Good afternoon, and thank you for standing by. Welcome to Western Digital's Fourth Quarter and Fiscal Year 2018 Conference Call. Presently, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this call is being recorded. Now, we will turn the call over to Mr. Peter Andrew (00:24), Vice President of Investor Relations. You may begin.

Thank you, Sherry, and good afternoon, everyone. This conference call will contain forward-looking statements within the meaning of the federal securities laws including statements concerning our product and technology platform, market positioning, business strategies and growth opportunities, market and flash industry trends, our joint ventures with Toshiba Memory Corporation and our expected future financial performance, capital allocation plans and potential share repurchases. 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 financial report on Form 10-Q filed with the SEC on May 8, 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 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 measure 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 measures, guidance to the corresponding GAAP measures is not available without unreasonable effort. During Q&A, we will ask that you limit yourselves to one question. As a reminder, we are also providing concurrent presentation on this webcast and a PDF of the slides, and our remarks will be available later today in the Investor Relations section of our website along with our quarterly fact sheet. With that, I will now turn the call over to our CEO, Steve Milligan.

Thank you, Peter (02:27), and good afternoon, everyone. 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 fourth quarter and full year financials and wrap up with our first quarter guidance. We will then take your questions. Our strong financial results for fiscal 2018 demonstrate the power of the Western Digital platform. For fiscal 2018, we grew revenue at the high end of our long-term range of 4% to 8% as demand for our hard drive and flash-based offerings remained strong. Non-GAAP gross margin improved nearly 5 percentage points to a record 42.5% and with non-GAAP operating expense growth of just 2%, our business model demonstrated significant earnings leverage. The long-term trends of data growth and its increasing value require a robust storage infrastructure. We have assembled a compelling portfolio of storage technologies that address these market opportunities in Big Data and Fast Data. With the continued expansion of our product lines, we believe we are well-positioned to address this growing market opportunity, which is expected to be $100 billion in calendar 2021. There has been much debate among the investment community about flash industry cyclicality and its effects on our business. I would like to share my perspective on it. The tight demand-supply balance experienced by the industry for the last several quarters was driven by several factors including the complexities of technology convergence such as the move from 2D to 3D and then in 3D to higher layer counts. As these technology conversions are maturing and manufacturing yields are improving, the rate of flash supply growth is also increasing. We estimate that in calendar 2018, industry bit growth will be at…

Thank you, Steve, and good afternoon, everyone. Our June quarter performance once again highlights the power of the Western Digital platform. Strong demand for our products helped deliver year-over-year revenue growth in all of our reported categories. The transition to 3D flash technologies in the flash joint venture fabs continued as planned, and we made further improvements in our manufacturing efficiencies. In Data Center Devices and Solutions, demand from our cloud customers drove continued adoption of our high-capacity helium drives, particularly at the 12 terabyte capacity. Strong demand for these products reflects the needs of cloud customers to upgrade their infrastructure and build new data centers to support the unabated growth in data. Our helium drives gained further traction on a global basis in both established and emerging markets. On a cumulative basis, since the launch of our helium platform, we have shipped more than 30 million drives underscoring our multigenerational leadership position. We estimate that the overall exabyte growth in capacity enterprise was more than 90% year-over-year in the first half of calendar 2018. And we continue to estimate more than 65% year-over-year growth for calendar 2018. Switching to Client Devices, we began revenue shipments of our latest NVMe client SSDs with additional product qualifications progressing as planned. In the June quarter, we expanded our surveillance portfolio with the introduction of the Western Digital Purple 12 terabyte drive, which is the industry's highest capacity surveillance-class product. This latest addition to Western Digital's portfolio creates new possibilities in video surveillance by supporting the capture and access of multi high resolution video streams for use cases such as deep learning and analytics. In embedded applications, we saw further adoption of our 3D flash-based products. The design win pipeline for emerging applications in the automotive, industrial and connected home verticals remains strong.…

Thank you, Mike, and good afternoon, everyone. I'm pleased with our financial performance in the June quarter and fiscal year 2018. We executed well across our broad array of markets with our diverse product portfolio, achieved expense targets and reduced interest expense, all of which resulted in significant earnings growth. We finished the year with a strong liquidity position as a result of improving our capital structure and continued strong cash flow generation. Revenue for the June quarter was $5.1 billion, an increase of 6% on a year-over-year basis. The June quarter revenue for Data Center Devices and Solutions was $1.6 billion, an increase of 14% year-over-year. Our Data Center revenue growth continues to be driven by cloud-related storage. Client Devices revenue was $2.5 billion, an increase of 3% year-over-year. We had significant growth in mobile and embedded products offset by client compute devices. Client Solutions revenue was $1 billion, an increase of 2% year-over-year driven by the strength of our global brands sold through retail. For fiscal year 2018, year-over-year revenue growth was 8% driven by growth in each of our end markets. This is indicative of strong operational execution and the strength of our diverse product portfolio. Non-GAAP gross margin for the June quarter was 41%, down 30 basis points year-over-year. Flash average selling price per gigabyte declined in the mid- to high-single digit range on a quarter-over-quarter basis. For fiscal year 2018, our non-GAAP gross margin expanded 470 basis points resulting from a higher mix of revenue from sales of flash products and capacity enterprise drives. Non-GAAP OpEx for the June quarter totaled $820 million below our guidance due primarily to lower variable incentive compensation. Our non-GAAP net interest and other expenses for the June quarter was $101 million, a year-over-year decrease of almost 50%. This includes…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. Our first question comes from Aaron Rakers with Wells Fargo.

Yeah. Thank you for taking the question. I just wanted to kind of double click on the NAND flash assumptions that you're making looking into the back half of the calendar year. Can you just, one, help us understand of what a "healthy" gross margin profile might look like in a NAND flash business in total and maybe using SanDisk historical levels as context to that? And what are your assumptions with regard to your ability to take costs down relative to the ASP expectations for the back half of the calendar year?

Do you want to talk about costs and then...

Yeah. So the cost declines are within our range on annual basis, so we've talked about 15% to 25%, that's kind of ongoing. As you see in our guidance, Aaron, obviously, we expect ASPs to come down a bit faster than that, and that's what's having the effect. Relative to our flash margins, I think we continue to see them healthy in a context that you just talked about relative to legacy SanDisk margins.

Yeah. Meaning that at similar points in the cycle if you want to refer to it, we've been able to operate at a premium to historical SanDisk margins. Aaron?

Yeah. And so, I guess with that context, I mean is there – as we look back historically, how do you see us currently in terms of the cycle? Is there a basis for that comment of what we should be looking at with regard to the cycle that we're in and how fungible maybe the capital deployments might be, or the industry's CapEx or capacity growth going into the back half of the year?

Well, I don't know if I know exactly how to answer your question. I mean we are focused on really a few things. I mean, one, let's keep in mind that our business model, our business was constructed to deal with dynamic market conditions. And so what we're focused on are on those things that we can control, what can we do in terms of making sure that we've got the right products and the right customer base, and not only that, what can we do with our cost structure to optimize things and then also what can we do from a capacity standpoint. And that gets into the discussion that we're currently having with Toshiba Memory in terms of expansion plans as it relates to 2019. That being said, we continue to expect that our margins are going to be at very healthy levels as indicated by the reset in terms of our margin model of 35% to 40%. And additionally, beyond that, we have high confidence in the long-term cash flow generation capabilities of the business and also believe, quite frankly that the market is, I will call it, overreacting to the pricing pressures that we're seeing from a flash NAND perspective, and we believe that at this level with the new share authorization, we have the opportunity to repurchase shares at an attractive level.

Fair enough. Thank you.

Thank you. Our next question comes from Joe Moore with Morgan Stanley. Joseph Moore - Morgan Stanley & Co. LLC: Yeah, thank you. With regards to raising the long-term gross margin profile, can you talk about the rationale for that I mean other than the fact that you've operated above that range for quite a while? I guess what is it structurally that sort of makes you think that gross margins can operate over a full cycle in a higher range? Thank you.

Well, the two main drivers are the greater mix of flash revenue which will be at a higher margin, and then the increasing mix of capacity enterprise hard drives. So both of those drive a higher margin profile. Joseph Moore - Morgan Stanley & Co. LLC: And I guess if you think about – just as a follow-on to that, I mean as you think about the historic SanDisk margin profile, I would think that the amount of capital spending as an industry that we have to do to sort of stay on the same growth profile a gigabit growth profile is higher, should that drive a structurally higher gross margin in NAND as we sort of need to fund a higher level of CapEx to stay on the bit growth trajectory or is that not part of your thinking there?

Well, I think we're going to need to get a sufficient return on the capital that we're investing. And so obviously, that is going to be subject to the pricing environment. But our intent would be to work with our customers and our partners to make sure that the capital that we're deploying to provide them with additional bits that we're getting a satisfactory return for that, absolutely. But we don't – I mean let's be honest, we don't fully control that, right, because it's market-based pricing. Joseph Moore - Morgan Stanley & Co. LLC: Sure. All right. Thank you very much. Very helpful.

Thank you. Our next question comes from Joe Wittine with Longbow Research.

Hi. Thanks. Steve, in your prepared remarks, you called out soft demand for mobility. I understand there's not much growth in unit demand there, but I'm curious if you were also referencing any decline in the growth rate of capacity per device.

Yeah, so relative to that you're right, the unit growth is muted, and relative to our previous expectation, it's come in lower than expectations. So I think that continued unit trend is there, and the unit trend and the capacity mix has been below our original expectations.

Thanks, Mike. And then just as a quick follow-up, it's early here, but looking out to December with price-per-gigabyte declining, do you still expect to see like a typical seasonal move from September going into December? Any kind of pain points in the market that could prevent that today?

Well, right now – I'll comment on that, and then Mike can correct me if I state it incorrectly. But right now, we're not expecting that. As we indicated, we're – I mean there may be some seasonal bump in terms of demand, but seasonality in our business has kind of muted over time between the September quarter and the December quarter. And we're not expecting there to be any dislocations in the market if you want to call it that would create a different opportunity from a pricing perspective. So we do expect continued – as we said in our prepared remarks – continued pricing – downward pricing pressure in terms of the flash market. And that being said, we'll have the ability to mute that impact because we're continuing to see strong demand particularly for capacity enterprise.

Excellent. Thank you.

Thank you. Our next question comes from Vijay Rakesh with Mizuho.

Yeah. Hi, guys. Just looking at the flash side, the NAND side, I was wondering how do you see – if you look at next year as you shrink to 64, 96, do you see the cost-downs being faster than what you're seeing on the pricing side or do you see the pricing stabilize into early next year?

Yeah. I think in general, we think the bit growth for next year is sort of the middle of our range, and given our comments, with a bias to the lower end of the range. And it's really about supply-demand balance and where things end. So as Steve just mentioned, it's market-based pricing, and so we would expect our cost progression to be roughly within our range as well. So nothing untoward and really is going to be tied to the supply-demand balance.

Got it. Unless the pricing on the flash side has been a little bit softer, have you seen that drive a little bit more penetration on the hard disk drive side of the business, either in client or enterprise? Thanks.

Yeah. To this point, it's not been anything material. As things progress, we did see during the period of allocation that we actually saw a slowing of flash penetration in PC adoption. We would expect and we have seen the initial indications of that progression continuing as we moved into this normalized period.

Got it. Thanks.

Thank you. Our next question comes from Wamsi Mohan with Bank of America.

Yes. Thank you. Steve, the shutdown of the Kuala Lumpur HDD manufacturing and shift to Thailand, how much of restructuring charges will be needed? How much cash restructuring charges? And how much savings can you drive from this move?

Yeah, I'm looking at Mark to help with a little bit of color in that.

Yeah, so in terms of our restructuring charges over time, we're looking at approximately $160 million that'll be spread over three fiscal years. So some of that was reflected in fiscal 2018. We'll have kind of the majority in 2019 and then a little bit in 2020. In terms of – we haven't set out our targets for value creation publicly, but we do feel we're going to get a very good return on that restructuring.

Yeah. To add a little bit of color on it, if you look at our hard drive margins and I recognize the fact that we don't disclose our hard drive margins or our flash margins, because it's not necessarily consistent with the way that we manage our business, in other words, we don't have a – we have an integrated business as opposed to a separate hard drive versus flash business, and I do know that some of the investment community wish we did disclose those margins separately. But just to provide a little bit of color, our hard drive margins for quite a while have been incredibly stable, and we have traditionally carried a premium vis-à-vis our gross margins versus our largest competitor. That absolutely continues to remain the case. And what we want to do is we want to continue to optimize our cost structure that allows us to continue to have that strong margin performance. Right now, we have not seen a meaningful degradation in our margin performance, but it takes a while to close the factory. And so, we needed to announce this. We needed to get ahead of it. It's going to take us a while to make this happen and we've been in Kuala Lumpur for 45 years. And so, right now, not a significant impact, but the effect of the restructuring that we'll be going through over time will allow us to continue to operate our hard drive margins at an attractive premium to our competitors.

Thanks, Steve. If I could quickly follow up, the NAND ASP comment in the quarter of mid-to-high single-digit quarter-on-quarter decline that you witnessed in 2Q, how do you see that trending as you go through the September-December quarters? What assumptions are embedded in your gross margin guide?

Well, we expect the pricing environment, as Mike and Steve indicated, to remain the same in terms of normalizing. So we would expect the declines to be roughly the same and...

We would kind of be similar to maybe a little bit higher than what we saw in the last quarter.

Yes.

The other thing to add to that, which I think is an important point to note is that when you look at – obviously, we are out looking a lower gross margin level in our fiscal Q1 or calendar Q3. Largely, that entire gross margin decline – largely, not necessarily entirely – is due to some of the pressure that we're seeing in terms of ASPs on flash.

No, that's very helpful. And, sorry, one clarification, can you just talk about any potential impact from tariffs to Western Digital? And I mean where your main competitor has some large capacity footprint in China, I was wondering if that creates any opportunity for you guys. Thank you.

Well...

Well, yeah, sorry. How it impacts our competitor, we don't have visibility to that. But, of course, we'll continue to monitor and see if there is an opportunity. We are largely not impacted by the recent tariff actions. If additional actions are taken on tariffs, we could be impacted. But, right now, there's really minimal impact to our operations.

Thanks so much.

Thank you. Our next question comes from Ananda Baruah with Loop Capital.

Hey. Good afternoon, guys. Thanks for taking the question. Just going back to one of the earlier remarks on where you think we are in the NAND pricing normalization cycle, what is your view on that just based on what is available today? And just going back to Wamsi's question and your answer, if ASP to NAND ASP declines are similar in December quarter to what you think in the September quarter, would the gross margin range – would it be reasonable for the gross margin range to be similar as well? Those two. Thanks.

Well, I think it's a little too early to call in terms of that, but I will – and this will probably be an unsatisfying answer, but there's a reason that we have a gross margin range, right? And so our margins are going to modulate over time within that 35% to 40% range. Sometimes they could be a little bit higher, as we saw historically, and I guess conceivably they could be a little bit lower. We're certainly not calling that, but we have a range for a reason. And right now, in terms of how we see market conditions evolving for the balance of calendar 2018 and then into 2019 is that we are comfortable with that gross margin range as it relates to our business. But that does not mean that we are not going to experience some degree of volatility. And oh, by the way, that's okay. Our business was constructed and our management team was constructed to deal with that kind of volatility and manage it to the best of our ability and generate long-term returns for our shareholders.

Thanks. And where in the cycle do you think we are right now? Best take.

Well, it's interesting. The reality of it is, is that everybody always predicts the end of a recession two quarters late. So it's always difficult to predict it when you're in it, and I don't mean that to sound like a cynic. A lot of it will be predicated on, let's just say, the behavior of others in the industry because we only have so much. We are encouraged by some of the actions that, for example, Samsung in terms of curtailing their investment plans, and we're working with our joint venture partner to temper our expansion plans in 2018. If we're successful in that regard, wherever we're at in the cycle, it will make it shorter, and it will make it less steep. And our job is to do what we can to control and influence our aspect of our operations.

Got it. I appreciate it. Thanks a lot.

Thank you. Our next question comes from Harlan Sur with JPMorgan.

Good afternoon. Thanks for taking my questions. On the high capacity cloud drives, manufacturing and test lead times are quite long there. So given the strong demand pull from your customers, looking at the recent cloud CapEx spending trends, looks like they're wanting to enter into long-term supply agreements with some of their key suppliers, which is pretty favorable because you kind of lock in pricing and obviously, you guys have control over your cost curve. And so is the team starting to see some of your customers wanting to enter into these long-term agreements with the team?

Yeah. I think when you think about our Capacity Enterprise business and those particular buyers, we have a range of different commercial agreements with them, and certainly in several instances, they are longer than a quarter long. And there's different mechanisms there, but yes, I think they are looking to assure supply over a longer horizon, and they're working with us to find the right way to do that that's mutually beneficial.

Great. And then on the flash side, just given the continued normalization of flash pricing, we are starting to see price elasticity kicking in, right, especially on things like smartphones where we're seeing healthy content increases on some of the upcoming flagship smartphones. Are you guys seeing accelerating attach rates to SSDs to client compute?

Yeah. As I mentioned on earlier question, we've seen a little bit of the resumption that was really us coming off the allocation period more into the normalized period. We'll see as the rest of this calendar year and early calendar 2019 occur, but you would expect there will be some elasticity there. That's been the case in the past, and we would expect we will see some of it.

Great. Thank you.

Thank you. Our next question comes from Mehdi Hosseini with SIG.

Yes. Thank you for taking my question. I have a problem with unmuting. Just wanted to go back to the increase in inventory this second quarter and is having an adverse impact on free cash flow. I'm just wondering where the rationale is in changing your footprint at this juncture. Would it not make sense to wait until you have better NAND pricing environment and allocate some of that cash flow to a more aggressive buyback given what the share price has done over the past two years? And I have a follow-up.

Well, I think that, first off, we talk about a balanced capital allocation plan, right? And let's be honest, our first job is running our business. And in that regard, we are clearly not capital challenged, I wouldn't say. And so right now if you look at it, and I'll just give this as a point of reference, our major competitor in the hard drive space is down two factories. Now we have been rationalizing our hard drive footprint for a while, because we have the HGST and the WD combination. So we used to have four hard drive factories; now, we're down to three. And so from a capital optimization perspective in terms of our footprint, we are not as optimized as our competition. And so we want to make sure that we've got a competitive cost structure in that regard. Now is the right time to do it. We've got things optimized in terms of those three factories. In other words, the capability of the other sites to accept the volume out of Kuala Lumpur is there. We've got a solid transition plan in place that'll take us a little bit of time to execute in a way that is rational and does not disrupt supply as it relates to our customer base. And we think it's the right thing to do and we've got sufficient capital to do that. And oh, by the way, because we can do both, we also think that it's a wise use of our capital to repurchase our stock, particularly at these levels.

Got it. And most of the call has been focused on NAND pricing. Let's look at the half a glass full. You have several new products coming out, the 14 terabyte MAMR later this year, and I believe you also have the high NVMe SSD coming out. Can you give us some ideas how these new products are going to trend? Is this going to be more of a material impact in 2019? Or any kind of milestones would be great so that we could focus on this new product ramp trying to tie in the NAND HD bodily.

Yeah, let me – so first on the capacity enterprise side just to be clear, the 14 terabyte is not a MAMR product, but it will be ramping towards the tail end of this calendar year, and we think we are in a good position to continue to maintain our leadership at high capacity – at the highest capacity points in that segment. Relative to our plans around enterprise SSD, as we've talked about, we have announced a high-performance NVMe product a quarter or so ago. We just a day or so ago announced a new SAS enterprise SSD. Those are high performance products, certainly will help us gain some traction within those product revenues, but we would expect the more material capability and impact to our P&L would occur in calendar 2019 as we ramp more mainstream NVMe product. So we're making good progress, but the things we're launching now are really good to sort of defend our position at the highest performance part of the market, and more broad expansion would occur in 2019.

Thank you.

Thank you.

Thank you. Our next question comes from Steven Fox with Cross Research.

Thanks. Good afternoon. Just to follow up on that. You mentioned some interesting products coming down the road, and you also have some other areas where you're productizing your core technologies whether it be spinning disks or flash. Can you talk about how those are trending towards impacting the gross margins, because I assume when you talked about flash prices that was sort of a like-for-like chip base (42:24), those are not exactly with mix included? Thanks.

Yeah. So I think Mark mentioned one of the drivers, or the main driver of our model update was really the trend of both capacity enterprise as a percentage of the total hard drive business, which of course is the higher margin part of that business, and the continued shift to flash as a percentage of our total, as well as the mix of our flash business. Both those things are driving that update in our model.

And the mix of – when you look within the flash business, is it generally a positive as you productize some of these areas or...

Yes.

...is some of them – they are.

Yes. Over time, the mix is positive as well.

Yeah. And I would also add to that it has a little bit more of a stickiness element to it as well.

Yeah.

Great. Thank you very much.

Thank you. Our next question comes from Rob Cihra with Guggenheim Partners.

Great. Thanks very much. I wonder if I could just dig back into that enterprise SSD point a little further, which is – I mean obviously, the high-cap enterprise hard drive has been great driving all the growth in Data Center. Do you feel like the lack of – I don't know, I'm not sure you won't say exactly but whatever the – relatively speaking, the lack of growth from the enterprise SSD side which otherwise is a strong business. I mean, are you guys just not focusing on it much because you don't feel like you're there yet with the new sort of internal in-house products? Or is there – or do you feel like your products aren't there yet? Like I know Mike, you said there's more of a – expect more of a calendar 2019 impact from the NVMe stuff. I mean is it just you pulling together the former HGST, the SanDisk, all the acquisitions you've made, all that IP and getting new products out with internal controllers and architecture? Is it just a matter of getting there or is there something else?

Yeah. So, Rob, this is Steve. I'll take that question, and we've talked about this fairly openly. If I look at our business, kind of scan it and give a report card in terms of execution, our execution in the enterprise SSD area has not been as good as it needs to be. It is a strong focus of ours, there is no question. It has been a strong focus for a long time. We've had some execution issues from a product development perspective. We've talked about those. We've made some changes. We're making some progress, and you're going to begin to see some new product introductions in that area, given some of the changes that we've made as we approach the end of this calendar year and into 2019. It'll begin to have a more material impact in terms of our financial results as we progress through 2019. But that is clearly an area that I have been disappointed in from an execution standpoint, but make no mistake, it is a key focus item for us as a company.

All right. Okay. Thank you.

Thank you. Our next question comes from Amit Daryanani with RBC Capital Markets.

Yeah. Thanks two – as well, if I may. I guess one, Steve, when you talk about moderating the pace of supply growth and you're in discussions with Toshiba about it, how much control do you or both of you really have in controlling your capacity sort of like how far can you push that button? And realistically, are you comfortable ceding market share if the market remains in oversupply mode for multiple quarters?

Well, I think that we have – we, with our joint venture partner, have, I will call it, complete control over what we do from a capital perspective. Clearly, we can't control what our competitors do and so – but yeah, we have that lever in conjunction or in consultation with our joint venture partner to affect the deployed capital in terms of expanding or converting capacity in our factories in Japan. Now relative to ceding market share, I mean that would be a calibration point that we would use to determine how much – in terms of where we would want to end up. It's not necessarily the only metric, but clearly one of the factors that we would consider along with what sort of return we would get on that deployed capital is where would that position us from a competitive standpoint including market share. So it's a consideration but it's not an absolute thing that we would look at as a red light/green light kind of decision point.

Understood. And then as we think about flash ASPs and you talked about declining kind of mid-to-high single-digits range consistently in September and December as well, how do you think of cost-per-bit decline? Does that actually start to slow down because as you migrate to 96 layer, I would imagine the cost per bits would slow down a little bit, the declines of that would slow down? So is that the second lever that's potentially compressing gross margin in September?

Well, cost declines have been – well, first off, let's talk about when we talked historically. We've talked about a range of 15% to 25% and in terms of per-bit cost declines on an annual basis. We've also indicated that this year we expect to be at the midpoint of that. The reality of that kind of getting to your point is that that does not necessarily occur in a linear fashion as you move through a year. And as we move to new node points, sometimes, the cost challenges can be more acute on the front end as opposed to on the back end. And so it may have some impact in terms of our margins as it relates to the September quarter. But we remain, I'll call it, committed or we still believe that cost declines will be in that 15% to 25% longer term and 20% for us kind of midpoint for calendar 2018.

Perfect. Thank you very much for taking my question, guys.

Thank you. Our next question comes from Sherri Scribner, and we will have one more question after her.

Hi. Thanks. I guess I squeaked in. I think on the last earnings call, you guys talked about hitting above 40% or 40% gross margins in all the quarters this year. And now, you're guiding a little bit lower than that. I guess maybe what is driving that lower outlook for the second half? Is that primarily related to the mobility that we've talked about? And going along with that, with the lower outlook for the second half of the year, do you still think you can exceed the $13 in EPS in calendar 2018?

Yeah. So you're right, Sherri, in terms of where we thought we would be in margins and where we are now. It is almost entirely driven by a softer demand environment, particularly in the mobility segment, which is creating a different supply-demand dynamic, therefore pressuring ASPs more than we anticipated. So you're absolutely right. And then I'll have Mark address the second question.

Yes. Sherri, that's a very clever way to try to have us give you guidance for the fourth calendar quarter. But the answer is yes, we will – we're still confident that we'll be able to exceed $13 a share in calendar 2018 EPS. So as Steve highlighted, our earnings power for the platform remains strong. We are going through this normalization period, and the teams and the business model are constructed to manage through that.

Okay. Great. And then with the buyback that you announced, the additional $5 billion, I know that you guys have been in the process of working down your debt levels. Is the buyback announcement sort of a signal that you feel comfortable with your debt where it is or do you think you'll still reduce some of the leverage that you have? Thanks.

Sure. So as we highlighted, we've a balanced capital allocation strategy, and we are still committed to deleveraging as one of our priorities. At this point, we do have more flexibility because we've been able to restructure our debt and we've been paying it down, so we're comfortable with where it is. We expect to continue to delever over time, and as we talked about, we're very happy with the way we brought down our interest expense through our debt restructuring transaction. So we feel like we're able to do both, and we're able to allocate the right amount of capital to running our business as well.

Thank you.

Thanks, Sherri.

Thank you. And our final question will come from Mark Miller with Benchmark.

Thank you for the question. I just wanted to talk a little bit more. I know it's been talked quite a bit, but is the expansion or the ramp of Chinese domestic NAND manufacturing also impacting this or do you expect that to be a greater factor next year?

No and no.

Yeah.

I mean it's a long-term risk factor as we've talked about before, but it is having no impact in terms of the recent dynamics. (52:13)

There's no meaningful output. There's no meaningful output coming from China, I mean. And if there is any output, it's not at any, let's just call it, capacity point that would compete against our products.

Okay. I was going to say it's also at a lower, a more – a chip – a prior-generation chips too, okay.

Yeah, exactly. Exactly. Yeah, exactly.

Okay.

Is that it, Mark?

Ladies and gentlemen, thank you for participating in the question-and-answer portion of today's call. I would now like to turn the call back over to management for any closing remarks.

All right. So thank you all for joining us, and we look forward to updating you as we move forward, and thank you for your interest in our company. Have a good day.

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