Bob Blair - VP, IR Steve Milligan - CEO Mike Cordano - President & COO Mark Long - CFO

Aaron Rakers - Stifel Rich Kugele - Needham Mehdi Hosseini - Susquehanna Sherri Scribner - Deutsche Bank Stanley Kovler - Citi Amit Daryanani - RBC Capital Markets Ananda Baruah - Brean Capital Katy Huberty - Morgan Stanley Rob Sierra - Guggenheim Partners Mark Moskowitz - Barclays

Good afternoon and thank you for standing by. Welcome to Western Digital's Second Quarter Fiscal 2017 Conference Call. Presently all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. Now I will turn the call over to Mr. Bob Blair. You may begin.

Good afternoon, everyone. This call will contain forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected financial performance for our third fiscal quarter ending March 31, 2017, our market positioning, expectations regarding growth opportunities, our financial and business strategies and execution, integration activities and achievement of synergy goals, demand in market trends, our product portfolio, product features, development efforts, and expansion into new data storage markets and our joint venture partnership with Toshiba. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2016. We undertake no obligation to update our forward-looking statements to reflect new information or events. Further, references will be made during this call to non-GAAP financial measures. Reconciliations of the differences between non-GAAP measures we provide during this call to the comparable GAAP financial measures will be posted in the Investor Relations section of our website. We have not fully reconciled our non-GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted. Accordingly, a full reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort. In the question-answer session part of today's call, we ask that you limit yourselves to one question to allow as many callers as possible to ask their questions. I thank you in advance to your cooperation and I now turn the call over to Chief Executive Officer, Steve Milligan.

Good afternoon and thank you for joining us. With me today are Mike Cordano, President and Chief Operating Officer, and Mark Long, Chief Financial Officer. After my opening remarks, Mike will provide a summary of recent business highlights, and Mark will cover the fiscal second quarter financials and wrap-up with our guidance for the fiscal third quarter. At our Investor Day on December, we took the opportunity to present our differentiated platform, strategy, and business model, and to describe the significant growth opportunities for our company. With a growing storage industry and evolving data driven requirements, we are uniquely positioned to help define and drive the storage architectures of the future. We are pleased with the increasingly strategic interactions we are having with customers validating our approach to value creation. We reported strong financial performance in the December quarter enabled by excellent operational execution by our team. The favorable trends across all of our end markets that began earlier in 2016 continued. This included healthy demand for capacity enterprise hard drivers, all NAND based products, and hard drives in client applications helped by stronger than expected PC demand. We reported revenue of $4.9 billion, non-GAAP gross margin of 37%, and non-GAAP earnings per share of $2.30 outperforming the revised guidance provided at our Investor Day. We continue to execute well on two key strategic priorities, the integration of HGST, SanDisk, and WD, and the ramp of our 3D NAND technology. The transition to 3D technology continues as planned with the ramp of our 64-layer architecture. We commenced retail shipments and OEM sampling of our 64-layer products in the December quarter. As we demonstrated at Investor Day, we are executing methodically and thoughtfully on our technology strategy and we fully expect our leadership in 2D NAND to extend into 3D NAND. In 2017 and beyond, you will see the deployment of our 64-layer 3D NAND across our product portfolio spanning removable embedded client SSD and enterprise SSD offerings. As we all know from recent disclosures by Toshiba and news reports, our flash joint venture partner is facing challenges. We have been in regular communication with them over the last several weeks. We are confident that their semiconductor memory business remains healthy and strategically viable. Under any circumstance we will act to protect Western Digital's interest and work to ensure that we maintain the leadership position of our joint venture. In closing, I want to express my gratitude to our Chief Technology Officer, Steve Campbell who is leaving the company after 20 years of distinguished service to Western Digital. I also want to welcome Martin Fink on board as our new CTO. Martin brings deep storage systems and memory driven computing expertise that will help us accelerate our ongoing transformation. I'm sure Martin is known to many of you from his years at HP where he most recently served as CTO and Director of HP Labs at HP Enterprise. I'm delighted to have him on the senior team at Western Digital. I will now turn the call over to Mike to provide business highlights in the December quarter.

Thank you, Steve, and good afternoon everyone. Our December quarter results reflect strong execution across our portfolio, amidst the favorable industry environment in both flash and hard disk drive markets. Demand remained robust throughout the quarter and we launched several new products further expanding the breadth of our offering. We made additional gains in the ongoing conversion of 3D NAND technology and the commercial ramp of our 64-layer technology is accelerating. We are building stronger and deeper partnerships with our customers as our platform is increasingly aligned with our customer strategic direction. Overall, we had a strong finish to calendar 2016 providing business momentum as we entered 2017. In client devices, our participation with OEM customers has meaningfully increased as a driving portfolio of hard drives and flash based solutions address the PC market that is healthier than expected. Our revenue from client devices increased sequentially primarily driven by client SSDs and embedded products, as revenue synergies from the SanDisk acquisition benefitted us further in a seasonally strong quarter. Increasing storage capacities in mobile phones and market preference for client SSDs are long-term tailwinds for this portion of our business. Switching to client solutions. We experienced robust holiday seasonal demand and achieved sequential revenue growth driven by key NAND based products. We are pleased to note that the combined revenue contribution from new products such as iXpand and dual USB drives also grew underscoring continued consumer enthusiasm for our retail branded solutions. We announced new retail prospects including the four terabyte My Passport, eight terabyte My Book hard drive for the PC and a new four terabyte hard drive for the MAC. Shipments of our 64-layer 3D NAND based retail products began in the December quarter and we expect an increasing use of this underlying technology in our portfolio in 2017 and beyond. In the data center category, demand for high capacity storage devices remain very strong. Year-over-year Petabyte growth for capacity optimized hard drive met our upwardly revised expectation which we had estimated at 40% growth. We are pleased with the mainstream adoption of our 10 Terabyte third generation Helium drive. We have revised our planning to anticipate Petabyte year-over-year demand growth for capacity optimized hard drives to continue at approximately the same 40% rate compared to our prior forecast of about 35%. At our Investor Day, we announced that 12 Terabyte capacity Helium drive as well as derivative SMR based 14 Terabyte drive marking the start of our fourth generation Helium product line. The traction we have achieved on our Helium drive offerings, which were launched four years ago, demonstrates two true cost of ownership value for our customers and we look forward to providing them with ongoing innovation around this platform. Notably the December quarter marked a cumulative shipment milestone of more than 12 million helium drives reflecting our leadership in this category. From an enterprise SSD standpoint, we experienced strong demand across our products at both hyperscale and OEM accounts driving sequential revenue growth. In the December quarter, we announced our latest NVMe PCIe enterprise class SSD with leading performance and a high capacity SaaS enterprise SSD contributing to a further expansion of our portfolio. In our data center solutions category, our disk and flash storage platform business achieved several new design wins at leading system OEM customers for their cloud scale storage system. We are achieving new customer wins and solid repeat business from existing customers in key verticals around the world. This nascent business continued to represent a strong growth opportunity for the company. Turning to Silicon operations. We are very pleased with the progress we are making commercializing our 3D NAND technology. As I indicated earlier, we have already began retail product shipments containing 64-layer of BiCS3 and we also expect to launch client SSDs and embedded mobile offerings with this technology throughout the year. Additionally, we are on track to begin sampling enterprise SSD products utilizing 64-layer of BiCS3 this calendar year. We expect our broad implementation of BiCS3 across our portfolio will result in Western Digital having the industry's richest mix of 64-layer 3D NAND based products in calendar 2017, underscoring our growing confidence in our ability to successfully commercialize this technology. In the March quarter, we expect to break ground for the construction of Fab6 along with our joint venture partner Toshiba. Fab6 will provide new cleanroom space to support continued conversion of our existing 2D NAND capacity to 3D NAND. We expect operations in Fab6 to commence in calendar 2018. In closing, our December quarter results reflect the positive impact of the Western Digital platform; deepening customer relationships helped by our portfolio and technology expertise, along with our global go-to-market capabilities further strengthen us as a leading storage solutions provider. I will now turn the call over to Mark for the financial discussion.

Thank you, Mike. I'm pleased with our financial performance this quarter. Our team executed well in a healthy market environment as we capitalize on our strong product offerings, achieve targeted costs, and efficiency improvements, and improved our liquidity position with continued strong cash flow performance. We exceeded the revised guidance from our Investor Day on December 6 across our key financial metrics. Our revenue for the December quarter was $4.9 billion driven by strong performance in each of our end markets. Revenue in data center devices and solutions was $1.4 billion. Client devices was $2.4 billion and client solutions was $1.1 billion. In each end market, our revenue was flat to up from the September quarter, which underscores our strong performance as the September quarter is typically our strongest period. Our data center revenue growth continues to be fueled largely by cloud related storage demand. As a result, this quarter we saw continued strength in capacity enterprise hard drives, sequential growth for performance enterprise hard drives, as well as increased demand for enterprise SSDs. Client devices which include both hard drives and flash based products benefited from a healthier PC market as well as traditional seasonal trends. Embedded solutions experienced strong growth primarily from increases in storage capacity in mobile phones. In client solutions, our revenue grew as a result of strong demand for removable and other flash based products during the holiday season. Our non-GAAP gross margin grew to 36.7%, up 280 basis points versus the September quarter. We achieved this expansion through continued product cost improvements and healthy pricing for our products. Our product cost improvements resulted from consistent execution and ongoing progress with our integration activities. Turning to operating expenses, our non-GAAP OpEx totaled $797 million, down $66 million from the September quarter. We continue to make progress towards our integration synergy target, while making ongoing investments in product development, go-to-market capabilities, and IT projects as part of our transformation to enable future growth. Our non-GAAP interest and other expense for the quarter was $221 million. Our non-GAAP interest expense was $205 million, a reduction of $31 million from the September quarter driven by the debt repricings and reduction. Our non-GAAP other expenses net of interest income were $16 million for the December quarter. These expenses were primarily a result of foreign exchange revaluations that had no economic or cash impact. While it was an expense in the second quarter it will result in lower expenses in future periods. Our non-GAAP effective tax rate for the December quarter was approximately 13%. On a non-GAAP basis, net income in the December quarter was $675 million or $2.30 per share. On a GAAP basis, we had net income of $235 million or $0.80 per share. The GAAP income for the period includes intangible amortization and charges associated with our acquisitions and stock-based compensation. Therefore the net difference between our GAAP and non-GAAP net income is primarily a result of non-cash charges. In the December quarter, we generated $1.1 billion in cash from operations with $189 million spent on capital investments resulting in free cash flow of $871 million. We also had strong working capital performance contributing to our significant operating cash flows in the quarter. We paid the previously declared cash dividend totaling $142 million during the quarter and also declared a dividend in the amount of $0.50 per share. We closed the quarter with cash, cash equivalents and available-for-sale securities totaling $5.2 billion. We have approximately $6.2 billion of liquidity available to us including our $1 billion in undrawn revolver capacity. Our net debt position has decreased approximately $800 million from the September quarter driven by higher cash balances. We remain committed to our long-term deleveraging plans, while also evaluating strategic investment opportunities as they arise. As Steve indicated, we have continued to make very good progress with respect to our integration. We remain on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar 2017. As of the end of our fiscal second quarter this year, we achieved approximately $175 million of cost of revenue synergies and approximately $300 million of operating expense synergies each on an annualized basis. With respect to the SanDisk integration, as of the end of our fiscal second quarter, we have realized synergies of approximately $135 million on an annual run rate basis, toward our 18-month target of achieving $500 million of total run rate synergies on an annualized basis. To build on what Steve said about our flash joint ventures, it is important to note that the operations and financial position of flash ventures are healthy and investments are on track for the significant ramp of our 64-layer BiCS3 technology throughout calendar 2017. As a reminder, the joint ventures generate positive cash flow that is used to finance a significant portion of the capital requirements for both partners. I will now provide our guidance for the March quarter on a non-GAAP basis. As I have previously indicated, we generate slightly more revenue in the second half of the calendar year than in the first half. In that context, we expect revenue for our March quarter to be approximately $4.55 billion which represents significant year-over-year growth on a pro forma basis. As a result for fiscal 2017, we currently expect to generate pro forma revenue growth that is consistent with our long-term financial model. We expect non-GAAP gross margin to increase to approximately 38% primarily driven by continued favorable pricing and product mix across our business. Turning to non-GAAP operating expenses, we expect those to total approximately $800 million consistent with our December quarter. We continue to make progress with reductions in our cost and at the same time support our integration and growth with certain incremental investments. Additionally, we expect OpEx to be essentially flat in the fourth fiscal quarter consistent with second and third quarter levels. Interest and other expense is expected to be approximately $205 million. We expect an effective non-GAAP tax rate in the 12% to 14% range. As a result, we expect non-GAAP earnings per share between $2 and $2.10 with an estimated share count of 298 million diluted shares. I will now turn the call over to the operator to begin the Q&A session. Operator?

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. [Operator Instructions]. We will be taking our first question for the day from the line of Aaron Rakers from Stifel. Your line is open.

Yes thanks for taking the question and congrats on the quarter. I guess one of the things that stands out is that the near line business or I should say the total enterprise business, your capacity shift was down about 8%, your units were down about 1%, I think Seagate was down 14% sequentially on capacity shift. But the data points that we have seen throughout the quarter seem to be fairly healthy even Niedek recording pretty healthy growth in the spindle motors and enterprise. So I'm curious is are you ceding share to Toshiba what the dynamics look like specifically in the enterprise market and whether or not you are kind of capacity constrained and that was a variable to consider?

First of all, I think the year-over-year growth; I talked about in my comments, Aaron. So we saw coming at kind of as expected in around 40%. The other thing I would say is some of this is timing of when this revenue shows up. So from our standpoint we are seeing consistent demand and continued and continued strength and demand there. So I don't think there is anything we would say was outside of our planning expectation. And let me just add to your comment on share, we don't believe we ceded any share in the period.

And were you at all capacity constraint?

We are -- this is Steve, Aaron. We are tight on capacity as it relates to capacity enterprise. The amount that we ship was not meaningfully impacted in terms of capacity constraints. But when you talk about this last quarter by the way given there is a large component count, if we saw demand spike in any regard we would struggle to meet some of that demand. But right now we are comfortable with where we are at from an overall capacity perspective but it is we are running pretty hard in terms of our capacity enterprise both in one account as well as on hard drive capacity.

Thank you. Our next question comes from the line of Rich Kugele from Needham. Your line is open.

Thank you. Good afternoon and congratulations as well. Couple of questions I guess first when it comes to the cloud service or rather landscape, your percentage of the business if we include NAND going into that segment, I mean obviously the high capacity enterprises, a big factor there but are you supplying a large amount of the SSD side as well and then I have a follow-up?

Well certainly hyperscale is generally a growing segment for us, Rich, and as you know that today is principally SATA based interface, so yes we see that as a growing market opportunity and participation for us.

Okay. And then Mark if you needed to access quite a bit of capital for investment in let's say to Toshiba business further, how much capacity do you have on the balance sheet for leverage and or ask maybe another way, what's the minimum amount of cash you need to run the business?

Well Rich let me just say this first with respect to running the business, we have more than adequate liquidity and we feel very good about both our cash balances and the location of our cash. So that's something we are in very good shape on. With respect to strategic opportunities and accessing additional cash, I would just say we don't comment on anything in particular. And with respect to accessing additional liquidity, we recognize there are variety of ways we can do it, we feel like we have good alternatives with respect to additional capital, if we find an opportunity that weren't accessing more capital. But at this point, we just feel very good about our liquidity, feel very good about the way the business is operating, and one of the things we should also highlight is all this is within the context of our long-term commitment to deleveraging. So we really feel like we are in a good position from a balance sheet standpoint.

Thank you. Our next question comes from the line of Mehdi Hosseini from Susquehanna. Your line is open.

Yes, thanks for taking my questions. I have two follow-ups. The mission critical seem to be pretty strong in December quarter and I want to bit understand what is driving that obviously with NAND and SSD prices going up that may have shifted demand to more hard disk drive and also traditional enterprises have it yet in budget flash. So if you could elaborate on those two drivers and my follow-up question has to do with the free cash flow margin that came in around 18%, how should we think about sustainability of that free cash flow margin into 2017? Thank you.

Yes, let me comment first on performance enterprise. I think it's largely the seasonality the year-end purchase cycle that drove it. So we don't see any change in sort of our long-range plans relative to SSD as a substitute for performance enterprise. So we see that as more sort of a temporary effect. I will comment generally speaking on constraints around NAND whether it would be this category or the client category, the sort of tight supply situation is creating our modest bleeding effect for hard drive demand.

With respect to our cash flow generation kind of two things, one at Investor Day, we talked about a long-term range between 37 and 42 days for our cash conversion cycle and we did come in below that range due to strong linearity and some other very good execution by our team. So we would expect that in the near-term we may be at the lower end of the range or slightly below it, but there -- over the long-term as we talked about at Investor Day as flash becomes a larger part of our revenue, we may operate closer to the middle or towards the high-end of that range but that's really a long-term statement.

Thank you. Our next question comes from the line of Sherri Scribner from Deutsche Bank. Your line is open.

Hi thank you gentlemen. Just looking at the gross margin this quarter at the high-end of your updated range and the guidance for the March quarter suggest you're going to be at the high-end of the range for your gross margin. So the question is how long are these sort of high gross margin rates sustainable, I know the NAND market is very tight, it seems like there is some decent demand for the higher capacity hard drives but how long should we expect you to stay in this high-end of your range and should we expect you to revert back to sort of the middle of the range at some point? Thanks.

Sherry, this is Steve. I would add a few comments. I mean as we talked about before and will reiterate on this call, we are dealing with a tight NAND situation. We expect that situation to persist from a supply perspective through the balance of 2017, calendar 2017. So that obviously has a positive impact on our gross margins. As well as Mike indicated, we are seeing good mix in terms of our products particularly in terms of capacity enterprise, that's helping us and I think it's also important to note that the margin model that we've talked about one is a long-term gross margin model. That doesn't mean to say that first off that we are not going to stop at 38%. I mean if we can improve our margins beyond that, we are going to do that. And there also maybe sometimes where we actually exceed that, but right now in terms of the current quarter that we now began, we expect to operate at the high-end for some of the factors that I just mentioned.

Thank you. Our next question comes from the line of Stanley Kovler from Citi. Your line is open.

Thank you very much. I just wanted to ask about Exabyte growth within the quarter and the outlook between the NAND and the HDD business for the following quarter. If we stake out capacity optimizer if you strip out that segment, what was the trend between the NAND and the HDD side of the business as far as capacity goes as we think about that coming down a little bit sequentially. And then as we look at the March quarter, what kind of seasonality do you expect from a unit perspective on the NAND and HDD businesses as well and I've a follow-up. Thank you.

So in terms of the first part and breaking down the Exabyte growth between hard drives and flash, we don't provide that that breakdown.

So we would also refer you to the investor material that we had at the Investor Day in terms of Exabyte growth kind of in the revenue growth and that's where I think there is a lot of good detail in terms of that side. If you want to call it segment of the business or market and generally speaking if you look at this last quarter both our growth, revenue growth, Exabyte growth, was generally in line with our previous expectations except for two things, capacity enterprise continues to push up to that 40% Exabyte growth that Mike talked about. And then also we saw a bit better of a PC market which helped us both in terms of our client SSD business as well as our hard drive business. And so really other than kind of a general rising of tides across the board, those were the only two segments that may be were a little bit better than what we expected. And if you can you repeat your second question, I don't remember that, well sorry.

No, no problem. The second part of the question was as we think about Q1, I wanted to ask about the unit seasonality that we should think about for the NAND business and the HDD business because seems like if you are expecting better seasonality at least from enterprise perspective and PC perspective but units on the NAND side typically strong in Q1. So just trying to understand what the seasonality might have looked like between the two sides of the business there?

Yes, I think that let me talk. I'll give kind of an indication in terms of total units just from HDD perspective. The TAM came in this past quarter in terms of calendar Q4 at call it 112 million unit range. We would say that it probably would dropped to let's just call it 100 million unit range and pretty much all of that decline is largely due to the PC area. I mean in terms of from a unit perspective. And NAND we would expect to be seasonally down understanding that there hasn't tight supply. So you're going to see a little bit better demand than what you normally would see just from a sequential perspective as well as the fact as pricing continues to remain healthy. So that will help from an overall revenue perspective. So that's just some general guidance for you to kind of work from.

Thanks. And if I could just follow-up, I wanted to ask about the consumer electronics and branded segment of HDDs, can you help us understand what the trends there it's a bit worsen seasonal, any product portfolio shift going on there, should we think about new products coming online in that area as we get throughout the year. Thanks a lot.

Yes, actually we really were operating within our expected range. I think we saw a little more strength on the flash side of the business driven by the same factors we talked about, but nothing unexpected there relative to either the HDD base or flash base part of that business.

Thank you. Our next question comes from the line of Amit Daryanani from RBC Capital Markets. Your line is open.

Perfect, thanks. Congrats on the great quarter guys. I guess to start off with could you just may be talk about how much gross margin expansion do you still have from the cost takeout from HGST and SanDisk. I think it's a couple of hundred basis points that still lies ahead of you but could you guys help us quantify those two buckets. And if that's still ahead of you then could we operate in the 38% or 40% plus scenario provided the current supply demand dynamics sustain?

Yes that's a really good question. I have Mark kind of address the specifics but yes I fail to mention that when Sherry asked her question but yet we still have meaningful synergies. So we had particularly on the WD and HGST side. We also have some revenue synergies and then vertical integration synergies on the SanDisk side, but you are absolutely right. As those begin to kick in further that will certainly help us to maintain or improve our existing margin levels. So Mark is --

Let me just build on what Steve was saying. So as far as the COGS side from the HGST integration, we have achieved approximately half of the $350 million in run rate synergies that we expect to finish by the end of calendar 2017. So closing up this quarter we had approximately $175 million of cost of revenue synergies and another $175 million to get. So you're about right in that ballpark.

Fair enough, that's very helpful and I guess may be just on the gross margin side, sequentially you guys are talking about revenues being down on 6%, 7%, 8% in the March quarter, gross margins are still reflecting higher, are they couple of things we would call out maybe it's mix or pricing that's helping but what's enabling such a big gross margin up tick when I would imagine as revenue deleverage?

Yes primarily mix and pricing and then we continue to make progress on our cost improvement operation.

Thank you. Our next question comes from the line of Ananda Baruah from Brean Capital. Your line is open.

Hey thanks guys and congrats on the progress and on the strength of the quarter. I guess two quick ones for me. The first is I would love to get your view Steve on the likelihood of hammer products being introduced over the next couple of years. And if you do think there is a possibility for that. What I guess what how should we think about sort of the impact on economics that you guys would see both on the hard drive side and potentially on the SSD side? Thank you.

Yes so we talked about it in the Investor Day that we expect that hammer technology will be productized sometime in the 2019 timeframe. There has been no change in our expectations as it relates to ourselves and others have talked about may be earlier than that. But in terms of our expectations, it's 2019. Now to be perfectly honest about that in terms of the question, the second part of your question, I mean there is two things that we have to do is that we have to demonstrate the capability of the technology so from an area of density standpoint as well as from a reliability and manufacturing perspective. And we also have to enable that technology so that it's competitive from a cost standpoint. Obviously given that we're not productizing until 2019, we haven't demonstrated that. And our view is that we would look to implement it until the economics or the products makes sense from a commercial perspective and so at this point, we would expect it largely to not impact our financials in any material way in terms of our financial model and that sort of thing.

Got it. That is helpful and then just real quickly, you made prepared remarks about revenue synergy benefit, I guess I was just wondering ultimately how do you guys view what the revenue synergy potential is from adding SanDisk to the portfolio, it occurs to ask simplistically that sort of alters now that you have a whole portfolio just alters the way that you can engage out with the majority of your important customers. And so I guess why would -- why wouldn't there be just super significant potential there over time, whatever over timing when you get it to sort of normalize to really drive very material benefit from that dynamic. Thanks.

I think you articulated our strategy very well and the benefits that we're actually seeing today and we expect to see on into the future as a result of our broad product portfolio and the way our teams are now able to engage differently with our customers. So we've seen great traction as Mike has talked about in terms of client SSDs as a great example but really this applies to the way, we manage the entire portfolio. So that's exactly how we see it and that's why we feel very good about our ability to achieve the near-term $500 million total synergy target that's the 18 months target after the deal. And then the longer-term I think it's $1.01 billion that we expected in 2020, so you're right on.

Thank you. Our next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

Thank you. Your closest competitor yesterday reported really significant unit and profit contribution from the non-PC, non-enterprise business that that you called consumer electronics and branded. Are you're not seeing that market do you share the view that new applications like surveillance and NAND will drive growth there and you just late to the party or what do you think the differential is because their business grew 20% sequentially, your business declined 20%?

Katy, let me comment on that, we are all like jumping at the bid to respond to that. We actually led the market in surveillance and so what's happening is that our largest competitor is now catching up to the party.

Right. So the other part goes to the way we classify this. So when we talk about our client solutions that is our retail branded business both flash and HDD base where things like surveillance show up is in our compliant devices business. So I think you'd expect similar trends that we saw relative to the strength of that business in our portfolio.

And can you talk about why over the last year surveillance has become aware of that of a driver of demand and how long do you think that plays out?

Well, that's I mean that's kind of I don't want to say difficult, I think that’s going to continue I mean obviously given in the world that we live in and I'm look at the geopolitical kind of thing I mean surveillance is a meaningfully growing part of the market and these are drives that are obviously optimized or those kind of used cases. And I think it's important to note that there will drives but before for surveillance applications may be in a smaller scale, they just want to optimize for those application. And so it does not necessarily mean that it is incremental growth in the overall HDD market it's just a matter of where they're been utilized.

Right and I think the positive trend that comes with that market sort of an HDD side is the capacity requirements we get a preferable mix we all benefit from that. The other thing you should think about is that surveillance market is not just the HDD base. So when you think about the broader ecosystem around surveillance depending on the system that close a bit certainly there is an HDD component of it but there is a very strong forward-looking demand that requires flash-based storage when you think about the cameras themselves things that sit on the edge.

Thank you. Our next question comes from the line of Rob Sierra from Guggenheim Partners. Your line is open.

Hi, thanks very much and just kind of couple many comp mentioned at this stage one on your 3D NAND migration can you just is there any updates are or are you still looking at the same targets which I believe were the crossover on a bid basis in calendar 2017, is there any sense as you start working through when it that you exiting still calendar 2017 and same thing on a cost crossover 64-layer versus 2D. And then I guess finally you mentioned Fab6 I think your initial target for the crossover from a waiver standpoint 2018 is that reliant on Fab6. Thanks very much.

Yes, so few comments so, Rob yes I mean just a target about what we've to reaffirm what we've talked about in the past is that we expect that the cost crossover 0.4 of that's free technology that 64-layer 3D NAND will crossover against our 1G technology in the first half of calendar 2017 that remains the case, no change in that expectation at this point. And then the other thing is that what we had said historically is that approximately 50% of our total bid output for calendar 2017 will be 3D based. And obviously the majority of that will be 64-layer because that's what were transitioning to in terms of the cost crossover point. And so no real change on in our expectations in that regard. And I believe on the last conference call we've talked about, I think it was 40% of wafer, wafers out by the end of the year and that expectation remains the same.

All right. And then if I could just as look quick follow-up the again kind of confirmation you guys resolved the licensing deal with Samsung in the quarter with straight so that started to help the December quarter again for your positive guide next quarter. Any I mean and if you could give us from how much profit or margin or anything I think wasn't a meaningful help in the December quarter. Thanks.

No, in the December quarter was not a significant driver it helps. But we had a lot of underlying strength that really drove the overall performance. So it was a nice addition.

Yes and Rob just to be literal we don't have an intention on disclosing the dollar amount of that arrangement with Samsung.

Thank you. Our next question comes from the line of Mark Moskowitz from Barclays. Your line is open.

Yes, thanks good afternoon. I apologize I don't talk for few moments so if it's been asked I apologize but I want to understand firstly is there any area within the business right now in terms of mix that you easily you're out earning or may be seen outsized gains because of the NAND flash tighten as broadly speaking for the hard disk drive business and if so where is that in the cloud, the enterprise or other and didn't?

Repeat that again Mark, we want to make sure I understand the question, repeat that.

Yes, the question is I'm trying to understand because of what’s growing in the NAND market right now from a capacity constrain perspective has that allowed for any sort of displacement of this drives to slowdown or maybe you've seen resurgence if you will in your hard disk drive business with cloud or enterprise or other that may be is not sustainable or maybe it is not, that may be people recognize you can guys still lot of offer goodness in hard disk drive that as well that's my first question that makes sense.

Yes, sure Mike comment on that earlier. I'll let Mike.

So give you some specific I think the tightness is, is helping in the client space so, the fact that there is tightness of supply makes more opportunity in the near-term for HDD demand to satisfy the storage requirement of a PC. Potentially in a much more modest way in the performance enterprise space we talked about that relative to our sequential growth in performance enterprise but they don't. The more pronounced factor there was actually just that the yearend budget, seasonal demand for enterprise systems. And on the, on the cloud side no real effect so, where we are shipping destroys as an industry that's a specific value proposition and that demand is real when ongoing so there is clear differentiation in the architecture as relative to where flash is utilized or where disk is utilize so, there is no sort of reverse displacement there.

Okay and then my second question is kind of an loading questions I'm going to asked in any way in terms of the cloud that the cloud buying patterns over the past few years have the time has been punctuated let them up and down or some pauses do you see this year ahead may be having less pause and actually just continue up cycle and if that is the case because of the combined model now of SanDisk and WD are you getting a more reception, get a reception from the cloud providers to do more are you getting more line to expand with those accounts and thereby can that actually continue to put upward pressure of one goodness on gross margin.

Let me answer it in the sequence the way you asked it. So I think relative to the buying behavior we've certainly always characterized this segment on a annualized basis for that reason. I think that was updated and increased our annual growth rate is an indication of our confidence now in going strength. We've talked previous conference calls around some of that reason that that's happening as their sort of fewer efficiency things happening in hyper scale whether they be operational or technological. We believe we continue to see more raw or base demand flowing through us for HD and micro. So we would expect that, that 40% growth for the current calendar year relative to the sort of the way we engage them I think we talked about this earlier we certainly benefit from the broad portfolio of products our ability to participate across both HDD and flash-based product offerings give us the unique position to work not only short-term relative to sort of business engagement. But also long-term as we think about long-range data center architectures in the future. So we have all the components we're uniquely positioned to have that conversation and we're already benefiting from that portfolio ultimately.

All right. So that's our last question, so I want to thank you for joining us today. We look forward to seeing many of you at upcoming investor conferences. Thank you very much.

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