Western Digital Corp. (WDC) Presents at BofA Securities 2022 Global Technology Conference (Transcript)

Western Digital Corp. (NASDAQ:WDC) BofA Securities 2022 Global Technology Conference June 8, 2022 1:15 PM ET

Company Participants

David Goeckeler – CEO

Wissam Jabre – EVP and CFO

Conference Call Participants

Ruplu Bhattacharya – BofA Global Research

Ruplu Bhattacharya

All right. Thanks, everyone, for attending the second day of our in-person Global Technology Conference. It’s actually great to see you guys in person. I’ve been getting used to seeing everybody on Zoom. So, to actually being able to touch people is great.

I’d like to give a warm welcome to David Goeckeler, who you know is the CEO of Western Digital. He’s been with the Company since 2020, but I’m sure you know him a lot from his days at Cisco. He was General Manager and EVP of the networking and security practice there. So, he’s had a very illustrious career. So, we’re hoping to have a great discussion with David. And then, I’d also like to say a warm welcome to Wissam Jabre. He’s been with the Company since February. But really, if you look at his career, he’s had 20 years of experience in finance and accounting, and he’s been at multiple semiconductor companies, I mean, at Dialog Semi, Freescale, AMD. So, a lot of experience on the stage today, and we’re hoping to have a great discussion.

So, with that, I’m going to transfer it to — I’m going to give it to Wissam to give the safe harbor statement.

Wissam Jabre

Thank you, Ruplu. Great to be here. We’ll be making forward-looking statements, and I ask you to refer to our SEC filings for the risks associated with these statements. We will also be making references to non-GAAP financials and a reconciliation of our GAAP and non-GAAP results can be found on our website.

Question-and-Answer Session

Q – Ruplu Bhattacharya

Great. So, David, I think the topic of the hour is the press release and the filing — 8-K filing that you had last night. So, I think I’m going to lead with that. I’m going to ask you to talk about some of the main points from that press release. From what I understand, I mean, you’re going to oversee a review of strategic alternatives. And what that tells me is that you’re going to look at all options, could be separation of the businesses, could be generating value in other ways. But just talk to us about what this press release is about and why now, why the timing now for it is?

David Goeckeler

Sure. So, thank you for hosting us, and thank you for the warm introduction.

It’s been a great process over the last 2, 3 weeks that Elliott has been engaged with the Company. We quickly engaged in conversations. And I’ve said in the past, those were very constructive conversations. I think their letter was constructive to the Company. They have a lot of good ideas. I think we rapidly converge that we both have the same goal, which is creating value at Western Digital. That’s what I came here to do. I think that’s why we were able to attract someone of Wissam’s caliber. We all see the opportunity. I’m sure we’ll talk about all the different ways we’re doing that through the way we manage the business, the way we drive the portfolio and the way we interact with our customers.

But Elliot had some ideas about structural alternatives. I think they suggested we have a more formal process to look at those. We agree with that, and we’re going to go do that. And we rapidly converged on a way to work together in a spirit of partnership as we go do that. And I think as you said, I think, and I think we all think there’s a range of potential outcomes here we’re going to go look at. They have been very constructive in offer to additional investment in some of those or all of those. We’ll see as we go through the process. But I think we are able to very rapidly converge on a way to put a partnership together that we both can go look at this with, as I said, very aligned goals. I think, we both think — I certainly think that there’s a range of outcomes that go from good to great to spectacular, and we’ll look at those. There’s risk adjustments on all of those, and there’s different opportunities, constraints of all those, but it’s something that we’re very committed to, and we look forward to the partnership with Elliott. It’s been a very constructive conversation, and I expect it to continue.

So, as I said, the core of it is, we’re very aligned on value creation.

Ruplu Bhattacharya

Right. And then, when I think about the process that you’re going to follow, as you do your review, what are some of the guidelines or guideposts that you’re going to keep in mind? Is there anything about the JV structure that you have to keep in mind. And from a time line standpoint from what I read, is it from now till when you file your proxy for the 2023 shareholder meeting? Is that the time frame that is allowed for this review?

David Goeckeler

Yes. So first of all, on your first question, there’s obviously a lot of things we’re going to consider in that. I mean, our goal is to create value across all time horizons in the near term, the midterm and the long term. I think, again, we both agree that we’re in great markets and we have a good opportunity. We’re a fundamental part of the digital economy. I think that’s a good place to be.

As we said in our Investor Day, the business is going more towards a cloud business, which is, I think, again, another good place to be, given our product portfolio and what we do. But clearly, I mean, we’re a substantial company. We have a lot of responsibilities to our customers. We have a very large JV partnership, which is extraordinarily strategically important to us as a company. I’ve been very transparent about that since I took the job. It doesn’t take long from the insight to understand how important it is. It doesn’t take long from anywhere to understand how important it is. It gives us scale in a market where scale is very, very important. We jointly invest on R&D, and we think that gives us the best technology in the world and a very important technology space for the world.

So, we’re going to consider all of that, and we’ll go through a process to do that. You’re right. We have an agreement of how that’s going to work over the next several months. And we’ll evaluate where we’re at when we get to our shareholder meeting and decide on what’s the way forward. If we’re not engaged in a transaction, then Elliot will join us as part of the Company. And I think that, that’s a — I think it’s a great way to structure the partnership and give us the time to go do what we need to do, again, with a very, very aligned set of goals around creating value and looking at optionality for — are there structural changes we can make that we would drive additional valuation. And that’s something from the Company’s perspective, we’ve been open to for quite some time, and we appreciate their constructive engagement in the process.

Ruplu Bhattacharya

Yes. No, it’s great to see you guys working together. And right now, they’re outside the Company. And if things go one way, then they could be some directors on the Board and part be part of the company. But either way, I mean, I guess what I would like to say is that if I look at what you’ve done over the last two years since you’ve become CEO, you’ve actually created a lot of value. I mean, you’ve made a lot of changes. So, can you talk about some of these changes that you’ve done to drive already value for shareholders?

David Goeckeler

Yes. I think you — so it’s an important point. So, first of all, thank you for saying that. We have been very busy. But it’s important to continue to do both. Like we’re — we have a business today. We’re very proud of that business. A lot of people put a lot of work into it. We have a very strong position with our customers. We’re going to continue to drive that forward while we look at structural, if there are structural changes we can make that would put us in a more advantageous position. But yes, we’ve been very busy over the last several years about how do we organize the Company. We’ve turned up the innovation road map in a major way. I think you saw two, three — I guess, been three weeks ago now, we did a product launch the day before our Investor Day. I think most people believe it’s the most amount of innovation the Company has launched in a single day in a very, very long time. And we reasserted leadership in the HDD business with not just a 22-terabyte drive, but a 26-terabyte drive at the same time when the whole industry was focused on 20, appropriately so. In the flash business, our BiCS5 enterprise SSD, again, additional innovation in WD Black in the gaming market. So, just a lot of progress on driving the business forward.

We’re a product company. We’re a technology company. You got to have the best technology in the world when you’re a technology company. And I think that we’ve — I feel very good about where we’re at. And I think the changes we made in the Company going to a BU structure, bringing in that leadership 18 months ago, that led to what you saw in the products we launched.

Now, we’ve also been doing other things that make us a much stronger company. We’ve been very focused on our balance sheet. We’ve paid down a lot of debt. Our debt ratios are in just a much better position than they were when I came into the Company. And that puts a stronger foundation under us. I’ve invested a lot in our JV partnership with my friends in Japan, and Hayasaka san and I have a very close relationship and a high trust relationship, and it’s extremely important to both of us that we continue to drive this incredibly productive partnership forward, something that’s gone on for 23 years and has led to some of the most fundamental innovations in the NAND industry, so. And then we’re continuing on. Wissam [Technical Difficulty] and we also just brought in a new Head of Operations in Singapore [Technical Difficulty]. So, we continue to do the things to execute the business we have to the best [Technical Difficulty]

Ruplu Bhattacharya

Great.

David Goeckeler

That’s a great point that we’re going to — we’re very focused on driving value across all [Technical Difficulty]

Ruplu Bhattacharya

No, I think that’s a great summary. And we’re going to talk about a lot of the things you talked about, especially the new products that you introduced at the Analyst Day. But one thing I just remembered, I forgot — in my excitement, I forgot to introduce myself. I’m part of the equity research team and I’m filling in today for Wamsi Mohan, who couldn’t be here. So, can I ask now that we talk about demand. So, can you talk about what your — what you’ve seen in the cloud space as well as in the client space and consumer? So just give us an overall view of demand as you see it today.

David Goeckeler

Yes. I would say it’s, I think, a kind of obvious statement that we’re in a very dynamic environment. And we do have a lot of visibility across the business. This is one of the things that really impressed me when I came to Western Digital that we have this $3 billion to $4 billion consumer business where we sell in every country where it’s legal to do so in the world, 300 million devices a year sold through those channels. And then on the other side of the business, we have almost everybody that’s building a cloud in the world is going to be using HDDs. So, we have tremendous visibility there and obviously, OEMs and a big channel business.

So, as we look across that landscape across the businesses we have, so on the cloud enterprise side, I guess the word I would say is consistent. We’ve seen consistent demand. We haven’t seen a change in tone from our customers. In that business, there continues to be a fair amount of supply chain congestion and everybody being able to get all the parts they need to build to true demand. So, there’s that on the market — there’s that kind of skew on the market, but demand has been consistent, and we expect in the second half for that to be — for data center cloud demand to continue to be strong.

There’s no doubt on the consumer side of the business, we talked about this earlier that we were seeing headwinds. We saw headwinds in the consumer business in Europe right when the war broke out in Ukraine. We saw that spread to China with the lockdowns, and now we’re seeing it across all consumer business. We’re seeing headwinds and growing headwinds. And I think the business has more headwinds than we even anticipated a couple of quarters ago. So, the consumer market and then the things that the consumer is going to influence consumer PCs, smartphones, we see that flowing through the business.

Ruplu Bhattacharya

So, the weakness in consumer, is that incrementally more weak than what you had expected? And does that influence where you expect to fall in the quarter, or is that too early to…

David Goeckeler

I think it’s too early, and we’re not here to talk about guidance. I think we’re just talking about just what we’re seeing in the market. And the consumer headwinds are incrementally stronger than we expected at the beginning of the quarter.

Ruplu Bhattacharya

Got it. And then, the cloud demand has been strong for many — several years now. Do you think that we’re due for a period of digestion, or do you think that that demand continues? I mean, in the past, you’ve seen some of your clients push out demand a quarter or so. So, I mean, just your thoughts on the sustainability of this going into the second half of the year and…

David Goeckeler

Well, I mean, I guess, I’ll start by saying I’m a big cloud advocate. That’s why I came to Western Digital again. I had a pretty good perch in the technology landscape in previous stages of my career. And one of the things I got a tremendous amount of conviction on is the cloud is a just fundamental change in all kinds of things. I know that’s kind of a well-worn point of view now. But the cloud has got a long way to go to kind of be adopted across all segments of business and society. It’s always going to be somewhat of a cyclical business. But as I said, we’ve seen very consistent demand. I think that there are some structural issues, especially on the HDD side, where you’re seeing less talk about digestion, ingestion. It’s been probably 2 or 3 quarters since I’ve gotten that question. One, we’ve got long-term — longer term agreements coming into play, where we’re now talking to our customers, our big customers about 2, 3, 4 quarters worth of demand at a time as opposed to 1 quarter at a time. So that kind of dampens the variability a little bit. There is — the customers are bigger and they’re all at different stages of data center build-out. So, you have some kind of mix where when you bring them all together, it smooths it out a little bit.

So, we — again, the word I chose was consistent on demand. We’ve seen consistent demand signals for the last several months, and they’ve stayed that way as we start to go into the second half. I suppose at some point, we could go into that kind of cycle, but we don’t see that right now.

Ruplu Bhattacharya

Okay. I think last quarter, you had seen some weakness in enterprise SSDs and in the smart video segment. Any improvement there? And I think your target is to grow the enterprise SSD business, the share of that from 8% to 16%. Can you talk about some of the levers that you have to do there?

David Goeckeler

Yes. So, very different markets. So, the smart video market, again, that’s been going on for a couple of quarters now where a lot of budget is going to COVID in China and lessen to that market. We haven’t seen a major change in that. It will come back at some point. I guess, you could be somewhat optimistic around lockdowns are ending, but we’ll stay very close to that, but there’s no doubt there’s been some pressures on that business.

Our enterprise SSD business is a little different story. I mean, we are qualified at — we’ve talked a lot about this because it’s very hard to accomplish to get qualified at the big cloud titans, big OEM suppliers. We’ve done that. And we got to the point last year where those were BiCS4 qualifications. So, at some point, the fab is moving on to BiCS5 and you only have so much BiCS4 supply. So, it’s not necessarily a demand problem there. It’s a supply issue. And we talked about this in our product launch in our Investor Day. We need to get to the BiCS5 enterprise SSD, and that’s now shipping and customers are qualifying that. And customers are actually pulling us into that because they want the supply of bits on BiCS5, but we’ve got to get through that qualification cycle, which we expect to be much, much smoother than it was the first time through.

Ruplu Bhattacharya

Right. So, maybe this is a good point to transition into the new product announcements that you had at the Analyst Day. I think you’re setting the pace for the industry now. You announced 22 terabytes CMR, you announced the 26 terabytes with OptiNAND. And like you said, the enterprise SSDs have now been qualified with BiCS5 at I think 3 hyperscalers. So, so far, how has the reception been? And are you seeing better reception for the HDDs or the SSDs?

David Goeckeler

So, let’s start with the HDD market. I mean, I feel very good about where the portfolio is. So, first of all, it starts with demand. Like I said, there’s been very consistent demand. We see this 30%, maybe high-20s, 30% exabyte growth in the cloud continuing year after year. So, the big lever there is innovation. We have to continue to drive innovation to bring our customers a better TCO proposition to store all of that data. So basically, not a demand-side problem. There’s plenty of data to the store. The question is, what’s the economics of doing it? And so, our ability to continue to innovate and continue to drive 22, 26-terabyte drives. I think the team has been thinking about this phase of the HDD market of 20 to 30 for quite some time, how are we going to fill that gap from 20 to 30? Because when you get to 20 and given the aerial density per platter, you know from a form factor point of view, you’re not just going to be able to put another disk in and just get continued growth in CMR. So, you have to start doing other things. You have to innovate across all the other vectors of the drive. And that’s where you’ve seen us over the last couple of generations make a number of step-wise deployments that they all start adding up now and there’s a cumulative effect. So, we — energy assist comes in, in the 16, 18 time frame. That helps us with aerial density. In 20, we bring in OptiNAND that helps us with a number of different things, but one of them is it makes SMR more efficient. And then SMR becomes a big part of the industry where — and that tells you that the customers are going to have to adopt SMR to get through that 20 to 30-terabyte range, and they’re doing that all now. All the big customers, almost all the big customers are now starting to adopt SMR because with OptiNAND, you get 20% additional capacity out of the drive. And the drives have gotten big enough where that’s a lot. So an extra 20% is very worthwhile.

So, that’s why we were able to launch a 22 and 26 at the same time. And really, I think, lead the industry to — in that 20 to 30 range. So, feel very good about where that’s at. Customers have known about that road map for a very long time. The drives have been in their hands, and they’re going through the qualification process with them. And they’re all working on how do they get their host side, how do they get their work done so that they can leverage SMR as they deploy those drives.

Now on the enterprise SSD, the reception has been very strong. I mean the — you saw that — again, I’ll go back to our Investor Day. I put — actually put the numbers up for one customer that when you get qualified, all of a sudden we double our business in data center storage with that customer. And at some point, you become limited by the amount of bits you have because it’s BiCS4. So, it puts the imperative on getting the BiCS5 control out. So, product has been very well received. The fact that we got through the qualification is basically a very strong endorsement at the controller we built is world-class controller. The largest data center operators in the world are going to bet their data center on that technology and the qualification, the process worked extremely well because once they turned on starting to deploy, they just started — you don’t just deploy a little bit like the first week or big orders start showing up because the customer has — they have confidence in the product, and that has been borne out throughout the year that we’ve been deploying.

Ruplu Bhattacharya

Got it. So David, when should we think about volume shipments of the 22 and the 26? And conceptually, you are seeing strong demand with the 18 and you were ramping the 20. So now that you have the 22 and the 26-terabyte drives, is it possible that a customer who has an 18-terabyte would not go for the 20-terabyte would just wait and leapfrog into the 22 and 26?

David Goeckeler

Sure. It’s possible. I mean, every customer is at a different point in the evolution of their data center. You tend to see customers adopt the highest capacity point if they can because it’s the best TCO equation for them. That’s — I mean, again, this whole thing gets back to innovation. If we can continue to innovate, drive a better TCO equation, we’ll be able to do all kinds of good things, including fuel the growth of the cloud for our customers. So, yes, I think you’ll see customers adopting a range of capacity points just like we do today. There’s still some customers deploying 16. So — but I think as a general rule, you’ll see customers go to the most efficient capacity point as quickly as they can. And so, we expect to see the ramp of those two products in the second half of the year.

Ruplu Bhattacharya

Okay. And with respect to the crossover of the 18 and the 20, does that change the crossover point, or do you think that’s still on track for where you had thought?

David Goeckeler

Yes. It’s — well, now you have three drives in the mix. So you’ve got some customers going to 20, you got some going to 22. I mean, the reality is there won’t be enough 22 for everybody to go to. So, everybody can’t go to it because there’s not that much supply. So, the industry will sort out on who’s going to use what drive as we ramp those.

Ruplu Bhattacharya

So maybe I want to shift the discussion here to pricing trends. And like you just said, with the new drivers, you’re providing a lot more value to customers, right? And they can get better TCO. So, do you have an opportunity do you think to raise prices because commensurate to the value that you’re providing on the hard drive side?

David Goeckeler

So yes, I’ll make some comments on this. I’ll let Wissam make some comments. So, I would reframe it a little bit. There’s an issue of raising prices is mainly around like, can we pass along cost or increased logistics costs and those kinds of things. And there is — that is happening in the industry. It’s not universal, but there are places where we’re able to pass along those costs. The pricing is more an element of supply and demand balance. And I think what you’re seeing is the industry coming into a much more supply and demand balance for high-capacity drives. Now pricing, I think the — what we need to do is we need to continue to drive innovation. And I keep coming back to the same thing. If you drive innovation, then you’re giving your customer a better value proposition and you can share in that value proposition.

I think if you look over the last several generations of drives, the reality is, is almost all of that innovation value into the customer, right? And a lot of that was, I think, because you had all of this capacity that you had to fill up with volume. So, you’re kind of this — because the client market is continuing to drop. So, you have all these fixed costs out there, and you’re driving innovation that the cloud is building and it’s kind of absorbing this client falloff. We’re kind of at the end of that era, right? It’s taken nearly 15 years, by the way. If I look at our infrastructure and I say, when did the first near-line capacity enterprise drives our media start to show up in the factory, was FY07. And here we are — I mean, we’re at the end of our FY22 and now those factories are 100% on capacity enterprise media. It’s been a 14 or 15-year transition.

If you look at the growth of capacity enterprise media in those factories over that 15 years, it’s 44% CAGR growth. I think most people would like to be in a market where there’s 44% CAGR growth for 14 or 15 years. But there’s also the other side of that is you had a — you had capacity you had built that was dropping at that same rate. So, we’re just doing this constant trade-off of what I’m using my infrastructure for. Well, now we’re at the point in the industry that Wissam and I spend time figuring out, well, should we build a new media facility, how much more are we going to invest in a head fab for growth to fuel the growth of the cloud? So, this kind of trade-off conversation is very different. And now if we continue to drive innovation, we can — as we go to our customers, we can talk about, hey, we’re all getting a better deal, like the customer is getting a better deal because they are getting storage at a more economical price point, and we’re getting more value out of that innovation because we can share in that value as opposed to transferring it to get the volume back.

Ruplu Bhattacharya

Got it. How about on the NAND side? How should we think about the pricing trends in NAND over the next couple of quarters?

David Goeckeler

Well, as we talked about, NAND, I talked about this on our call. We expected NAND to be in an undersupplied position in the back half of the year. But given the weakness in consumer and consumer PCs, we see that as more of a balanced market. So, that’s what I would expect in the back half of the year.

Ruplu Bhattacharya

Got it. And if we’re talking about NAND because of the fab contamination that happened this year, so how should investors think about bit growth in fiscal ’22? And is it reasonable to assume that if this year’s bit growth is lower, next year should be higher?

David Goeckeler

Yes. And by the way, I said I was going to let Wissam answer that. But let me talk about bit growth. The next question, I’ll go to Wissam. But look, we invest to maintain share. And that — but there’s an arc of that over years, right? So, you see this all across the industry. There are some years you’re down. There’s other years, you’re up. You don’t just — the change doesn’t happen in one or two quarters. So, we’re going to continue to invest to maintain our share. Rob talked about that at the — Rob Soderbery, who’s the General Manager of that business, talked about staying in that 14% to 16% window. That’s what we invest for, and we expect to continue to do that. And so we definitely lost a fair amount — we lost 7 exabytes of supply this year. So, that’s a fair number of bits that aren’t going to get hit the market. And we’ll — now the fab is fully back up and running, and we have plans for our Y7 fab in Yokkaichi and then more fabs in Kitakami. So, we’re going to continue to invest to get back to that share position.

Ruplu Bhattacharya

Got it. Maybe I’ll ask the next one to Wissam. So, on margins, so I think you’ve guided gross margins this fiscal 4Q to 31% to 33%. And your long-term range is 33% to 36%. So, maybe talk to us about the drivers for margin improvement and what needs to happen for you to get to the long-term range.

Wissam Jabre

Sure. So on margins, yes, I mean what we’re — our target model is to be at 30% to 33% — 33% to 36%. And there’s different levers by different business. So, when you look at it, for instance, on the hard drive side, we’re targeting 31% to 34%. There’s definitely an element of a portfolio mix, moving more and more to the cloud and so on, but there’s also some element as well with our innovation to be able to do a better job at value price — value-based pricing. And there is also the — on the cost side, a lot of actions that — and initiatives that we have in the Company to drive cost down. So for instance, with respect to hard drive, we’re looking at harmonizing all the platforms. So reducing the number of platforms, which allows us to reduce the different variations that we use in our BOMs that allows us to sort of reuse across platforms. In addition to focusing on the supply chain side, with respect to the manufacturing process, increasing automation, increasing the utilization of AI, as well as when you look at where we are today with the cost headwinds that we’ve seen from COVID, which is around for hard drive 200 to 250 basis points. We anticipate some of those to be rolled back during that time horizon.

So, there’s a clear line of sight on that 31% to 34%. On the NAND side, what we’re targeting is 35% to 37% through cycle, gross margin. And there, there’s really a couple of main levers. One is we continue to focus on the capital efficiency of our NAND technology as well as cost leadership. And so, there’s that 15% or so cost downs on an annual basis. In addition, there’s a portfolio mix that basically takes our portfolio to — our bids and places them in higher-value products, so as we mix more, for example, to the enterprise SSDs, that should help margin also improve over the cycle.

Ruplu Bhattacharya

Thanks for all the details there. Maybe I’m going to stay on you, Wissam. You’ve talked about CapEx for this year being — the cash CapEx is about $1.3 billion and gross is $2.9 billion. So, that’s about, I think, 7% of revenues. Long term, I think you’ve said 8% to 10% of revenues is the target CapEx. So, as we think about looking out into the next couple of years, how much is maintenance CapEx, how much is new build? And where is that — where do you think CapEx is more on the HDD side or on the flash side, where do you expect to invest more?

Wissam Jabre

So look, the way we look at CapEx is, we are very focused on being able to obviously invest for the long term and grow capacity. But also we don’t want to be in a situation where we get ahead of ourselves and overbuild. And so, we’re using a very disciplined approach for CapEx. On the hard drive side, for instance, we’re targeting 4% to 6% of revenue in the long — as our target model. Now, we may deviate a little bit from that sort of over the next couple of years. But in the long term, that’s our target. And on the NAND side, obviously, we have to continue to invest in our technology, maintain that capital efficiency, nodal transitions that allow us to maintain the sort of the 14% to 16% market share that Rob Soderbery mentioned at the Investor Day in terms of being able to deliver that.

Ruplu Bhattacharya

Okay. I’m going to make it three in a row. I’m going to ask you one more. Capital allocation. So, how do you think about debt reduction, buybacks? And from an investor standpoint, people are obviously thinking about the dividend. So, when do you think — what is the right time to reinstitute that and any thoughts on M&A.? So just your capital allocation priorities?

Wissam Jabre

Sure. So, our top priority obviously is to continue to invest in the business, to continue to drive growth and drive basically improved profitability and cash flow. Our second priority is to continue to delever, get ourselves into a stronger financial position, reduce the debt on the balance sheet. And there, we’re targeting a gross — we’re targeting a leverage ratio of around 1 to 3.25. I understand it’s a wide range. Obviously, we have an element of cyclicality in our business. And what that translates to approximately in terms of gross debt, it’s $6 billion to $6.5 billion, which would allow us to maintain, one, our investment grade rating and also maintain a certain buffer capacity, if we need to. And then, we are committed to returning capital to our shareholders. And as we get closer to the time when we sort of get to the $6 billion to $6 billion to $6.5 billion, we’ll be much more descriptive, I would say, or provide much more details on how we think about returning that capital.

Ruplu Bhattacharya

Okay. And on M&A, I mean, do you see opportunities? Are you constantly looking for opportunities, or do you think that where we are in the cycle right now, it’s more internal investment?

Wissam Jabre

Well, for now, we’re focused on delevering our balance sheet and getting ourselves into a much stronger position.

Ruplu Bhattacharya

Got it. David, maybe I’m going to come back to you. One question that we get from — or one concern that we get from investors is the possibility of a recession in the U.S. or a slowdown in Europe. So, as you think about your business today as it stands, I mean, do you think that the business is better positioned to weather a downturn? And how would your playbook change if we went into a recession? And compare the business now to like what it was in 2008 to 2009, the last big downturn.

David Goeckeler

So, I think we’re much better positioned on a couple of dimensions. One is, we’ve got the portfolio more built out, especially in NAND. The idea that — we have major pillars of our portfolio, and I talked about this for a couple of years. The idea is to get and stay qualified in all the important markets and then be able to mix across those depending on what the situation is, get the best outcome. So, it’s very clear, we have a I think an enviable consumer franchise, quite frankly. I mean it’s a market that can consume a lot of product. It’s — we have a very good brand. We have ability to drive premium there on brand, drive share that way. Then, we have a large pillar in mobile. Obviously, we’ve always stayed qualified at the premier mobile suppliers, and that’s not easy to do. It speaks to the quality of our NAND and our ability to play in those markets. We clearly have a big client SSD position that’s been built out since the acquisition of SanDisk. And again, we played this transition from client HDD to client SSD, really understanding the requirements of those, have a great position with customers and have transitioned that over the last four, five years to a very strong market position in client SSD. And then, in the last 18 months, we’ve built out this enterprise SSD pillar of the portfolio.

So, we have really, I think, really strong optionality in the portfolio to mix to where we can get the best outcome. And then, given the scale of our business and the fact that we’ve got an HDD business as well, we have a relationship with like — first of all, anybody that’s building a cloud is going to be our customer. We have relationships with all the OEM providers. We have this consumer business with enormous presence around the world. And then, we have an at-scale channel business as well. So, we have a lot of routes to market, and we have a lot of diversity in the portfolio. And then, we have technology leadership. I mean the BiCS technology is very, very strong. And it’s also very capital efficient. We have the most capital-efficient portfolio in the industry. And this is an explicit design goal of the engineering team between Kioxia and Western Digital.

It’s not just build BiCS6, it’s not just build BiCS plus. It’s not — it’s build it in a way that it is very capital efficient and the most capital-efficient cost per bit in the industry. And we have demonstrated that for well over a decade to the point where people — I mean, I get asked these questions sometimes like, oh, you must be falling behind because you’re not spending as much capital as your peers. And it’s like, yes, we’re not spending as much capital of our peers because we don’t need to. And so, that’s a very, very strong position.

And then, on the HDD side, the cloud is a very different thing than it was 15 years ago. I mean, the scale and the fact that we’ve now spent the last couple of years getting back to, as you said, a market leadership position, I think it puts us in a very good position to get the — the way I think about it is macro is going to be what macro is. I mean, we’re all very, very concerned about that. But what we need to do is get the best out of it that we can. And that having the most diversity of customers, having the most diversity in portfolio and having very good fundamental technology and then putting an organization together where you have the agility to change rapidly. You have to be able to change faster than the environment you’re in. And that’s why there’s been structural work inside the Company to basically structure the Company that way and bring in leadership that has that point of view that we can be nimble to get the most out of what opportunities presented to us.

Ruplu Bhattacharya

Got it. I think we’re just out of time. So, thank you, David. Thank you, Wissam. We covered a lot of different topics. Company is doing really well. We really appreciate you coming here and talking to us about all of these things. So, thanks again. Thank you.

David Goeckeler

Thank you. Thanks, everyone.

Wissam Jabre

Thanks, everyone.