Good afternoon, and thank you for standing by. Welcome to the Western Digital’s Fiscal Third Quarter 2023 Conference Call. Presently, all participants are in listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning & Analysis of Investor Relations. You may begin.

Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including expectations for our product portfolio, cost reductions, business plans and performance, demand and market trends, and financial results based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to David for introductory remarks.

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our 2023 third quarter results. Western Digital’s third quarter performance exceeded expectations with core metrics at the high-end of our guidance range, demonstrating the company's resilience in a challenging market environment. We reported third quarter revenue of 2.8 billion non-GAAP gross margin of 11% and a non-GAAP loss per share of $1.37. Over the last several years, our team is focused on enhancing business agility and delivering a range of innovative industry leading products that address the increasing data storage demands of our customers. The groundwork we laid combined with the actions we have taken since the beginning of this fiscal year to right size and refocus our business have enabled us to navigate a dynamic environment. I am pleased that we delivered non-GAAP gross margin at the higher-end of our guidance range due to strong execution across both our HDD and Flash businesses. In HDD, our early actions to streamline our manufacturing footprint and focus our product offerings on delivering the best value for our data center customers have resulted in gross margin upside and profitable market share gains in HDD. In Flash, our broad go to market strategy anchored on our enviable retail franchise in a strong client SSD portfolio enabled us to optimize bid placement and bolster gross margin. During the fiscal third quarter, we saw signs of demand stabilizing across various end markets. In consumer, Our flash and HD results were consistent with the expectations we shared in January. In client, demand for each major product area came in better than we expected across PC OEM, channel, mobile and gaming. In cloud, demand for capacity enterprise hard drives improved whereas the demand for flash drives was consistent with our expectations set in…

Thank you, David, and good afternoon, everyone. Fiscal third quarter results reflected the challenging market environment with continued pressure on revenue and profitability. Total revenue for the quarter was $2.8 billion, down 10% sequentially and 36% year-over-year. Non-GAAP loss per share was $1.37. Looking at end markets, cloud represented 43% of total revenue at 1.2 billion, down 2% sequentially, driven by an increase in capacity enterprise drive shipments, which was offset by a decrease in Flash shipments. Nearline bit shipments were 79 exabytes, up 31% sequentially. Year-over-year, revenue declined 32%, primarily due to a decline in shipments of both hard drive and flash products, as well as price decreases in Flash. Client represented 35% of total revenue at $1 billion, down 10% sequentially and 44% year-over-year. On both a sequential and year-over-year basis, the decrease was driven by price declines across our flash products and lower client SSD and hard drive shipments for PC application. Finally, consumer represented 22% of total revenue at 0.6 billion, down 22% sequentially, and 29% year-over-year. Sequentially, the decrease was due to a seasonal decline in shipments of both retail hard drive and flash products, as well as price declines in retail flash. The year-over-year decrease was driven by lower retail hard drive shipments and price declines in flash. Turning now to revenue by segment. HDD revenue was 1.5 billion, up 3% sequentially and down 30% year-over-year. Sequentially, total HDD exabyte shipments increased [50%]] and average price per hard drive increased 10% to $109. On a year-over-year basis, total HDD exabyte shipments decreased 23%, and average price per unit increased 9%. Flash revenue was 1.3 billion, down 21% sequentially and 42% year-over-year. Sequentially, Flash ASPs were down 10% on a blended basis and 12% on a like-for-like basis. Flash bit shipments decreased 14% sequentially and…

Thanks, Wissam. Over the past few quarters, we have successfully ramped a series of industry-leading storage products and commercialized innovative technologies, while concurrently rightsizing our cost structure. Our proactive actions have positioned Western Digital favorably for the future as demand gradually returns to normal levels. In closing, I would like to thank our team members for their unwavering commitment in advancing innovative products and driving operational efficiency. Their exceptional efforts have allowed Western Digital to deliver in [Technical Difficulty] to the dedication and support of our people worldwide, and we remain committed to upholding the highest ethical standards in all that we do. Okay. I look forward to your questions. Let's open it up.

[Operator Instructions] Our first question comes from C.J. Muse from Evercore ISI. Please go ahead.

Yes, good afternoon. Thank you for taking the question. I guess I'd love to get a sense for where you're seeing demand stabilize versus where you still see pockets of inventory? And as part of that, I guess embedded in your revenue guide, it looks like you're kind of suggesting HDD down maybe 10% to 15%, SSD down 5% to 10%. So, I guess is that kind of the right way to think about it? And then as part of that, where do you think we're seeing stabilization and where do you think we need to work down inventory some more?

Inventory correction there is mostly behind us. Our channel business performed really well this past quarter, I think, above what our expectation was. The inventory issue is still very much in data center and it's very lumpy. We have some big cloud customers that are consuming. We have others that are really in a full inventory digestion and aren't taking anything. So that market is still where we see a lot of inventory digestion going on. And I expect that to be lumpy for the next couple of quarters. We are seeing some signs of stabilization in China. We talked about that. I think it's setting up for recovery in the second half of the year, a lot more activity around RFPs and discussions about what demand is going to look like the second half. So, that's a bit – an overview of where we see the market. I think on your numbers, you're probably down a little more than we are on HDD. I think that's probably more a single-digit kind of number on a sequential basis.

Very helpful. And as a quick follow-up, can you kind of walk us through what you're thinking today in terms of underutilization charges beyond the June quarter?

Yes. Well, let's talk about for each business. I mean, I think in HDD and I'm sure Wissam will have a little bit to add here as well. HDD, which is the smaller part of the number, but still significant we're going to see a drop in volume next quarter. So, we'll see some underutilization there. On the Flash side, we continue to underutilize the fab. We're managing it in a very dynamic way, kind of week-to-week month-to-month to make sure we've fully understand demand and keep our inventory in a position where we want it. And so – but we will definitely see underutilization on both sides of the business next quarter.

And just to add – C.J., sorry, just to add a bit more color, I think we – in our guide, we're estimating around [220 to 240] [ph], the range of underutilization charges. And by business, this is roughly two-thirds Flash, one-thirds HDD or one-third [SSD] [ph].

Thank you.

Thanks, C.J.

Our next question comes from Joe Moore from Morgan Stanley. Please go ahead.

Great. Thank you. You mentioned that you're taking lower cost for market charges on NAND, can you talk about the methodology there? Is that – do you pool that and then take a charge overall or is it anytime any individual product falls below the market price you adjusted down?

So, Joe with respect to our LCM charges, we do it at the finished good product level. It is not pulled.

Got it. Okay. Thank you. And then in terms of the underutilization charges and things like that, do you know how the covenants are going to be defined? Are you going to be able to remove those charges from the EBITDA number as defined in the covenant?

Those are typically allowed to be added back per our credit agreement to the EBITDA.

Okay, great. Thank you very much.

Thanks Joe.

The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.

Yes, thank you for taking the questions. Just to build on that last question, just to be safe. Your gross margin expectation in this current quarter, I'm guessing the commentary assumes that you're not expecting another inventory charge in the flash business? And if so why not?

So Aaron, we typically factor into our guidance all the expectations. And when we exited Q3, like a typical quarter, we do our reserve reviews and we take the – we make sure that the balance sheet properly stated. And so based on our forecast, everything is baked into the guidance. Typically, we have a small amount in the guidance just like we did also in the past quarter.

Okay. And then I guess my follow-up question is on the hard disk drive business, I can appreciate you guys seeing some cloud customers, kind of – it sounds like purchased really no product this last quarter. I'm guessing from a competitive perspective how would you characterize the current environment? Have you seen increased price aggressiveness? How do you guys think about the discussion around HAMR and your roadmap going forward, etcetera?

Yes, I mean, I think there's always price pressure in this market Aaron, but we've been very disciplined about the value of our products. I think you – one of the things we feel very good about is, we've been investing in our HDD roadmap, things like OptiNAND, ePMR, UltraSMR, these products are really now starting to ship in volume. We talked about the 22-terabyte CMR drive was the highest volume drive at 20 and above. So, we feel very good about where the portfolio is, about where it's going. We've got a number of very large customers qualifying SMR right now. That's clearly the next step in the data center, our UltraSMR product there, the 2016, we talked about we'll finish up calls this quarter and start deploying next quarter. So, we feel like we've got a portfolio that is aligned with what the market needs. And that's showing up in, kind of how we're able to monetize that portfolio and not have to compete on price. So, future technologies like HAMR will be there. We're still are ways away before that product is going to be a volume type product. The volume products are the 22s going and then SMR are going to be the big volume products over the next couple of years and after that we'll get to HAMR. We feel confident about that technology. It's been in development for a long time. We're in the final stages of it as an industry and I think everybody is excited that it will be the roadmap for 30 and above when we need it.

Thank you.

Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead.

Thank you. I wanted to ask about the network security breach. Can you give us an update on the recovery there? Looks like your operations are back to normal levels, but have you experienced or do you expect any more issues with productions or your ability to ship products?

Yes, we've been very transparent about that incident. When we noticed it, we let folks know, we took our – we basically disconnected ourselves from the public Internet to protect ourselves and then restore the environment. We still have capabilities inside the companies and the factories were operational throughout that. Clearly, a tremendous amount of work by the team, but we feel like we're nearly all the way back now as far as operation. We got to bring the store online in here in another week or so, but it was really, really good to see our business continuity plans, you don't want to rely on them too often, but when we had two, they were there and they kept the company moving forward.

Okay, great. Thanks for that update.

Sorry, Sidney. I just wanted to add that for fiscal Q3, we don't have any impact in the numbers to the network security.

Okay. That's great. Maybe my follow-up question is, Samsung [indiscernible] talk about their cutting production. I'm curious if your competition with the customers have changed since that announcement, and related to that, do you expect the June quarter to be the bottom of – for your margins for your Flash business? Thank you.

I would say, we have – I mean obviously we have very robust conversations with our customers all the time. I wouldn't pin the tone of conversations on to how any one particular player in the market is acting or what they're doing. We stay very focused on our business. As far as where is the bottom, I mean we expect the market to come into balance as we go through the second half of the year. I think we're clearly taking a lot of actions in our own business to closely manage it, supply and demand. Keep the utilization of the fab close to where demand is. So, we manage our inventory. Clearly, we're going through one of the most severe downturns in a while, but we think as we move through the second half of the year the market will come into balance.

Great. Thank you.

Our next question comes from Mehdi Hosseini from SIG. Please go ahead.

Yes, thanks for taking my question. One near term and more to with inventory. Your inventories are – absolute dollar value keeps going higher. And I want to understand how the mix is changing between wafers, finished good, and other material? Is there any way you can give us a color how incremental changes are happening for different categories within inventory, and have a follow-up?

Yes, we typically don't break that out as much on the call. This is a bit too much detail, Mehdi, for me to discuss here. The one comment I would make though, when we think of inventory, our operations team is really focused on minimizing where we can. So, we basically try to stage it in the places that makes the most sense from a demand perspective.

Let me rephrase the question. How do you – how should we think about the risk of inventory write-down?

I mean, the inventory write-down typically is, it's really based – the ones that was, for instance, I called out is based on basically the inventory value relative to where the market price is. And so, if – when prices decline by a lot, then we do have to take a closer look and see if there's any impact, but that's what I would say about that.

So, would – are you assuming that the rate of price decline is moderating, so maybe that would minimize the downside risk?

What I'm saying is, we – what I'm saying is, at the end of every quarter our balance sheet is properly stated because we do look at where the inventory value is versus where the demand is and the prices are most particularly at the finished good level. And so, where we see differences we have to adjust our inventory value, otherwise it is properly stated. I guess your question is more around trying to predict where the price is going and we typically don't necessarily do that.

Okay. Thank you. And then the question for David, looking at longer-term more than just one quarter. I think there is some confusion or unknown factor how new type of AI would impact demand for HDD versus SSD, do you have any view how this incremental demand created. These are expensive working stations. How is it going to impact SSD versus HDD?

We're doing analysis on that, Mehdi. What I would say is, to me – I'll even go a little longer-term, bigger picture. This just reinforces the value of stored data. I think that it just seems like there's this constant ways for people can figure out how to use all the data they've stored to do very productive things with it. And I think the latest is training these AI engines. And so, we just think it's another element of the long-term value of data storage and it's just a big secular tailwind for the HDD business and the enterprise SSD business. I mean, again, you know that they're both – they both have big TAMs in the data center, and they're both growing. And we think this is another reason why people will store more data is because they can monetize it in different ways in the future.

But I guess I was hoping you would shed some light as to how the HDD CAGR would change? I don't think this is going to lift the TAM for each different types of stores at the same rate. Is there any thoughts that you can share with us?

I think it will – HDD is the lion's share of storage in the cloud. So, you would expect that's where the bigger lift would be across those two technologies.

Okay, thank you.

Thanks Mehdi. It’s good to talk to you as always.

The next question comes from Shannon Cross from Credit Suisse. Please go ahead.

Thank you very much for taking my questions. My first is, as you look at what you're doing on OpEx in terms of holding in cost, how do you think about the – how you're – where you're investing? And how are you making those decisions? And how should we think about potential impact to future projects at this point? And then I have a follow-up. Thank you.

Yes. We've been very – obviously, we've been – one of the things we've been building into the business over the last several years as we've restructured the business is more agility and the ability to proactively respond to the market we're in. I think that's kind of the hallmark of the organization we're trying to build is agile and dynamic. But clearly, on top of that, Shannon, we went to a business unit structure for a reason. It's because we have two very, very focused organizations with very sophisticated leaders in them that is constantly doing the ROI analysis of where we put our OpEx, and we get the most out of it. And I think quite frankly, that's led to the portfolio we have today. I think we have the best portfolio we've ever had. And that's an effort that goes on constantly, continuously. And so, as we continue to draw down OpEx to resize the business to the realities of what the market is. We've built the capability over the last couple of years to do that in a way where we can make sure we're going to get – first of all, the OpEx we spend, we get the best ROI out of it, the best return and that we make sure that we're making – we're taking actions to the business that don't harm the long-term value of it, and we make the right decision on a day-by-day, week-by-week, month-by-month basis. So, I think this is really a capability we've built in the last three years, and I think it's serving us well right now to make sure that we're not cutting in ways that are going to impact the long-term health of the business.

Thank you. That was helpful. I'm curious – and maybe I'm trying to make lemonade out of lemons. But I'm just wondering, as you've cut capacity on the HDD side, and you've had these underutilization charges, are there things that you've learned in terms of maybe how you manufactured in the past ways to drive incremental productivity? I'm just thinking it's kind of – it's certainly a unique time to maybe take a step back and look how things are – how things have been done and what you can do in the future? Thanks.

So, I'll make a few comments. I suspect Wissam will have a few comments as well. I mean this is – there's been a lot of focus on this in the last year of how do we become more efficient, how do we automate more. Several of our factories have won World Economic Forum Lighthouse awards for automation. How do we rescale our employees? And how do we just – we've been very focused on driving a level of automation, driving productivity, and just lowering our fixed cost asset base in the HDD business. And I think our fixed – I don't think I know, our fixed costs in that business are now the lowest they've been in well over a decade. So, I think that's paying off in the way we're able to generate margin in the business at lower volume levels. And then as the volume starts to pick back up, we've got capacity to meet what the market needs, and I think we'll do that at a much lower cost basis.

Yes. I mean the one thing I would add also, in addition to what David said, some of the activities that we drive in terms of the manufacturing side are taken back into the development organizations to think about things that come on platforms and the ability to improve on the way our products are designed for manufacturing efficiency, even increasing manufacturing efficiency going forward. And of course, with that comes a better cost structure.

Alright. Thank you very much.

Thanks, Shannon. Appreciate it.

Our next question comes from Krish Sankar from TD Cowen. Please go ahead.

Hi, thanks for talking my question. David, first question is on your NAND ASP decline in March quarter, seems to be better than what your competitors had. I'm just kind of curious, any puts and takes if you talk about your specific pricing versus competition in March, how to think about it in June? And along the same path, you mentioned the supply-demand balance later this year and bit shipment for flash growing. Are you baking in some, kind of a mobile recovery that's going to help you drive that? And then I have a follow-up.

Yes. I think on pricing, it's kind of the same story all the time, right? Whether it's a down market, upmarket, mid-cycle market, which is really have a diverse portfolio. We've talked about this a lot from retail to the channel business, PC OEMs, enterprise SSD gaming has become a very nice part of the portfolio and growing part of the portfolio. And it's just that – mobile, obviously, is a big part of our portfolio. And it's just been mixing across that where we get the best return, right, putting our supply and our bits in the places where we can get the best return. I do think that, that is a – that go to – that breadth of go-to-market is in markets that we can reach literally from every single consumer to the largest technology companies in the world and kind of everything in between. And just the ability to mix across that with a strong portfolio and a strong set of brands as well, SanDisk, SanDisk Professional, WD_BLACK, puts us in a good position to get the best return on our supply. Next quarter, we don't really want to comment on future pricing. It's all into the guide. We've talked about the individual markets. What I would say is, we're pricing in or we're putting in what we think is going to do on an individual market-by-market basis and then how we'll mix that next quarter.

Got it. Got it. Thanks for the dividend. And then as a follow-up on the HDD side, it's kind of nice to see the 22 terabyte CMR is now bigger than 20 terabytes in terms of volume. How should we expect that to grow? And what is its impact on gross margin?

I think that's our focus – on a CMR drive, that's our focused capacity point and it's significantly ahead of other CMR drives above 20. So – or above the 20 terabyte drive. We expect that to be our premier drive for the next – until we have a different CMR product in that part of the business. So, we expect that to be a very good growth engine, and we've talked a lot about that drive of – it provides a lot of value. It provides a lot of TCO value for our customers. And we – it contributes an appropriate amount of margin from that perspective as well.

Got it. Thanks David.

Thank you.

Our next question comes from Wamsi Mohan from Bank of America. Please go ahead.

Hi, thanks for taking my questions. It's [indiscernible] filling in for Wamsi today. David, I think maybe another pricing question for you. I think you talked about price elasticity. Could you just elaborate a little bit on what exactly you're seeing either in Flash or in HDD? And a related question to that is, there's some worry that maybe a lot of memory inventory might be built again this quarter from the likes of some OEMs like Apple because they want to maximize their favorable component pricing? So, do you think this could lead to a further elongation in the recovery of the market, even though in the near-term it might get a little bit tighter? So, just your thoughts on that? And what exactly are you seeing in price elasticity?

I think the elasticity in NAND is mainly what I was talking about. I mean, we're seeing PC OEM up mid-20s year-over-year on capacity. I think a really interesting number to me is the elasticity across our consumer franchise, which is tens – hundreds of millions of devices we sell a year in that channel up a third year-over-year on capacity per unit. Gaming up more than that, and mobile up even more than that. So, I think we're seeing the market work. Even in the midst of a great downturn, you expect – well, especially in the midst of a great downturn, you expect to see elasticity start to kick in, and we are starting to see that across the portfolio. What was the second part of the question, again?

It was about a customer [indiscernible].

Prebuying. Yes. I think you do see – I think we are seeing instances of that. I wouldn't say it's pervasive, but we see instances of it. And I think it – I think maybe it's a sign of where the customers think we are in the cycle as well.

Got it. So, for my follow-up, if I can ask a quick one to Wissam, how are you thinking about free cash flow going forward? I mean is it – what needs to happen to get to positive free cash flow? And is that possible in this calendar year? So, just your thoughts on that? I mean, how are you looking at working capital and thinking about free cash flow? Thank you.

Yes, [real close] [ph]. So, we are totally focused on free cash flow. As you've seen us since the beginning of the year, we've been very proactive on OpEx, reducing that quite a bit on CapEx, as well as taking underutilization to manage and preserve our cash and not build inventory. And so, this is very important to us. In fact, we continue to make improvements. I mean, if you look at our CapEx trend, it's gone down quite a bit. This year, we'll probably be spending approximately if not even more than 35% below last year. With respect to the next few quarters, we typically do not guide for free cash flow. But what I could say is that this is, as I said, a top priority for us and is a big focus, as you would imagine, as we navigate the dynamic environment.

Thank you for all the detail. Appreciate.

Thank you.

Thank you.

The next question comes from Tom O'Malley from Barclays. Please go ahead.

Hi, good afternoon guys and thanks for taking my question. My first one is related to the HDD side of the business. Your competitor recently talked about a recovery that initially was expected to be in June and is now pushed out to the December quarter. Could you just frame the way that you're thinking about the recovery? Is it kind of in-line with that? You're obviously guiding the HDD business down, but any color you could give on the back half of the calendar year about when you expect that business to recover?

Yes. I think, Tom, it's – I would say as we go through the second half of the year, it will get better. The issue is that these revenue levels and these unit levels, it's just very lumpy. You have very large customers that if they buy or not buy, it can impact the TAM and the available market in a very significant way. So – and that's what we're experiencing next quarter. I mean, this quarter, we saw things were a little better than we thought on capacity enterprise shipments. We'll see a sequential decline in that, and then we're expecting to go back up as we go in the second half of the year. But I expect it to be lumpy as we go through this inventory digestion because a lot like we saw in the PC OEM space, a lot of customers are just completely focused on inventory digestion, which is basically new purchases just go to zero. And customers at this scale with this, kind of business that has an impact. So, I expect to see a lumpiness over the next several quarters. I do have a level of optimism about China in the second half of the year. We're seeing better activity there. And so, we expect to see that improve in the second half of the year as well, which should also help the business.

Helpful. And then just a follow-up is on the Flash side. You guys talked about a mix of customer behavior, right, where some are still consuming inventory and then others are more aggressively purchasing to various degrees. I don't want you to speak on specific customers, but we've heard this across the ecosystem, particularly through this earnings period here where there is a discrepancy in terms of spend. Could you help maybe just frame where you're seeing that spend? Is there a certain type of customer that's spending more than others or is it really just random where guys came in with certain inventory levels and are working through that? Just any color there would be really helpful as we've heard that data point from multiple companies here?

I guess I would say that customers that are different segments of the market that are through their inventory digestion are now more or less shipping to end demand being lean on inventory. There are instances of people doing strategic buys in that – in some of those cases where they've got their inventory to where they want it, but now they're making their own – they have their own view of the cycle. That's a very small number, I would say. And then the other one is just – where they're at in their – the data center customers especially are just in – there's a variability of the level of inventory at each customer, and they're so big that it can impact the entire market. So – and like I said, ones that have heavy inventory are basically working that down in an aggressive way. And so, I think it's going to – like I said, I think it will be lumpy for a couple of quarters until we get through that.

Thank you.

Thanks, Tom.

Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you so much for taking the question. David, three months ago, you mentioned that you were cutting production in your NAND business by 30%. I'm curious if the magnitude of the cuts today are, kind of in that ZIP code, if anything has changed materially? And going forward, what would you need to see to start taking up your utilization rates in the Flash business?

Yes. We're kind of at the point where we're – I think it's – I think probably the same ZIP Code is probably a fair way to say depending on where you live, ZIP codes can be pretty big if you're in the country, I guess. But it's really about managing to where we see the demand and keeping our inventory relatively in check. We know it's going up somewhat, but we want to make sure it doesn't get away from us. So, we'll use the fab in that. I mean, we're just – we're going to have to see demand signals for our customers is just as simple as that. We have a very close relationship with a lot of them. We're in the – obviously, in the market every single day. A lot of these consumer and channel markets are more transactional, where we can see the business across a wide swath. And then, of course, we're talking to the biggest customers biggest technology companies in the world. So, we'll get a – we have a pretty good idea of where their demand is, and we'll set the fab appropriately to make sure that we keep the right inventory position and we have the product when they're ready.

Got it. That's helpful. Thank you. And then one follow-up for Wissam on the balance sheet side of things. I know you don't guide free cash flow on a quarterly basis or annual basis, but just curious how we should be thinking about inventory, whether it be dollars or days, going into the June quarter and working capital overall. Is that going to be a consumer of cash in the June quarter or do you think you can generate some cash from working capital? Thank you.

Sure, Toshiya. With respect to inventory, the current projection is, I would say, flattish in terms of dollar, but in terms of days, I anticipate we should see a downtick from here. Well, we continue to, as David said, manage it on a very, very regular basis very closely. And so, that's probably the biggest in terms of the working capital. That's the number that would be moving the most. Again, we don't guide the free cash flow, so I wouldn't want to make any more comments around working capital. But I think the answer on the inventory would be a good indicator to what working capital will look.

Our next question comes from Harlan Sur from JPMorgan. Please go ahead.

Hi, good afternoon. Thanks for taking my question. The market share numbers are out for last year, you guys drove a strong number 2 position in client SSD, strong double-digit sort of percentage share position, right? But in enterprise, you guys drove, sort of low single-digit enterprise SSD market share last year, and it’s sort of hovered in this 4% to 7% range for a while now, like what is the team doing to try and drive its share in this fast-growing market to more of what I would call appropriate, sort of double-digit percentage share profile?

Yes. Thanks for the question, Harlan. Always good to hear from you. We've talked about this quite a bit over the last year. It's about qualifying the products at the big players, qualified in the channel. We just qualified this last quarter on BiCS5 enterprise SSD with some of the biggest customers. So, the road map is moving forward as we expected. It's just a very dynamic market right now. So, it's difficult to judge share. Obviously, our goal is what we've put out there is to drive that higher. And I have every confidence we'll do that as the market stabilizes and some of these big customers get back to their normal rates of purchasing.

Our next question comes from Srini Pajjuri from Raymond James. Please go ahead.

Yes, thank you. I have a question on the cost side, Wissam. So, it's a little tricky to figure out given all the, I guess, one-time charges. I'm just wondering, you previously talked about NAND cost declines in the mid-teens, I believe, just wondering if you're tracking to that. And then as we go to BiCS8, how should we think about the cost declines, especially – I guess, historically, we've had 30% to 40% bit demand growth. And going forward, if that dynamic changes, if it's lower than 30%, do you think we can still, kind of get to that mid-teens cost declines or do you need the 30% to get to that level?

Sure. So, thanks for the question. In terms of Q3, we have to think of it basically with and without underutilization. When you factor in the entry underutilization charges, we wouldn't be – we wouldn't have reduced cost or cost income down by mid-teens. However, if we exclude that, then we're close to mid-teens in Q3. Now, to your question on BiCS8. I mean this is – with the way our road map works and the timing of when BiCS8 starts ramping, it is pretty much designed in a way to allow us to continue that mid-teens reduction – cost reduction over time. I wouldn't want to comment about the exact sort of percentage and so on in terms of the crossover because I think it's a little bit premature to talk about this. But conceptually, that's what we're aiming with ramping BiCS8 slightly earlier than previously anticipated.

Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead.

Yes. Thank you. I was hoping you could discuss the trajectory of exabyte demand of your cloud customers in the next couple of quarters? And whether there's a divergence and a recovery across on-prem and public cloud? And I guess as you address that question, how do you assess whether you might be shipping below normalized replacement demand? Thanks.

I think we see the enterprise and the cloud market. They're both soft right now. So, we don't see a huge difference between the two. Again, the difference is, Karl, that you got this idiosyncratic behavior at really big customers. So, a customer that usually buys a significant amount of hard drives in a quarter, hundreds of millions of dollars goes to zero. You can pretty much assume they're buying under replacement demand. So, that's kind of where we're at. We just – again, other customers are going along more according to plan. So, the inventory level is a bit distributed across big customers. So, we look at this quite a bit to understand like where do we think the exabyte growth is and where are we setting the – our long-term production capabilities and all of that. But right now, it's just a little difficult to draw long-term conclusions and some of – a little bit behind some of your question, given just the way the market is – the lumpiness of the market.

The next question comes from Vijay Rakesh from Mizuho. Please go ahead.

Hi. Just a quick question. I don't know if you talked about Elliott strategies, and I think they had filed some – they had some filings, but just wondering how that process is progressing? I don't know if you can talk to it.

It's progressing. Very active. Everybody in it is under NDA, so I can't say anything about it, and we look forward to talking about it when we reach a conclusion.

Our last question comes from Ananda Baruah from Loop Capital. Please go ahead.

Hey, thanks guys. Appreciate it. Maybe for Wissam. I might have missed it, but just wondering if there's any context you can provide about how you're thinking about the debt due in February of 2024? How you're going to handle that, go back handling that? Thanks.

Yes, Ananda. With respect to the 1.1 billion of convert due in February 2024, the plan is to address it over the next couple of quarters.

Okay. Jason, is that the last one?

Yes, that was the last question.

All right, everyone. Thanks for joining us today. We look forward to seeing you through the quarter. Take care.

Thank you.

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