10.24.24
The company provides revenue trends by end markets; helpful information to understand demand. For the last five quarters, cloud revenue has climbed steadily and is up more than 150% in the last year. Client revenue is almost flat, up a paltry 5% from twelve months ago. Consumer is also about flat, having decreased 7% over the past year.
The NAND market has improved dramatically in the last five quarters, but, as the company forecasted last quarter, margins have flattened out. NAND gross margin for the company was 38.9% in the quarter. This is up 200 bps from last quarter, which is a little better than what was guided for. Gross margin for NAND over the last five quarters (oldest to most recent) were (10.3%), 7.9%, 27.4%, 36.5%, and 38.9% this quarter. Guidance for the second quarter is for GAAP gross margin to be in the range of 36.5% to 38.5%. This is for the company overall, but the HDD and NAND margins have been within 100 bps the last two quarters, so it is reasonable to assume they believe NAND gross margin in the current quarter (FQ2-25) will be around 37.5%. This means NAND margins for this period have crested and are likely heading down. This is highly unusual because there has been an historically low level of NAND investment for the last seven quarters with no sign of optimism. This means the market weakness is coming from reduced demand. Pricing for NAND across the industry has roughly doubled in the last year, so the cause of demand weakness is probably price elasticity.
As for NAND volumes and pricing in the quarter, bit shipments increased 14% sequentially in FQ1-25 with like-for-like ASPs up 4%. Blended ASPs decreased 6% quarter-over-quarter. The company was able to increase sales volume by shifting to a mix of lower-margin client and consumer products. Management had forecasted flattish pricing in NAND this quarter, so these results match that, if one takes the average of the blended and the like-for-like ASPs. For the last five quarters (oldest to most recent) pricing has been up 4%, up 7%, up 18%, up 11%, and up 4%. Note this includes the 4% rise in FQ1-25. Put this all together and WD’s NAND pricing has risen by 52% over the last fifteen months. This price increase is much less than what has been seen at Micron, Hynix, and Samsung, yet WD’s flash gross margins are better than their competitors. This is a combination of WD having a better price structure (from the scale of the Kioxia joint venture) and coming off of a higher base in the downturn because of a better product mix.
In the second fiscal quarter (October through December), they expect PC OEM demand to stabilize and for gaming demand to decline, as the surge of holiday demand has been met. The company made a non-prediction prediction by saying that end market demand in consumer and client segments will recover sometime in 2025. You might as well say you don’t have any idea rather than saying the market will recover sometime in the next fourteen months. Conversely, the company is seeing high demand for enterprise SSDs. This is because of AI demand. Even with flattening ASPs and gross margins, their view of the NAND market remains positive. This seems both hopeful (in the face of pricing trends) and logical (there has been no upturn-type investment in NAND capacity.) Demand for eSSDs is stronger than expected, because AI market demand is stronger than expected. As we saw with Hynix this week, the NAND market has a really strong eSSD segment and everything else – client, consumer, mobile – all have too much inventory and weak end market demand. At this point, AI demand is all of the strength in the upturn.
– S. Hughes (cyclical long MU)