January 27, 2022
FQ2-22
WD doesn’t have a DRAM business, and they sell hard drives in addition to NAND and SSDs, so I read their releases for insight into the NAND market.
Earnings Presentation
• NAND bit shipments increased 13% sequentially (was 8% in the previous quarter)
• Like-for-like ASPs were down 3% (flat in the previous quarter)
• Here are the last five quarterly changes in NAND ASPs (like-for-like, from most recent to oldest): down 3%, flat, up 4%, flat, down 6%. Putting this all together, like-for-like NAND prices for WD are down about 5% in the last 15 months. This is a positive margin environment for NAND makers because their costs decline around 15% per year.
• Blended NAND ASPs declined 6% QoQ (down 3% in the previous quarter)
• The company’s NAND gross margin declined slightly this quarter, to 36.1%, after increasing the previous four quarters (27.1%, 30.0%, 35.5%, 37.0%)
Conference Call
In the prepared remarks the CFO said they expect flash revenue to decline in their third fiscal quarter (the quarter we are in now), driven by ASP declines. The expect flash revenue to return to growth in the second half of the year.
Below are a few quotes from the call that are pertinent to the health of the NAND market:
C.J. Muse – Evercore ISI – Analyst
That’s very helpful. And as my follow-up on the NAND side of things, I think you’ve historically talked about the transactional market kind of as a leading indicator. And so curious, as you look into March, how are you thinking about pricing? And I know you don’t guide pricing, but curious, is there a larger headwind like-for-like or on a blended basis as you sit here today and consider the likely mix?
David Goeckeler – Chief Executive Officer
I would say pricing is – look, I mean, I said it in the script. Pricing has stabilized in the more transactional markets. I think there was a little bit – I think the narrative in the industry given some of the shutdowns that are going on, would it flow through immediately? We haven’t seen that. But we did see a stabilization.
Also it’s worth noting that majority of the portfolio is priced before we go into the quarter, and that happened before any of the events of the shutdowns in China. So that’s not going to show up for another quarter or two. But I would say we’re seeing more stabilization. Our view, I think, has been that we will see better pricing in the second half, and that’s pretty much the way it’s playing out.
Depending on kind of the impacts of some of the shutdowns, that may move forward a little bit. But I think mainly the impacts of what we’ve seen – impact on NAND pricing is going to be more second half favorable, including some of the stuff we’re seeing now on even the tool vendors, the component issues hitting them. So we’re watching that very closely. I would say right now, we’ve got a more stable environment over the last two, three weeks.
In response to a question on how much business they are losing for lack of controllers, which are a critical IC in both hard drives and SSDs:
David Goeckeler – Chief Executive Officer
Yeah. I would say the NAND – the business we’re leaving on the table in the NAND business is higher than in the drive business. It’s significant in the drive business, in the order of $100 million to $150 million in the third quarter there. But in the Flash business, it’s basically twice that.
So yes, it’s controllers, it’s power ICs, it’s a number of different parts on enterprise SSDs and embedded as well.
Summary
NAND pricing for the last year plus has been good for WD, overall expansionary for flash gross margins. Component shortages are causing the company to miss on some NAND demand, on the order of $200M to $300M in the last quarter. Overall, this quarter was positive news for the NAND market. Management said they are seeing stabilization in the NAND spot market, which is a leading indicator for their corporate pricing. They also believe the second half of 2022 will be more favorable for NAND pricing than the first half.
-S. Hughes (long MU)