a seasonally stronger part of the year. With that, I'll now provide a recap of our HDD and flash businesses as it relates to our first quarter results. In HDD, continued strong demand for our latest generation energy-assisted drives among our cloud and enterprise customers drove record revenue and exabyte shipments in our cloud end market. In addition, we experienced strong revenue growth in our smart video product line, and we're unable to meet demand. During the quarter, we announced OptiNAND, a revolutionary technology that utilizes flash in the HDD control plane to further increase aerial density. With this leading architecture, we achieved 20-terabyte capacity using our field-proven 9-disk mechanical platform and ePMR technology. Next month will commence volume shipments of our 20-terabyte CMR hard drives based on OptiNAND technology. In flash, revenue grew in the quarter due to continued strong demand within the cloud and client end markets for our latest generation of our enterprise SSD products and the ramp of new 5G phones incorporating our latest BiCS5 node. Within enterprise SSD, we experienced continued success in the cloud with another successful quarter of qualifications. We are now qualified at 3 cloud titans and have made excellent progress working our way through the qualification process in the enterprise and distribution channels. We expect these qualifications to start to drive accelerated revenue growth in 2022 as our customers begin to deploy these products into their networks. The ramp of next-generation 5G phones incorporating our latest generation of BiCS5 products accelerated in the quarter, with revenue growing over 20% sequentially. We expect this migration to 5G, combined with a continued increase in the amount of storage per phone to drive another strong quarter of revenue growth in the fiscal second quarter. Gaming was strong in the quarter with a solid lineup of products for game consoles along with a growing brand recognition of WD_BLACK based products in the channel and retail. Heading into the second fiscal quarter, we are well positioned to take advantage of seasonal strength and grow in a wide variety of gaming channels. As I noted earlier, the client PC OEMs' distribution channel and retail were impacted by our customers' ability to ship product, greater component sourcing constraints within our own operations and uneven geographic demand due to COVID lockdowns. Demand was solid, but these transitory issues impacted our ability to realize this demand in our results. In total, bit growth accelerated to 30% year-over-year in the first quarter as we ramp BiCS5 to 17% of flash revenue. This quarter, we expect year-over-year bit growth to further accelerate to the mid-30s range with BiCS5 bit crossover to happen later in the quarter. Our long-term goal is to grow bits in line with the market, taking advantage of our product and end market breadth to shift our bits to optimize profitability. As we look into calendar year 2022, we are optimistic as our customers continue to indicate strong end demand across cloud, client and consumer end markets. We have industry-leading technology, the right product portfolio and investments and the organizational agility to fundamentally drive improved profitability regardless of market condition. We have a great position in 2 large and growing markets in flash and HDD, and we have proven our ability to drive innovation throughout our portfolio and deliver industry-leading products to a broad and loyal customer base. We believe that the migration to the cloud and demand for storage solutions throughout the client and consumer markets will drive a huge opportunity for Western Digital and our customers. I'll now turn the call over to Bob to share details on our financial results.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, overall results for the fiscal first quarter were within the guidance ranges provided in August, marking the sixth quarter in a row that we've met or exceeded guidance. Total revenue for the quarter was $5.1 billion, up 3% sequentially and up 29% year-over-year. Non-GAAP earnings per share was $2.49. Please note that EPS included $56 million in total COVID-related costs, which was higher than we anticipated entering the quarter. I'll provide more details on these costs in a minute, but we are pleased to deliver such good results in the face of this unanticipated headwind and other supply chain issues. From a disclosure perspective, in addition to the change in our end market breakdown that Dave discussed, this quarter, we moved to segment reporting for our flash and hard drive businesses. For more details, please refer to our earnings deck. Looking at our end markets, cloud represented 44% of revenue at $2.2 billion, up 12% sequentially and up 72% from a year ago. This represented the second quarter in a row of record revenue. What is encouraging about this cloud revenue growth is the strength and breadth of our revenue streams across product areas. There was growth on a sequential basis in both the flash and hard drive business units as well as across every product category within the cloud, including capacity enterprise drives, enterprise SSDs, smart video and platforms. As the cloud continues to grow as a percentage of our revenue, we see an opportunity to reduce volatility in revenue and profitability. Over the last 3 quarters, we have successfully ramped our 18-terabyte energy-assisted drive to our highest volume mainstream product within the cloud end market. Overall, cloud HDD exabyte shipments grew 9% sequentially and over 70% year-over-year and comprised over 80% of total HDD exabyte shipments. Client represented 37% of revenue at $1.9 billion, down 2% sequentially and up 6% year-over-year. A highlight within the client end market was growth within our flash business unit, specifically in mobile, gaming, automotive, IoT and industrial applications. Our strength here was more than offset by pressure in desktop and notebook hard drives due to supply disruptions at our customers and within our own operations. Finally, consumer represented 19% of revenue at $973 million, down 6% sequentially, but up 10% year-over-year. Both our flash and hard drive business units declined on a sequential basis due to similar supply disruptions in addition to uneven geographic demand due to COVID lockdowns. Turning now to revenue by segment. We reported flash revenue of $2.5 billion, up 3% sequentially and up 20% year-over-year. On a blended basis, flash ASPs were down 3% sequentially, primarily due to mix and pricing within our transactional markets. On a like-for-like basis, flash ASPs were flat. Flash bit shipments increased 8% sequentially and 30% year-over-year. Hard drive revenue was $2.6 billion, up 2% sequentially and up 39% year-over-year. On a sequential basis, total hard drive exabyte shipments increased 4%, while the average price per hard drive increased 5% to $102. As we move to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the first quarter was 33.9%, up 1 percentage point sequentially. As noted earlier, this included $56 million in COVID-related costs or a 1.1 percentage point impact. These were highest COVID-related costs in over a year. Our broad routes to market and ability to proactively shift bits to the most attractive end markets enabled us to expand our flash gross margin by 1.5 percentage points sequentially to 37%. Our hard drive gross margin was 30.9%, up 60 basis points sequentially. This included COVID-related impact of $51 million or approximately 2 percentage points. Operating expenses were $761 million, within our guidance range. Operating income was $952 million, representing a 15% increase from the prior quarter and tripling year-over-year, highlighting our profitable growth. With our improving profitability, our tax rate in the fiscal first quarter was 11%. Earnings per share was $2.49, toward the top of our guidance range. Operating cash flow for the first quarter was $521 million, and free cash flow was $224 million. Capital expenditures, which include the purchase of property, plant and equipment and activity related to our flash joint ventures on our cash flow statement, was a cash outflow of $297 million. We continue to expect gross CapEx for this fiscal year to be approximately $3 billion and cash CapEx to be around $2 billion. In the fiscal first quarter, we paid off $213 million in debt, including a discretionary debt repayment of $150 million. Our gross debt outstanding was $8.6 billion at the end of the fiscal quarter. In addition, as a result of our strong financial results and free cash flow generation, last week, we repaid the remaining balance of our term Loan B in the amount of $943 million, bringing total gross debt outstanding to $7.7 billion. Our adjusted EBITDA at the end of the first quarter, as defined in our credit agreement, was $4.2 billion, resulting in a gross leverage ratio of 2.0x, down from 2.7 a year ago and was the lowest in 3 years. As a reminder, our credit agreement includes $1 billion in depreciation add-back associated with the flash ventures. This is not reflected in our cash flow statement. Please refer to the earnings presentation on the Investor Relations website for further details. Moving on to our outlook. Our fiscal second quarter non-GAAP guidance is as follows. We expect revenue to be in the range of $4.7 billion to $4.9 billion and we expect flash revenue to increase sequentially and hard drive revenue to decline sequentially. We expect gross margin to be between 32% and 34%. We expect operating expenses to be between $760 million and $780 million. Interest and other expense is expected to be approximately $70 million. Our tax rate is expected to be approximately 11% in the second quarter and for the fiscal year. We expect earnings per share to be between $1.95 and $2.25 in the second quarter, assuming approximately 316 million fully diluted shares outstanding. I'll now turn the call back over to Dave.

Thanks, Bob. I want to conclude by thanking the Western Digital team for their hard work and commitment to our customers throughout a challenging quarter. Despite the transitory issues we have been able to successfully navigate, it is clearer than ever Western Digital's innovative technology portfolio is foundational to the rapid digital transformation and transition to the cloud that the world is experiencing. With our deep roots in a broad range of end markets and a sharp focus on execution, I'm confident in Western Digital's ability to capture this massive opportunity, and I'm looking forward to the rest of the fiscal year. Let's now begin the Q&A.

[Operator Instructions] Our first question comes from Aaron Rakers with Wells Fargo.

Hey, Aaron?

Yes. Sorry guys. Can you hear me?

No problem. We hear you.

Sorry about that. Yes, so I've got 2 quick questions, if I can. I guess, first of all, it seems like there's a lot of moving parts in the quarter and more importantly, into the guidance outlook for fiscal 2Q. Bob, I'm just wondering if you can help quantify to your best estimate of how much impact you're carrying in revenue expectations relative to some of these "transitory effect"?

Yes, it's difficult to quantify, right, because there's impact in terms of our own execution, which, I think, we worked our way through pretty well during the quarter. And then we have customers who have supply chain challenges as well where they're trying to get match sets and build out their environments. And then, of course, we have supplier challenges as well, where we're working like everybody else, pretty hard to get components in. So it's difficult to give you a definitive answer in terms of what the impact was in the quarter, we just closed or even obviously, in the next quarter. But it's certainly somewhere in the couple of hundred million dollar range and potentially a little worse in the December quarter.

Aaron, this is Dave. First of all, thanks for the question. I guess the one thing I would say as well is, whereas maybe a quarter or 2 ago, we were seeing it in maybe certain parts of the business, some of the OEMs, PC OEMs. Now we're seeing it more broadly, even the big data center players are having their demand impact. Our demand from them is being impacted by their ability to get other components. So it's really become a much more broad-based issue across the portfolio.

Yes. And then if I can follow up real quickly, one of the things that stands out to me is that I think you reported a blended ASP decline of about 3% sequential in the flash business. So I believe the mix of enterprise actually went up to the positive. So when I look at that ASP erosion relative to actually some of your peers in the NAND market, it seems to be a bit of a disconnect. Can you help me understand the pricing dynamics you're seeing in NAND right now?

Yes, I can start, and then Dave can fill in. Yes, I mean, the blended ASP, as we started the quarter, we indicated we expected it to be down. And it was based on the mix we were anticipating. The mix came in essentially the way we had expected. And it was -- I don't want to get into every little detail of the mix. But one of the things we said at the beginning of the quarter was we expected more mobile volume in the September quarter, and that is what we saw. We actually think we'll see even more mobile as a percentage of the total in the December quarter. So mix is definitely a bit of a headwind for us. But really, ASPs are not going down that much. And we're really pleased with the cost reductions we've been able to achieve both in the quarter we just finished as well as what we're expecting to do this quarter.

Yes, I guess, Aaron, Bob right on the money on that. I guess the only thing I would add is a little bit of softness in some of the transactional and consumer markets, but that we're already seeing that level out a little bit. And we're really seeing this bifurcation where the qualified bits in the market are strong and unqualified are a little bit weaker. I guess that's not surprising given all the nodal transitions the industry is going through. But the primary issue, I would say that's the issue in mix, as Bob pointed out. And we expected that walking into the quarter.

Our next question will come from C.J. Muse with Evercore.

I guess if I look at your revenue guide and kind of the commentary on NAND bits, it sounds like the implied HDD revenue guide is roughly down 15% sequentially. So I guess, A, is the math right there? And B, I guess, what's causing the severity of decline? Can you kind of help us understand what's digestion versus some of the transitory supply chain issues that you spoke to?

Yes. I think that's probably a little -- we don't guide each individual business, but I think your number is probably a little heavy. You hit on some of the issues. Some of it is mix. We've actually got one of our very, very big customers that has their own supply chain issues that's pushing out some orders. So that's a bit of an idiosyncratic thing that's happening there. There's some supply chain issues with, especially in kind of mid-cap and the ability to build all of that supply we want. We talked about that even in this past quarter in the smart video market, which is strong and there's some unmet demand there. And then we've got -- we're seeing a little bit of an inventory issue, quite frankly, in China, where there's a lot of high-cap inventory there, and that's kind of pulling the number down a little bit for the next quarter. But we -- so we expect all those things are transitory issues. We're really happy about the portfolio. I think the fact that AT&T was now -- the majority of the portfolio, we talked about shipping 20-t on a 9-disk platform and OptiNAND is out there and in customers' hands. So we feel really good about the innovation that was delivered in the quarter and about where the road map is going in the drive business and the new technology has been very well received.

That's great. And I guess as my follow-up, Bob, could you speak to how we should be thinking about gross margins into the first half of '22? Obviously, there's certain unknowns in terms of revenues and NAND pricing. But would love to hear perhaps some of the other puts and takes that we should be thinking about as well as the timing of when you think some of the COVID-related costs may abate?

Yes, C.J., you're right. It's difficult to say exactly what's going to happen over the next few quarters. But -- and as you know, we only give guidance 1 quarter at a time. Now having said that, we're pretty optimistic on 2022. Again, we think a lot of the challenges in the quarter we closed, in the quarter we're in now are really supply chain related. We think the underlying demand situation is very positive. We really believe, as I said in our cost reduction plans, and we think we'll be able to deliver solid margins. So I don't want to get into giving guidance for next year, but we're definitely optimistic.

Our next question will come from Joe Moore with Morgan Stanley.

I wonder if you could update us on where you are with BiCS5 qualification? I assume saying you'll be mobile heavy this quarter. It means you're kind of still getting qualified across the SSD markets? And I had a follow-up.

Yes, I think that's right. I mean it's early in the node. We are happy with the ramp this quarter. We ended at, I think, 17% BiCS5, and we expect to get crossover before we exit the year. But like any new node, you're in more of the mobile components market as the rest of the products get qualified, but that's all work underway. And our customers are definitely pulling us in that direction. They want BiCS5 on the SSD products and the engineers are hard at work at getting that work done. That will be an evolving story as we work through '22.

Great. Thank you. And then I think you referenced some of the segments in client SSD maybe being a little weaker. Can you separate out? Is there a Chi effect there where it was good for a while and then it was less good versus just overall client SSD being oversupplied because of other issues in the supply chain. Like how do you sort that out? And what do you see happening in the client SSD market?

I don't think we see it as a Chi effect. I mean, I was just talking to our sales team this morning, and I think the channel has now kind of normalized and back on seasonality after the Chi disruption. I think we just see this issue with people not able to get all the components they need to put together the full kit for what they want to ship, and that's causing some softness in the channel. So I think it's more related to that than it is anything Chi related, at least in my view.

[Operator Instructions] Our next question will come from Karl Ackerman with Cowen.

Bob, earlier in a response to a question, you had indicated some of the impact or challenge in your enterprise, I believe, HDD business and SSD business was a result of a push out by a customer. My question there is if we isolate that customer, how do you see the demand trajectory of cloud in mass capacity markets not just into the December quarter, but also into the second half of your fiscal year? Certainly, as you begin to ramp some of these 20 terabyte drives and other higher capacity drives in HDDs as well as some of these new design wins you have in enterprise SSD.

Do you want me to take that or you?

I can start.

Okay.

Yes. So I think as a general statement, we're seeing continued very strong demand from our data center customers, especially we've very big data center customers. They're giving us good signals about next year and what they plan to do. It's hard to pin that down to a certain quarter right now, but we continue to see very strong demand there. Like I said, we're starting to see the supply chain impact show up there as well. But I'm sure that will all get worked through as we go through the year. But we look into '22, and we have our customers telling us, it continues to be a strong demand environment.

Yes. I don't think I have anything to add. I mean we believe in the cloud demand. I think it's strong, and there just is a lot of supply chain dislocation right now.

Our next question will come from Wamsi Mohan with Bank of America.

This is actually [ John ] on behalf of Wamsi. Just curious, there has been a lot of media focus on Kioxia. And in the past, Western Digital has expressed interest in the asset. Do you think that consolidation still make sense? And do you still have an appetite for it?

Well, I mean I think I'll speak in general about Kioxia. They're a tremendous JV partner. And we've spoken a lot about the JV and what the benefits of that are. And all the -- I think one of the highlights of the quarter is the continued production of the flash road map and BiCS5 and the cost situation that, that's driving. I mean I think it's always been a very big focus of the Western Digital and Kioxia team to very focus on capital efficiency and cost downs in the portfolio. Those -- the seeds for BiCS5 performance that we're seeing now were shown many years ago. That continues to be a great focus of the joint teams. And I think the fact that we have a joint road map with another supplier as big as Kioxia gives us a lot of investment in our road map. And then, of course, we produce together as well and have a lot of synergies there as well. So it's a great partnership. We -- it's been going for over 20 years now. It's going to go for -- we're signed up for at least another decade. And we always look at that as we continue to invest in fabs, and we're really happy with the partnership, and we're going to continue to get the best out of it.

Our next question will come from Mehdi Hosseini with SIG.

Two questions. The first one is for the team. Obviously, there is a long lead time associated with the equipment procurement. So at this point, I would think that you have a pretty good feel for a bit, NAND, bit supply growth in calendar year '22. Is there any color you can share with us? And I have a follow-up.

Yes. I mean we do have good visibility, and you saw our bit growth came back up again this quarter. We expect it to be a bit higher year-over-year next quarter. Our long-term goal continues to be to grow at the rate the market is growing, and we won't get that perfectly every quarter, but that's our objective. And we think that, again, with Kioxia, we've got the right plans in place for next year.

But what is the target for next year, calendar year?

Yes. I don't think we put a specific number out there yet. Some of the industry analysts suggesting industry demand growth in the low 30% range.

Got it. Thank you. And given the fact that your enterprise and cloud customers are expressing a good solid demand in calendar year '22. Have you determined how to allocate, and perhaps I'm trying to better understand how you're thinking about the mix between cloud enterprise and client and consumer.

Yes. I think we're certainly having those discussions with them. I mean, I think every quarter, we discussed the current quarter and out many quarters -- several quarters in advance at least, I mean, we don't lock in per se on those numbers exactly, but we think about share of their particular businesses and what that's going to look like and what that means to demand for us. So yes, we're having those conversations, and we're factoring them into the mix of bits for next year and how we allocate across the portfolio. Of course, there's a nodal mix equation of that as well as it's kind of referred to in the previous question, when are different products available on different nodes out of the fab. So we're working through all that right now.

Our next question will come from Timothy Arcuri with UBS.

I want to go back to the HDD guidance and just maybe ask around what the normalized base of revenue is. I mean, obviously, your peer guided flat, you're down kind of like low teens. It sounds like something in the range of $2.25 billion in that range. It sounds like part of that is a push out and some of that some company-specific issues on the supply side. So can you help us bridge the gap there? Is it -- is 2.6% kind of flat like the normalized level if you adjust for all that? Or is it something that's slightly down Q-on-Q, but not down low teens?

Yes. I mean, again, it's hard to quantify exactly what the supply chain impacts were, and we're actually not giving guidance by segment, but we definitely believe the hard drive business is a growth business and it will continue to grow over the next few quarters. We think 2022 will be a strong year. And yes, this is a bit of an aberration in the December quarter, but it's -- the business is really solid. The underlying demand is very good. And you're right. I mean we already commented that there are some supply chain issues that are impacting us right now.

Our next question will come from Toshiya Hari with Goldman Sachs.

Dave, I wanted to ask about enterprise SSDs. You talked about now being qualified 3 cloud titans, which is great. You also talked about some of these wins translating into revenue growth and potentially driving an acceleration and growth in '22. Can you help us kind of shape the ramp into '22? Could it be more first half weighted, second half weighted? I know these projects can move around a little bit. But any help there would be really, really helpful. And then related to that, the impact on profitability as you ramp that business, initially, would it be a headwind and then eventually a tailwind? Or should it be fairly margin neutral from the get-go?

Toshi Hari, so first of all, yes, we are really happy with the progress of the portfolio. I remember sitting here a year ago, and we were just trying to get over the hump on the first one, and now we're over 3 of them, and we continue to work at the OEMs, which the enterprise OEMs, which tend to be longer call cycles, and we're making good progress there as well. And you're right. We'll -- we got the calls done. We'll start to see some -- a little bit of deployment next quarter and then start to ramp it throughout '22. So I think it's an evolving story as we go throughout the year. From what is -- I think it's a very attractive TAM. I think with good margins, and that's why we're investing in the products. And I think as we mix more into that and have more supply into that, it's a tailwind for the overall portfolio. That's definitely a true statement.

Your next question will come from Ananda Baruah with Loop Capital.

Yes, I guess my question would be for whatever it is that you guys consider to be the revenue impact to the December quarter guide, could you just sort of anecdotally map out for us, how much is from the flash business relative to HDD? And then inside of HDD, how much would be from the impact of kind of the cloud type. It sounds like there's some component stuff on their side there? And then you had mentioned some channel dynamics and some WD dynamics as well on the PC business. That would be helpful.

Yes. I mean this is -- I'm trying to think how to answer this question differently. I mean we're actually not giving guidance by segment. However, we did say we expect revenue to be down a bit on the hard drive side. We expect it to be up sequentially on the flash side. There are supply chain challenges in -- with some cloud customers. There are supply chain challenges with some PC OEMs. We also mentioned that there seems to be a fair amount of inventory in China right now. So there's -- there definitely are some short-term challenges with respect to the hard drive business. But again, long term, the underlying growth is really good there.

Your next question will come from Vijay Rakesh with Mizuho.

Just had a couple of quick questions. On the client SSD side, as you look at next year, just wondering how you're thinking, what the outlook was. I know server looks pretty strong for next year. But on the client SSD side and on mobile too, how you are looking at next year's demand?

Yes. We think the PC TAM is good next year. I mean we're obviously coming off of a blockbuster year with COVID. I mean we see the pre-COVID baseline is around 265 million, 270 million units. That went up to 340 million this year expected around that number, and we see somewhere around 320 million to 335 million next year. So definitely been -- we're going to come off this year a little bit. But we're -- we see basically the baseline has been reset, pre-COVID by a significant amount. So we feel good about that. We're hearing that from our customers. We're talking to those customers now about 2022 plans and what they plan to do and how much supply they're going to need and share conversations with each of them and those conversations are going well. The smartphone market, again, we continue to see this past quarter and the quarter in, we're seeing really good strength in that market. So I think this is -- there's a larger point here about the flash market is that the number of end markets is just more diverse now, especially with enterprise SSD growing and getting to be such a big market that there's a much better mix of demand that we play across in the market. And so we see strength in PC. We see strength in smartphones. We see strength in data center. Like we said, the more transactional markets this past quarter is more nodal transitions going on. There was more bits available in those markets, and we definitely saw that. But again, we're heading into a seasonally strong quarter on retail. So as we go through the quarter, we'll get a very strong idea about how retail is going to play out as well as we go through the holiday season.

Our next question will come from Sidney Ho with Deutsche Bank.

Relates to hard drive business, earlier, you talked about inventory issues in China. Can you add a little color to that? How much are -- how much excess inventory are there? Do you think that will get back to normalized levels exiting the year? And any other geography you're watching out right now?

That's the main geography we're watching, and it's mainly high capacity, and we think it will get worked through in the next quarter. But it's definitely in the channel and it's some of the big customers. So it's just something that's going to impact the amount of business that goes -- that flows through that part of the market, which is a pretty big market for all of us, but we don't see it more than a quarter, maybe a little bit more of impact.

Our next question will come from Patrick Ho with Stifel.

Bob, on the prepared remarks, you talked about the different variables in terms of the supply chain shrink and the suppliers, your own manufacturing efficiencies as well as the customers. Can you for both September and December give kind of a qualitative commentary on which were the biggest impacts in both September and December?

Yes. I think what I said earlier is we're actually expecting December to be a little more challenging than what we saw in September and the September quarter was not easy. And starting with our own teams, I think we did a really good job given what was going on with COVID in Southeast Asia. We did mention our COVID costs were up to $56 million this quarter. And we've done a really excellent job in terms of working with local governments to try and get as many employees vaccinated as possible and to really do the best we can to assure supply in terms of our own factories. Now as we mentioned, like everyone else, we have challenges in terms of getting components as well, particularly, obviously, the controllers on both the hard drive and the flash side, and that has an impact on the business. I don't know quarter-to-quarter, which quarter is worse, but it's a challenge in both of them. And it's a challenge that's not going to go away soon in terms of the semiconductor availability. I mean we're getting some lead times of 50 weeks right now. So it's definitely a very real issue in terms of getting components in. And then we've already talked a fair amount about the customer challenges. And I would say it feels to me and Dave can comment like there are more customers impacted by the supply chain in the December quarter than there were in the September quarter. It seems a little more broad-based.

Yes, I don't think there's any doubt about that. I think when we talk to our sales teams and we talk to our customers, I mean it's -- I think just over the last month or so, the number of places where we're hearing, they are not able to meet their own true demand or they can't pull the demand from us if they're building their own infrastructure because the supply chain components has definitely broadened. And it's -- I think it started in some of the PC makers. I think that's where we heard the most about it, if you go back a couple of quarters. And now, like I said, we're hearing more about it in other segments, including the big data center providers. So it's definitely an impact of the business, and we just navigate through it. I mean, I think when you talk to our customers and we talk to our own sales teams and we look at what everybody is telling us, the end demand continues to be very, very strong. And everybody is just trying to figure out how to meet that and how to get enough components and get the right components to build the right kit, whether it's for something they're going to sell or it's building their own infrastructure to build what they need. And as Bob said, we see that ourselves. And our ability to get components and our ability to make sure our factories continue to run. And I will say I'll be a little bit selfish here and complement our own teams. But the Delta variant in Asia was a very big impact. And this quarter was probably one of the most difficult since COVID started. There were points where we had thousands of employees in quarantine and still kept everything going. So when you see what's happening on the ground and what the impact has been, it's not hard to understand how all the discussions around supply chain impacts. I think the good news is that we're working very, very hard, as Bob said, with governments to get vaccines distributed and get things back on track. And as we exit the quarter, and we sit here today, things were in a much, much better shape than they were a couple of months ago. So it makes us optimistic as we go through 2022 that this will get worked out and that will all be able to meet the true demand that's out there.

Our next question will come from Harlan Sur with JPMorgan.

So on your client business, you guys talked about the PC market being weak in September due to supply disruptions at customers. We all know about the match set challenges on component shortages, that's been pretty well telegraphed. But you also mentioned the WD sort of specific supply chain disruptions on client HDD as well. Is the primary impact the shortage of HDD controllers and preamps or is the primary impact on the COVID-19 related sort of operations disruptions? And given your semiconductor suppliers' lead times, when do you expect to see your client HDD specific chip supply issues start to ease?

I'll take a crack and then Bob can add some color as well. I mean it depends on how you look at it. I mean, certainly, our COVID costs are up significantly this quarter. I think nearly 50% or more, 60% on what they were last quarter. We had been steady state for probably 3, 4 quarters in a row, and now we've bumped up significantly. So a lot of that is cost going into managing our own infrastructure and work that's going on with our own teams. Of course, a lot of it is logistics as well. That's always a big component of it. So those costs are going up. Our own supply is mainly around controllers. I think it's fair to say. And as Bob said, we're planning a year out on lead times and working with our own suppliers on how we, number one, make sure we get everything we need to meet our demand, which has been challenging and then get it in a time frame that we need. But we're working through it. And like I said, I think that there's no doubt, if you go back a couple of quarters, we've been talking about this about how we were not able to meet all the demand that we saw out there. I think the thing that we see different walking into this quarter is there's -- we're seeing even a greater impact across all of our customer base, and it's spreading to places where we hadn't seen it before. And that's both raising the uncertainty and also just depressing the demand because customers can't get all the pieces they need, so they don't need everything from us. So we're starting to see some hints in some markets, starting to clear up a little bit, super early days. But again, if you look at what's going on in the ground in Asia, things are getting better, at least from our perspective, our narrow perspective, although we have 40,000, 50,000 people there. Things are getting better on the ground and that gives us optimism that the situation will improve from here as we go through '22.

Our next question will come from Tom O'Malley with Barclays. Thomas O'Malley: I had another one on the HDD business. You guys have done a really good job of improving profitability over the last year plus. My question is, as related to supply issues, clearly, there's a revenue headwind here. Could you talk about the impact to gross margins? Do you expect that you see a greater impact there because of the supply issues? Or is this more of a revenue issue with gross margins kind of hanging in? Any help there would be nice.

Yes. Let me start and then turn it over to Bob. I mean I think there are some headwinds. I mean one of them would be a little bit of mix because at least for a 1 quarter impact because we've got such a big customer pushing out some demand. And then you've got pricing going up on components. So you've got inflation in the supply chain is a bit of a headwind as well. All that said, we appreciate your comments. The team has worked extremely hard. We've rolled out a lot of innovation in the drive business and driven the gross margins. 30.9% this quarter, we thought was a great result. And on top of that, we had couple of points of COVID headwind on top of it. So it all starts with making sure we deliver a great product to our customers. It starts with innovation. You guys have heard me say this many, many times, and I think the innovation engine is alive and well. Another big step forward this quarter with OptiNAND. And I think as the team continues to drive innovation and we drive great products to our customers, we'll have the opportunity to continue to have a better conversation with our customers around profitability. All that said, there are some headwinds, I would say, in the near term.

Yes, there are definitely headwinds. But like you said, the team has done a great job in terms of the product portfolio, and we think the gross margins will be down a little. We are going to have probably COVID costs in the same ballpark as we have this quarter. So that's a couple of points. But I think we've got a really good chance of having gross margins above 30%, again, on the hard drive business.

Your next question will come from Jim Suva with Citigroup.

I just have one question, and it sounds like the December outlook is truly in aberration. So the people will push back and say, well, why is it truly an aberration and not simply the new norm. So maybe if you can walk us through around why December is so unique because whether it'd be supply chain or shipping costs, they look quite prolonged. So if you could just kind of lay out the reasons about why December is so unique for such aberration?

Well, I mean, first of all, we're in a very unique time and we're still. I think as we talked about the supply chain disruptions that have been brought by COVID and especially the Delta variant that really pushed through Asia over the last quarter or more have been very, very significant and very severe. And to the people that were managing the situation on the ground there, they did a tremendous job, they had an enormous amount of work just to keep everything running. So I think that just leads to a very unique environment, Jim, that we're navigating through. Like I said, when we look at demand and we look at what our customers are telling us about demand in the market, we hear very good things. We -- they're very positive and very bullish. We just have -- you just have different customers in different states of their own ability to build what they need to build or want to build and that's constantly shifting. And when you add it all up in any particular quarter, you're going to get a result and that's what we got, and that's what we'll manage to. But we think that as the supply chain issues get worked out, the demand trends in the business are very, very strong, and we're on the right side of where the world is going from a technology point of view. Now I thought it was significant this quarter to 44%, record percent of our quarter was in the cloud. And hopefully, you guys react positively to our simpler decomposition of our revenue across cloud, client and consumer, but we expect to see more growth in cloud, 72% year-over-year growth in that part of the business, and we continue to have the portfolio pivoting in that direction and expect it to be -- expect to participate in that growth as it goes forward.

Our next question will come from Steven Fox with Fox Advisors.

So I guess I'm just trying to understand the idea that none of the demand pushouts are perishable because this is the seasonally strongest quarter of the year. How do we have confidence around that maybe not necessarily that it's perishable, but maybe spending that would have occurred in December, it doesn't occur in March, even if there's availability just because of timing around -- usual timing around spending?

Well, again, I think it goes back to -- if you're talking to a very large cloud provider that's trying to build out their infrastructure, I think they're going to catch up on building it out to what their demand is. If they can't do it this quarter, they'll get the components in the next quarter. So again, we see very good demand environment. And I think that as our customers are able to get all the components they need, they will continue to come back to us and adjust their demand to us. That's what we see. We have very close relationships with them. And so I don't expect that the demand from our customers' point of view is not like kind of a 1-quarter thing. It's like -- it's just -- it's a demand curve that goes on, and I don't see it as being perishable demand. I see it as everybody is trying to figure out how they can get as many components as they can to build complete kits for what they need to do. And as they do that, they come back to us and change their demand signal. And we've seen that. Maybe a good example is on some of the PC manufacturers, where 1 quarter, they'll drop their demand significantly. In the next quarter, they'll come back and raise it significantly when they've got their own supply chain issues worked out. So as I said, we've seen this in other parts of the market, and we've dealt with it, and we know how to deal with it. Now we're just seeing it across -- the broader cross-section of our business. And quite frankly, some really big customers across that are in that mix now. And we'll -- we've been working through this now for the last several quarters, and we'll work through it this quarter.

Yes. And the most seasonal business is the consumer business, and we are expecting to have a sequential increase in the consumer business. So I think that's probably where it might be perishable demand. But we think that will be pretty solid this quarter.

And today's final question will come from Srini Pajjuri with SMBC Nikko Securities.

Dave, I had a question about your pricing strategy going forward, especially given the cost inflation we are seeing in the supply chain. I guess some of the cost increases are temporary and some may be permanent. I'm just curious as to hear your thoughts in your conversations with your customers, what kind of feedback you're getting as you kind of look to pass through some of these costs to your customers? And also I want to hear about your -- what you think your ability is in terms of passing through some of these incremental costs if these costs continue to, I guess, remain permanent?

I think you hit on the answer in your first part of your question set up, which is these are broad and long relationships with our customers, and they don't go up and down quite so fast. So we certainly have conversations with our customers when our costs increase, but it's not as simple as just passing it along. It's got to persist for a while before we would have that conversation. And quite frankly, we participate in a market. It's -- and so it's more about the market price. I think the overwhelming issue with pricing is around innovation, and making sure we continue to drive innovation across our portfolio. And as I look back on last quarter, the 2 things that -- 2 really big things that stand out to me from last quarter is, one, is just the execution of the team in a really, really difficult environment, especially the -- as I've talked a lot about the factories in Asia; and two is the innovation road map and the fact we're transitioning aggressively to BiCS5. We introduced OptiNAND. Those are the things. We introduced a 20-terabyte drive and are going to be shipping that in volume now here in the next month. That's with our energy assist technology 9-platter, 9 disk drive, 2.2 terabytes per platter. So that's the primary issue where it's going to drive an innovation-led discussion with our customers about pricing. In the cost side of it, of course, as if they're going to be very long term, we're going to have those conversations. But I would say they're long and substantial relationships, and we manage through the quarter-to-quarter stuff with them really in both directions. But really, the focus is on that -- on driving innovation. If you drive innovation, you're going to get a better return for it. And quite frankly, I think we've seen that over the last 3 or 4 quarters as we brought energy assist in our 18-terabyte drive, the 30.9% gross margin this quarter in HDD is a multiyear high. So we feel very good about that.

And speakers, that was our final question. I'll turn it over to you for any closing remarks.

All right, everyone. Thanks for joining us. We really appreciate it. It's always good to talk to everyone. Thank you for all your questions, and we look forward to talking to all of you throughout the quarter. Take care.

Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.