Bob Blair - IR Steve Milligan - CEO Mike Cordano - President and COO Mark Long - CFO

Mehdi Hosseini - SIG Aaron Rakers - Wells Fargo Amit Daryanani - RBC Capital Markets Wamsi Mohan - Bank of America Merrill Lynch Ananda Baruah - Loop Capital Stanley Kovler - Citi Research Rob Cihra - Guggenheim Karl Ackerman - Cowen & Co Vijay Rakesh - Mizuho

Good afternoon and thank you for standing by. Welcome to the Western Digital's Second Fiscal Quarter 2018 Conference Call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operation Instructions]. As a reminder, this call is being recorded. Now, I will turn the call over to Mr. Bob Blair. You may begin.

Thank you, Stephen, and good afternoon everyone. This conference call will contain forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected future financial performance, our market positioning, expectations regarding growth opportunities, our financial and business strategies, demand and market trends, our product portfolio and product development efforts, our plans to deleverage optimize our capital structure and reduce certain cost and expenses, the expected impact of the Tax Cuts and job Act, our joint ventures with Toshiba and our long-term access to Flash. 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 Annual Report on Form 10-Quarter filed with the SEC on November 07, 2017. Any applicable forward-looking commentary is exclusive of one-time transactions and does not reflect the effect of any acquisitions, divestitures or other transactions that may be announced after January 25, 2018. 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 the 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 measures guidance to the most directly comparable GAAP measures, because material items that impact these measures are not in 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-and-answer part of today's call, we ask that you limit yourselves to one question to allow as many callers as possible to ask their question. I thank you in advance for your cooperation. I also want to note that we are displaying a PowerPoint deck during today’s commentary and that a PDF of the slides in our remarks will be available later today on the IR section of our website along with our quarterly factsheet. With that, I will turn the call over to our 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 first quarter and wrap up with our guidance. We will then take your questions. We demonstrated the power of our platform with record non-GAAP financial results in the December quarter. I am very pleased that we achieved a year-over-year revenue growth in each of our end market categories. We reported revenue of $5.3 billion, non-GAAP gross margin of 43% and non-GAAP earnings per share of $3.95. We once again generated strong operating cash flow reflecting continued healthy demand in our end markets most notably for capacity enterprise hard drives and flash-based products. Entering the new calendar year, there are several noteworthy trends as we pursue our long-term value creation strategy. The global economic environment is healthy; the GDP growth rates in the U.S., China and the EU are positive, portending significant IT spending. Data has been created at a record pace worldwide and the value of data is increasing too driven by advancements in mobility, cloud computing, artificial intelligence and the Internet of Things. The unabated growth in data is creating a global need for a larger and more capable storage infrastructure. The level of CapEx spending by cloud service providers to accommodate this growth is robust. As Michael addressed in more detail, the healthy pace of data center build out has resulted in a recent reacceleration of demand for a high capacity enterprise hard drives. Against this backdrop, we are well positioned with our powerful platform to enable our broad customer base to capture, preserve, access and transform an ever increasing diversity of data. The flash market is normalizing in a constructed manner as a diversified value-added storage solution provider with a wide breadth of serve markets; we will continue to demonstrate resilience of our model by delivering compelling financial results. I am very pleased with our progress in technology and product development. The deployment of our 64-layer 3D NAND technology continued across our product portfolio and we will be ramping our 96-layers technology later this calendar year. We continue to lead the industry with our high capacity helium platform and we remained on plan to sample our MAMR-based capacity enterprise hard drives in the second half of calendar 2018. It was gratifying at the end of the calendar year with a resolution of our negotiations with our JV partner Toshiba to extend and strengthen our relationship and ensure our long-term access to flash and I am happy to report that our JV operations continue to perform very well. I am very proud of our team driving and focus on execution and the results they have delivered. With that, I will ask Mike to share the business highlights.

Thank you, Steve. Good afternoon, everyone. We are pleased that we finished calendar 2017 with strong December quarter results. We executed well across our business with continued strength and demand for our products and solutions. As Steve indicated, we saw year-over-year growth in each of our end market categories, reflecting our power of our platform and addressing a broadening set of markets and customers. In Client Devices, revenue grew nicely from the year-ago quarter, driven most notably by demand for our embedded flash and client SSD products. We began shipments of our 3D flash-based embedded solutions with a mobile and compute market including our first USF offering allowing us to address our broader market opportunity beginning this calendar year. In addition, we saw continued strong demand for our products and growth areas, such as connected home, surveillance and industrial verticals. Solid year-over-year revenue increases in Client Solutions highlighted the continued preference for our G-tech, SanDisk and WD brands during the strong holiday season. We made further end roads in our engagement with leading brick-and-mortar and e-tail partners during the December quarter. At CES earlier this month, our products received half a dozen awards, underscoring the ongoing innovation and differentiated value we are delivering to this market. In Data Center Devices and Solutions, demand for capacity enterprise drives remains strong. Shipments of our 10 terabyte helium drives grew further and the transition to the 12 terabyte capacity point accelerated. We also began shipments of our industry leading 14 terabyte drives, for hyperscale applications during the December quarter. In terms of exabyte growth in capacity enterprise, as previously indicated, calendar 2017 was the slower period for the market, primarily due to industry-wide component constraints, with an overall exabyte growth rate of slightly less than 30%. However, as we noted in our December conference call, we saw strengthening demand for capacity enterprise drives, as we ended 2017. In the first half of calendar 2018, we estimated that the year-over-year industry exabyte growth rate will exceed 60% as the pent-up demand is fulfilled. For the full calendar 2018, we estimate exabyte growth to exceed 50%, as broad deployments of capacity enterprise drives are expected to persist throughout the year. Data center build out by several large hyperscale customers and guided industrial policies are driving significant global infrastructure expansion. These trends are leading to a growing need for capacity enterprise drives in the high end as well as the mid range. Western Digital, the mid range part of the capacity enterprise market has been an area of lower exabyte share. We have responded to the rising demand for 4 terabyte to 5 terabyte capacity drives, especially in Asia, with our recent introduction of a new range of cost-advantages, air based products. We expect the demand for high and mid range capacity drive to support the higher rate of exabyte consumption in calendar 2018, and our long-term annual exabyte growth estimate is unchanged at 40%. From an operational standpoint, we expect to achieve further cost and expense reductions, as the hard drive market continues to evolve. For example, we have reduced development expenses in our product portfolio by eliminating future investments and performance enterprise drives and narrowing our client HTD portfolio. Additional actions include our previously announced closures of manufacturing operations in China and Singapore. Turning to flash joint venture, the ramp of our 64 layer 3D flash technology, BiCS3, progressed well with further improvements in yields and productivity. The mix of our 3D flash bit supply approach 70% exceeding the December quarter with BiCS3 constituting more than 90% of 3D flash bits. Additionally, we commenced initial production of our 96-layer technology BiCS4 and began product shipments to retailers in the December quarter. We expect to ramp BiCS4 in the second half of the calendar year. From a fab standpoint, as we had announced in December, we will begin our participation in Fab 6 starting with the second investment tranche. Fab 6 operations are expected to commence in the next few months with our initial bit output in the third calendar quarter of 2018. From a flash industry perspective, we estimate bit growth in calendar 2017 was at the low end of the long-term range of 35% to 45% with Western Digital’s growth somewhat higher than the industry given a relative strength in 64-layer 3D flash. In calendar 2018, we estimate industry bit growth to be near the high end of the long-term range due to improving manufacturing yields and continued transition to 3D flash with our growth consistent with the industry. Before I conclude, let me note that the normalization in flash markets is both expected and beneficial for the industry, creating new opportunities for flash. In fact extended periods of supply constraints limit market adoption and the pace of innovation. We view this normalization as a part of our business and it is our objective to leverage the strength and breadth of our portfolio to drive the best business outcome in a variety of market condition. In calendar 2018, we expect the Western Digital platform to strengthen further from the planned launches of several new products and solutions and I look forward to providing you further updates in the months ahead. I will now turn the call over to Mark for the financial discussions.

Thank you, Mike, and good afternoon everyone. I’m very pleased with our financial performance in the December quarter. Our team executed well across our broad array of market as we capitalize on our diverse product portfolio, increase growth margins and achieved cost and expense target. All of which resulted in significant earnings growth. We also finished the December quarter with a strong liquidity position, as a result of our continued robust cash flow generation and we made progress on deleveraging and improving our capital structure. We had record revenue for the December quarter of $5.3 billion, an increase of 9% year-over-year driven by strong performance in each of our end markets. Revenue in Data Center Devices and Solutions was $1.4 billion. Client Devices was $2.6 billion and Client Solutions was $1.3 billion. Our Data Center business continues to be fueled by cloud related storage demand. Our December quarter revenue for the Data Center Devices and Solutions increased 3% year-over-year. We saw significant growth from capacity enterprise hard drives, which was partially offset by an expected decline in performance enterprise hard drives. Client Devices revenue for the December quarter increased 9% year-over-year, primarily driven by significant growth in mobility, client SSDs and surveillance products. Client Solutions revenue for the December quarter, increased 17% year-over-year mostly as a result of the strength and reach of our valuable global retail brands. Our non-GAAP gross margin was 43.2% up 655 basis points year-over-year. This gross margin expansion resulted from a favorable supply demand environment for flash-based products. Cost improvements and a higher mix of flash-based revenue. With respect to operating expenses, our non-GAAP OpEx totaled $865 million. This included ongoing investments in product development, go-to-market capabilities, IT transformation projects and the first full quarter of operating expenses related to our recently acquired companies. As described in our December call, our operating expenses are higher than our October guidance driven entirely by the over achievement on our six months variable compensation plan. Our non-GAAP net interest and other expense for the December quarter was $180 million, a year-over-year decrease of approximately 19%. This includes a $197 million of interest expense for the December quarter, a decrease of $8 million year-over-year primarily from the re-pricing of our debt and the retirement of our euro term loan deep, partially offset by increases in LIBOR, which were approximately 70 basis points on a weighted average basis. Let me explain the impact of the recent tax reform on Western Digital. We will benefit from the new tax law by having the ability to access our global cash in the U.S. in a highly efficient manner. As a result, we will have greater flexibility with respect to our overall capital allocation and investment decision. In the December quarter, we booked a provisional net tax charge of $1.6 billion due primarily to the one-time mandatory deemed repatriation tax, which is included only in our GAAP results. The payment of this repatriation tax will be spread over the next eight years, which is expected to begin in fiscal 2019 with approximately 60% due in the last three years of the period. Beginning in fiscal 2019, we expect our non-GAAP effective tax rate to be at the high end or slightly above our long-term guidance of 7% to 12%. In the December quarter, our non-GAAP effective tax rate was 4% which was lower than our expectations because of the new tax legislation which resulted in a reduced U.S. corporate tax rate for the first half of fiscal 2018. On a non-GAAP basis, net income in the December quarter was $1.2 billion or $3.95 per share. On a GAAP basis, we had a net loss of $823 million or $2.78 per share driven by the one-time net charge related to tax reform. A GAAP net loss for the period also includes intangible amortization, charges related to integration activities and stock-based compensation. The net difference between our GAAP and non-GAAP result is primarily due to charges that have no cash impact within the quarter. In the December quarter, we generated $1.2 billion in operating cash flow, an increase of 12% year-over-year. We continued to reinvest in our business with $629 million in capital investments resulting in free cash flow of $553 million. On a fiscal year-to-date basis, we generated $2.3 billion in operating cash flow, an increase of 54% year-over-year. We deployed $915 million on capital investments resulting in year-to-date free cash flow of $1.4 billion. We paid the previous declared cash dividend totaling $148 million further during the quarter and also declared the dividend in the amount of $0.50 per share. We closed the quarter with cash, cash equivalence and available for sales securities totaling $6.4 billion resulting in approximately $7.9 billion of available liquidity including our $1.5 billion of undrawn revolver capacity. We repaid our euro term loan B in full and our net debt has decreased approximately $500 million to $5.8 billion at the end of the December quarter, mostly driven by cash flow generated by the business. We remain committed to the following capital allocation priorities. Organic and inorganic business investments deleveraging, optimizing our cost of capital and capital structure while enhancing our financial flexibility and delivering returns for our shareholders through our dividend and reauthorize share buyback program. We achieved our planned cost and OpEx synergy targets from both the HGST and SanDisk integrations within the expected timeframes. The combined savings of the programs have contributed to our strong financial results and validated our strategy for the acquisitions. While we have achieved our synergy target as of the end of the calendar 2017, we will continue to deliver and expense benefits from both of these transactions over the coming years. I will now provide our guidance for the third quarter of fiscal 2018 on a non-GAAP basis. We expect revenue to be approximately $4.9 billion consistent with a seasonally weaker fiscal third quarter. Gross margin to be between 42% and 43%. Operating expenses to be between 840 and $850 million which includes the annual payroll tax reset. Interest and other expense to be between 180 and $185 million. The effective tax rate in the 5 to 7% range and our diluted shares to be approximately 309 million. As a result, we expect non-GAAP earnings per share between $3.20 and $3.30. We believe our integrated product and technology platform is a key differentiator that will enable strong long-term growth, profitability and value creation through industry cycles. While we expect to see normal seasonality in the second half of fiscal 2018, we continue to see the opportunity to achieve revenue growth at the high end of our long-term model of 4 to 8% for fiscal 2018. Based on our current business outlook and capital structure, we now expect our non-GAAP earnings per share will be between $13.50 and $14 for fiscal 2018. For calendar 2018, we continue to expect revenue growth at the high end of our long term model. We also expect that non-GAAP gross margin will be above the high end of our long-term model range of 33% to 38% throughout the year. 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] Our first question comes from Mehdi Hosseini of SIG. Your line is open.

I want to start-off with the longer term question. In the past year, we were destructed by Toshiba. Now that looking forward, I would like to revisit your longer term method that you presented at Analyst Day December of 2016 has been a while. How should we think about those longer term growth and longer term objectives beyond the next few quarters? Is there any change -- is there any change in the strategy? And how do you see the Company evolving with the next few years especially in the context of updating us since you've been kind of absent over the past year or so?

Yes so, Mehdi, I would say that there has essentially been no fundamental change to our long-term strategy since we had our Analyst Day and growth rates from an industry perspective, from our perspective remained consistent. We constantly think about, how the market is evolving and changes and relook at our strategy, but I would say that right now there is no real fundamental change. One other thing that we are contemplating is, does it make sense to have in Investor Day coming up here in the fall. We haven’t made a formal decision on that, but we will certainly from an internal perspective be refreshing our view on everything and providing appropriate updates to our investor base. But as a general statement, there has been no fundamental or big change to either our strategy or the fundamentals as we saw them at our Investor Day.

Sure. But when I look at your segment information especially for December quarter, your Client Devices on a Q-over-Q basis to me was a little below expectation, it was down 1%, and your data center, you have to understand you may have been constrained by NAND shortage. But it doesn’t show the kind of scaling that I thought it would happen maybe 18 months after acquisition of SanDisk, and this is why I was asking for an update. So, is there -- with the Toshiba overhang distraction had an impact? If not, how come we're not seeing the kind of outperformance that should have happened by now?

Well, I am not quite sure what numbers you are referring to. So I think we should probably take that offline and maybe dive into it a little bit. But fundamentally I think that, we’re pleased. As Mike indicated, I’ll comment on two things. One, if you want to call being a slight negative in that universe of expectation that we had capacity enterprise, last year grew a little bit less than what we had anticipated, that’s a short-term statement. We talked about the reacceleration that was seemed here in the first half and through calendar 2018. So I would say that our data center and devices business kind of grow a little bit less than what we would expect longer term. On the positive side, Client Solutions which is a market segment that we had expected to kind of modestly decline over a period of time actually saw extraordinary growth, really speaking to the strength of our market position, the strength of our products or brands, et cetera. So, there is always going to be puts and takes within the particular segment. But on balance I have to say that I am very pleased with the way that the last 12 years, there was no Toshiba overhang from an execution perspective, and as I said, I am extremely proud of what our people have accomplished both from an operating and from a financial perspective.

Thank you. Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Yes, if I can, one quick housekeeping question and then one other question. Can you just talk a little bit about where you stand today as far as debt to adjusted EBITDA? And how that relates to your capital return strategy? And then the question is and I’m just curious, if you could address the enterprise SSD market? It didn’t hear a lot about that during the script of the call. I’m just curious of how you characterize your performance there, and if there is anything that we should think about going forward that might change the trajectory of that business?

Yes, let me take the enterprise SSD question first. So I think as we’ve stated our product portfolio is sort of execution and expansion would happen in 2018 largely and then also towards the mid to second half of ’18. So we are continuing to hold serve if you will, but we have more to do at the product level that we expect will become more meaningful, as the year progresses for the mid part of the year summer and beyond.

Yes, with respect to our debt-to-EBITDA, in terms of the way our EBITDA is calculated under our debt instruments, we are now below two times debt-to-EBITDA. So we’re in a very good position, we have achieved a level that gives us strong flexibility in terms of what we want to do from a capital allocation standpoint and we will be evaluating our top priorities and kind of executing accordingly overtime.

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

I have a question and a follow-up as well. Maybe we’ll start on the flash side, I think you guys mentioned industry and your bit growth would be at the high end of this 35% to 45% range. That seems fairly in line with, I think, a lot of peers are saying. I’m just wondering though, how do you think of cost per bit decline trajectory as you go through that high end of that range, if you may? And if we do have normalization as you characterize in the flash market in ’18. What do you think that does to your gross margin structure? Does that -- is normalization a stable driver, outside driver or downside driver to your gross margin?

Yes, so we’ve talked about in this new 3D regime, the sort of way to think about annualized cost reduction is approximately 20% per year. I think in our previous call, we talked about our view of the environment is such that ASP declines, if you're seeing some up are largely offset by cost declines. We see that happening in the current period and we expect that to happen going forward.

Right, and as I indicated in my guidance for the calendar a year, as a result that’s what gives us confidence that we will operate above our total gross margin model of 33% to 38% for the entire year.

And if I could just follow up Mark, OpEx of March quarter slightly higher than I think what most of us were modeling. I’m just wondering, how much of the payroll tax reset driving that in the March quarter? And then just broadly, how do I think about OpEx through calendar ’18 for you guys as a range?

Good question. So, the rest for payroll tax is something on the order of $15 million or $17 million. And as a result, you can think about a -- I think what we talked about in terms of an $830 million kind of baselines quarterly run rate that we expect to decline and we have the number of activities ongoing to enhance efficiencies, so that that will decline on a quarterly basis throughout the year.

Thank you. Our next question comes from Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

Steve, I was wondering, you spoke about this pretty strong global economic backdrop to data center build out. Obviously, you are guiding on both the high capacity drives as well as NAND on the upside of these ranges. On the NAND side, the 35 to 45 range that you have for bit growth, how much of that is based on this improving economic backdrop? Or are you building in any elasticity of demand once you see this price normalization? And I have a follow-up.

Well, I'll answer the question this way. We have been saying and anticipating that the industry is going to grow at that high end of that 35% to 45% range for a while. And so, it really is more of a longer term statement as opposed to something that has changed over the last three to six months because of macroeconomic environment or something like that. And so, it takes a while that we think long-term plan and so we have seen the investment levels be pretty consistent with the growth levels. The one thing that we have seen recently that is an interesting dynamic is some companies that one are in the DRAM market as well as the NAND market, and then have the flexibility to convert 2D NAND to DRAM, they appeared to be doing that more so. So relative to that 35% to 45% or at that high end, there appears to be a little bit more of a downside by to that as opposed to about that it would exceed that. So we are beginning to see that kind of come down a bit, which is obviously good from a NAND perspective, right.

Right, the other thing I'll comment on as we look at the demand side of equation sort of expected capacity upgrades as we progress through the year, and how they translate through the demand cycle for NAND, we think that those numbers, not only are we in sort of a constructive period. As we see the year, we have the possibility of getting into a more constrained environment in the second half of the year.

Thanks, I appreciate that color and I try to quickly follow up. You spoke about this hyperscaler pick up. Any color geographically where you are seeing the most activity in the first half of 2018? And what is the average capacity of the drives of these hyperscalers?

Yes. So, I think we are seeing strong demand domestically as well as certainly in China that would be the one would stick out to us. Yes, I think and if you look at the capacity point is that general statement, the domestic relative to us here in the U.S., they send to take a highest cap drives. In China, they don't always necessarily take the highest cap drives that then speaks to this area where we had a bit of hole in our product portfolio in terms of 4 to 8 terabyte in air products, which we recently introduced in the air of cost competitive product that will help to better address that portion of the market at least vis-à-vis our product portfolio.

Thank you. Your next question comes from Ananda Baruah of Loop Capital. Your line is open.

Just one or two around gross margins, SEC gross margin, if I could. Just have to clarify, I believe the comment around SEC gross margin in December, was that you guys just hold them flattish, and in flattish I might be paraphrasing, but I think that was the spirit of it. Does that still hold? I just want to check that. And then, what are you guys anticipating for a NAND ASP declines through this year? And I have a quick follow-up on gross margin there. Thanks.

Well, as you can see, our guidance for the quarter for the total gross margin is 42% to 43%. So, we’re looking at very small changes in gross margin and I think it's -- we are seeing as Mike pointed out, some normalization in the flash market, but it's mostly offset from an ASP decline standpoint by the cost declines and as a result our gross margins are healthy.

Or relatively stable.

I apologize. I was actually referring to the calendar year ’18 guide.

Yes, so what we’re seeing, I think in December where we talked about was being in a position where we would maintain total gross margins above the long-term range that we’ve talked about, and that’s certainly the case with respect to the trajectory of flash gross margins. I think the latest commentary I think you heard from Mike suggests that -- again while we may have some declines in gross margin -- remember some of declines in our total gross margin are also going to be a function of the seasonally weaker first half of the calendar year. And then in terms of the visibility in to the back half, as Mike pointed out, the gross margin trajectory will be a function of on the flash side how much this tightness in the market materializes. So, at this point, we continue to feel that it is a constructive market and as Mike pointed out there is this potential for tightening which would certainly have a positive effect on gross margin.

What’s your sort of base case expectation for NAND ASP declines for calendar ’18?

We haven’t disclosed that.

Yes, the only thing we’ve said around that is, our expectation would be that the ASP declines would be largely offset by our cost declines and that gives you an idea.

Yes, with cost declines being in the 20% range.

Right, okay. Is there any reason to think you’ll be tremendously different from past cycles ASP declines?

Well, I think if you look at it that part of what we’re saying is that, yes, it will be different than past cycles, in a positive way, and we try to talk to it and explain it as best to our ability, but it’s a bigger market. So the incremental impact of capacity additions, I think that you are seeing also to some degree that’s conversion from 2D NAND and the DRAM and that’s moderating and I think you are just seeing a more rational set of behaviors economically focus that is resulting and still from volatility but not the same level of volatility that has been seen in the past.

And the maturity of the end market so the secular trends for demand remained strong and I think as Mike highlighted some normalization of the NAND market is actually very healthy because it will open new markets and it will increase demand in those mature markets to the extent of price sense. So we feel that calendar 2018 is a very constructive period and as Steve was highlighting, there were dynamics both on the supply side and on the demand side that you can just go and apply the patterns from previous cycles and think you are going to really get the right outcome for this period.

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

I just wanted to clarify some of the trends in the near line market. So how should we think about the impact of mix? You've talked about selling more mid range drives versus high end and as we think about the entire near line revenue line within your HDD mix, especially going into the first half of the year. Could you remind us the levers there on gross margin between overall HDD volumes for you guys versus mix near line shipment to 60% there? And I have a follow up. Thank you.

Yes. So I think the thing to think about is it’s a more diverse market now. So we're -- certainly, we have been focusing our strategy at the highest capacity drive, which remains a robust part of the market. We are now seeing demand across our range of capacities, so from a unit volume perspective, that helps, right. The way to think about leverage through our model though is ultimately about our component utilization. So, when you think about it most for CapEx on the drive side is tied up in heads and media manufacturing, and whether we can figure those as 12 or 14 terabytes or 8, the combination of those to get to the expected exabyte growth rate remains fairly common. So you are modeling just on contemplate different unit volume scenario than just as sort of historical view to the high cast.

So when I think about the volume impact there versus the overall portfolio coming down. Can you help me understand how the mix shift is going to improve overall ASP as well?

So, we do expect overall ASPs to benefit from a mix standpoint on the HDD side and we as a result, you know we know we have the -- we’ll have some volume declines from a seasonal standpoint and parts of the business. We do -- we see relatively stable gross margins.

If I could ask a separate follow-up on more related to cash, you authorized or I should say reauthorize the buyback program back in November. And then if I look at the outlook for the share count looks about flattish with the current quarter. What are you contemplating in terms of share repurchases there?.

Yes, we have not made any public statements about our repurchase plans at this point.

Any sense of timing on that to just provide an update or use of cash?

I think we’ve already indicated our priorities. I mean and I don’t want to go through what was already read, but first thing as we invest back in our business, optimize our capital structure, deleverage and repurchases on that list, and it will be contemplated with the a broader set of capital allocation considerations, as we look to drive longer term value creation.

Thank you. Our next question comes from Rob Cihra of Guggenheim. Your line is open.

A clarification and although one question, if that’s alright. The clarification just in your slide you’ve briefly mentioned, and if there is no more development or point back development on performance drives and so, is that like stopping development on 10-K? And does that mean they go end of life or they go end of life at one point or is it just pulling back? I just was wondering if you could give a little info there.

Yes, let me be very clear, we have ceased development on 10 and 15-K RPM hard drives. So, our products in the market are the last of our products, and we will obviously manage them through a long tail, but we don’t intend to introduce new products.

Can you tell us what that tail might be? Is this a tail of months or years?

No it’s a long tail of years.

Alright and then if I could ask the actual question. There has just been decent amount of debate frankly for several months now in terms of how much the tightness in demand has helped to drive market and get any obviously you sell both. Can you talk if you think there has been a meaningful equal help for drives or left cannibalization than there would have otherwise been because of tightness? Or do you really think it's had that much impact obviously looking back and then looking forward, if you think that’s about to change it all?

Yes, so there is only one real area that, that has had an effect and its really in mobile. So 2.5 inch drives and then we would say it had a modest positive effect on the size of the HDD markets and then looking at rearview mirror. So, our penetration rate if you will flash to HBD is running behind our original expectations. What we see happening this year is more normalizing of that trend.

In other words the penetration of SSD in notebook based configurations will accelerate, right, which we are agnostic to positive.

Thank you. Our next question comes from Karl Ackerman of Cowen & Co. Your line is open.

I actually wanted to focus on your progress and strategy of your systems business, particularly now that you have had some time to integrate Tegile in your operations in addition to your JV with Unis over a year ago now that strengthens your opportunity to go after Asia hyperscale players, who actually have a large contribution to the increasing global hyperscale CapEx. So could you elaborate on what you have done so far to integrate those businesses? And whether or not you actually have all the pieces in your portfolio, you like to target this area of the storage market? And I have a quick follow-up please.

Sure. Yes, so I think the recent acquisition of Tegile was a positive step forward across all markets, but particular to your question on China because the adoption of object storage in China is lagging slightly so the ability to have a file front end and be able to lead with the product is more mature in the market then pages to our participation in the China market. So I think from an overall portfolio standpoint, we are encouraged by the addition of the product that came to the Tegile acquisition. We continue to make steady progress although we don’t talk specifically about the growth rate and size of that. It is growing sequentially and we’re making good progress and I think we’re happy with the results, particularly in the last couple of quarters as we’ve added the addition of these file all flash or ray products to our portfolio.

As a follow-up, I would appreciate if you could elaborate on how much your cost saving assumption in your NAND business adhere includes the qualification of your internal NAND supply in your own enterprise SSD business?

That’s an easy question, I'll take it. The answer is none. So when we did SanDisk acquisition, we talked about is vertical integration opportunity and we actually decided especially when the markets went into a constrained position that extending out our relationship with Intel who gave us access to more bits and that has worked well for us and we’ve got some product introductions are going well with Intel. So from a business standpoint, not having our own NAND in all of our enterprise SSD we having some but not all that actually yielding a better long-term economic outcome than that we replaced all the Intel products immediately.

Right and I'll just add to that certainly that it’s a testament to the way that relationship is going, the quality of those products in the marketplace and what we think we can do it from also allowing us to focus our product R&D on other thing. So, there is a number of benefits in this choice that's advantaging us through calendar 2018.

Right, and the good news is as I indicated, we do still have the 20-20 target for the SanDisk transaction that will include significant benefits from vertical integration, so intersecting with our own product line that has our own name by that time period.

Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open.

Just looking at the hard disk drive side, I saw you guys mention in starting the ramp of 12 and 14 terabyte drives. As you get small now just wondering what the mix would be as we exit 2018 with 12 and 14 terabyte?

Yes, we would expect as we exit calendar 2018 on the high cap range, it will be majority of our mix, but I did mention 12 and 14 together. And -- but I did mention what we do expect is this more diverse market as we pursue continued growth. So we will see a continued and steady mix up at the highest end of our portfolio but given different used cases and workloads, both technologically but also geographically we do think we’ll see a longer tail of shipments at the lower capacities, as we referenced in this announcement of these mid range product that we announced for a week or so ago.

On the demand side, I saw BiCS3, I assume that 64-layer was almost 70% plus shipments now. So, as we go through 2018, what are the puts and takes on the NAND gross margin? Where can you drive cost down, I guess 96-layer is more later in the year, but just wondering as you go through the year where the puts and takes in the gross NAND margins?

Well, so two things. One is continued yield and productivity on the existing ramps that is on throughput which is ongoing on that’s a big statement and then of course as we move to the new node in the second half of the year that gives us additional opportunity.

Got it. Thanks.

All right, so I want to thank everybody for joining us today and we look forward to speaking with you going forward. Have a great rest of day.

This concludes today’s conference call. Thank you for joining. You may now disconnect.