Western Digital Corporation (WDC) Morgan Stanley Technology, Media & Telecom Conference (Transcript)

Western Digital Corporation (NASDAQ:WDC) Morgan Stanley Technology, Media & Telecom Conference March 5, 2024 2:00 PM ET

Company Participants

David Goeckeler - CEO

Wissam Jabre - CFO

Conference Call Participants

Joe Moore - Morgan Stanley

Joe Moore

Welcome back, everybody. I'm Joe Moore from Morgan Stanley Semiconductor Research. Very happy to have with us today the management team of Western Digital, David Goeckeler and with Wissam Jabre. I think Wissam, you wanted to read the safe harbor, and then we'll go into some Q&A.

Wissam Jabre

Thanks, Joe. Happy to be here. We'll be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends and dynamics and future results. These forward-looking statements are subject to risks and uncertainties. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. 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 - Joe Moore

Thank you. Okay. Great. Well, that's -- thank you for that. So there's been quite a bit of news on WD the last few days, including this morning, which to be honest, I've been on stage, I haven't read yet, but I got the gist of it. But maybe you can -- before we go into that, maybe we could just kind of start on the business environment and how you guys are seeing things nowadays.

David Goeckeler

So Joe, first of all, thanks for having us. We really enjoy being here. yes. The -- let's talk about the current business environment. I think we came into the quarter. If you go back to last quarter, we are very happy with the way the business performed. We clearly saw both businesses turning. I think if you look at each business on the NAND business, what we've been trying to do is really put together a

I think through the downturn, we've delivered best-in-class gross margin in our NAND business by a significant amount, quite frankly. And I think it's really the combination of those 2 things where we're the best core technology, given the scale we have in R&D with Keohane tied to the best portfolio. And then in the HDD business, of course, we saw the big hyperscale players in the U.S. coming back more robust conversations there. We saw good growth in China. We had over 100% sequential growth in China in the HDD business. So we came into the quarter with a lot of strength and a lot of momentum in the business. which brings us to the current quarter. I'll give a little bit of an update on what the environment looks like right now.

I think from when we guided, the business is stronger than that at this point. If we look at the guidance ranges, we provided, we expect to be near the high end of guidance of the range we provided. But each business is performing better from a profitability point of view. Couple of points of additional gross margin in each business. All the rest of the numbers are within guidance ranges. So we expect this quarter, we expect on an EPS basis to exceed the high end of our guidance range.

Joe Moore

Okay. Great. That's good to hear. Maybe you could parse that a little bit. So a couple of points of gross margin improvement, maybe start with NAND. You mentioned how good the numbers were last year. And I think that may be set up expectations thing where other people who had burned a lot of inventory at very low prices saw a bigger rebound versus you guys, which you took quick action to reduce supply, kept the mix pretty good and then guided for some improvement, but maybe less than some of the peers. How are you seeing that progress now? And what's the general tenor of supply-demand for NAND?

David Goeckeler

Yes. Supply demand is coming back into balance. We're not all the way there yet. But you're right. What we're trying to do is dampen volatility and deliver better through-cycle profitability. That's what we're trying to do. So hopefully, you don't see as much pricing acceleration and deceleration in our business. And just you see a more sustained higher level of pricing. I mean we look at it as absolute pricing versus pricing change. And when you look at that way, we believe we're the best -- we're best-in-class NAND business. If you look at what's going on now in the business, this quarter, bits will be down sequentially. Going into F Q4, we expect bits to be flat. So any change in the business in NAND is going to be all pricing driven.

Joe Moore

Okay. And I'll come back to some of that, but maybe just on the quarter being better, similar on the hard drive side, where are you seeing that gross margin improvement? Is that all price? Or is there other cost element.

David Goeckeler

The hard drive business is driven by both better pricing and higher shipments. So we're still in an underutilized state. We expect to be -- still have some utilization this quarter, but we're seeing a little better volume. And of course, when you're -- we have underutilization, we're going to see a margin impact of that. But we're seeing better volume and better pricing in the drive business. And as I think if you roll both of these forward into Q4, we're going to see again, in Q4, we're going to -- our F Q4, which is our June quarter. Again, on the flash business, you're going to see bits flat so we'll see some modest pricing driven improvement there. And then we'll see some modest growth in exabytes and pricing in the drive business. So I would expect some modest sequential growth going into F Q4. Yes. But we're also -- I want to balance it with one thing, we're going to see more variable comp headwinds in outperformance of the business in Q4.

Joe Moore

Yes. Okay. That makes sense. And then you guide one quarter at a time, which I appreciate, but any sense on the durability of the good things that you're seeing beyond the current quarter?

David Goeckeler

Well, if I look at the drive business, we're getting -- we're coming back. We did a lot of work during the downturn where we just structurally remove capacity from the system. So I think the drive industry is an industry that has been going through this client to cloud transition for literally 15 years. And the client business, there's just a lot more unit capacity that in the system that is required in a nearline dominated business. So we've just removed that from the system, I think we've signaled that to our customers. We don't have as much capacity as we had in the past. And in return, they're giving us more visibility into what their ordering looks like throughout the rest of the year. So in the drive business, we came into the fiscal year believing we're going to see sequential growth throughout the fiscal year, certainly, in the first half of the year, first 3 quarters of the year, we're seeing that.

And last earnings call, we extended that to this calendar year. So we feel good about that business in a return to kind of reversion to the mean of the 20%, 20% to 25% through cycle exabyte growth we're getting back to that. And in the flash business, we expect fab out supply this calendar year to be mid-single digits. So we've seen -- the profitability of the business has been significantly impaired. And so there's been no CapEx going back into the business. And I think if you look at the wafer equipment spending in NAND, it's been low for quite some time. And from our perspective, we're going to need to see ourselves -- we expect that 35% to 37% gross margin is our target on a through-cycle basis. We've been below that for quite some time. So we expect to be above it for quite some time before we're going to see CapEx coming back into the business. And we're just now -- although we've taken a few good steps here, the first couple of steps have been very, very good. business is going in the right direction, but we've got a way to go before we're back into our model, and we see CapEx spending come back into either business.

Joe Moore

Okay. Great. And then the announcement you made this morning, you've given us some further data on the separation. You're going to be taking a lead for the flash business and Irving 10 will be the head of HDDs. Maybe can you talk a little bit about that decision? What made you decide to go to the NAND? I agree with it, but that's because I'm a NAND guy not to drive guy, but what drove that income.

David Goeckeler

You convince me, Joe.

Joe Moore

You just kind of talk about what makes Irine the right person on the drive side.

David Goeckeler

Look, these are a couple of comments before I get into that. These are both great franchises, and it's very difficult to be forced to be in a position where you're going to pick 1 of them because I think that they're both tremendous assets. I think that they have -- both have tremendous futures. And also, I think that there were multiple executives inside the company that were candidates to run either one of them. I think 1 of the things we've done over the past 4 years is really build a very, very capable executive team, of course. What we saw here is, of course, a huge part of that. If you look at my choice, the reality is I think the NAND business is the more complex business with the JV, the relationships you have to manage across cross-border relationships. I've spent a lot of time building those. I'm very excited about the business, quite frankly.

I think it's underappreciated. I think especially the Western Digital NAND business is underappreciated with our consumer business. I think our consumer business is a total gem. I think there's a lot of value in that. And I look forward to all of the all the work we can do to really fully value that asset. And on Irving, Irving is a tremendous executive. I mean Irving is a world-class executive. I've worked with him for many years. He joined Western Digital a couple of years ago now and just immediately had a huge impact on the business.

We have a massive Asia presence. He's based in Singapore. He's got an enormous amount of operational experience. If you look at all of the changes we've made, when we talk about our HDD business and the amount of capacity we've taken out of it and how we've structured that business. Irving's has been driving a huge part of that. And so he's just very, very well positioned to take that business forward. And I'm very, very optimistic about the future of the HDD business.

Joe Moore

Great. So we've been -- we've made some effort to parse out the earnings of the 2 businesses over the last 7 years to try to triangulate the value. And obviously, there's some guess work in there because you haven't talked about the OpEx splits and things like that. But I guess the 1 thing that we need to incorporate into that is the sort of inverse synergy of spinning this into 2 companies. How much incremental cost do you expect that this takes to build 2 separate companies? And if I look at the relative profitability, for example, of the hard drive business versus Seagate, how do I think about bringing incremental cost into the business.

Wissam Jabre

Yes. And so look, it's still early days. We're still working through a lot of these details. While I can't provide necessarily financial numbers. What I can tell you is both businesses from a cost structure perspective are in great shape and ready to be independent companies. What we've done over the last several quarters is we've rightsized both businesses. We've taken a lot of cost out -- you've seen us take a lot of actions on OpEx and CapEx taking it down. And so we've created quite a bit of room for any potentials dissynergies. There will naturally be some dissynergies as you mentioned, as we create the 2 companies. But with the actions we've taken, we have room to absorb those.

Joe Moore

Yes. I mean maybe this is an unfair question, but we value -- we try to think of the hard drive business. We discounted 10% to the EV to sales of your closest competitor. And that's largely because I don't know this question, right, that there's an incremental cost that comes in but maybe over the long term, any reason why you shouldn't have the same kind of ROI profile that they have.

Wissam Jabre

I don't see any reason why in the long term, the business won't be at or better best-in-class.

David Goeckeler

I mean I completely agree. This is the whole thesis behind the split. I kind of keep hearing things like this and it drives me a little bit crazy. Like why should it be discounted.

Joe Moore

It makes a big difference because we assume the debt goes -- if it's not a discount, it's worth like several dollars more per say.

David Goeckeler

Yes. I mean it's like more profitable and growing faster other than that. yes, I mean, look, this is -- we think there's fundamentally different investor bases for these 2 businesses. And I think that we've done a ton of work over the last 4 years. Like when I came into the company, there's no excuse for not running the business as best as it possibly can be run. And I think over the -- especially through the downturn, it really showed up. These businesses are best-in-class assets, both of them and I think we can -- they're ready to be stand on their own. We built an executive team that could run both of them independently. I think they're both world-class assets and I don't think they're going to be discounted to anything in the market. I think they're really premium assets in we're going to --

Joe Moore

Be one in profitability and growth is better than it will richer like that's how it looks.

David Goeckeler

Yes. That's right.

Joe Moore

The stuff I say, it matters very little in the long run. Anyway, I appreciate that. So then the other announcement on Monday was the JV. Maybe you could talk to that.

David Goeckeler

You want --

Wissam Jabre

Yes. So basically, we announced this JV with JSAT and IC manufacturing and technology service provider, very well known in the industry. We've partnered with them for many years. So here what we're doing is basically we're selling a factory in our back-end assembly and test factory that's flash-based in Shanghai. Basically, we sold equity 80% of our equity interest, and we're retaining 20%. What this gets us is it gives us flexibility and to become more effective at managing through the industry cycles. It gives us a bit of better free cash flow and working capital going forward and we get to monetize the asset for $624 million. What it gets Jay said, is a great manufacturing asset with highly specialized team that has run this asset for many years. We do expect the transaction to close in the third calendar quarter of this year.

Joe Moore

Okay. Okay. Great. So on that note of the balance sheet, how do you feel at this point? You've sort of gotten through the convert replacement that you had to do? How do you feel about the balance sheet where we are today?

Wissam Jabre

Yes, I feel much more comfortable than where we were, but we're definitely not where we need to be. So from a liability management, as you mentioned, would sort of refinance the convert. We paid down half of the delayed draw term loan that we drew down last year, there's another $300 million due by the end of June. We've done a lot of work on working capital. You can see over the last few quarters; we continue to improve our cash conversion cycles. But leading up to the cyclical downturn, we had spent quite a bit of time also paying down debt. And so that financial discipline is still there. And as the business continues to recover, we expect to continue to improve our balance sheet going forward.

Joe Moore

Yes. Okay. It all makes me so much better when there's a positive EPS associated with all that.

David Goeckeler

The world doesn't have the --

Joe Moore

That certainly helps. And can you talk about the net CapEx that you guys are looking at this year. Are you -- as the business improves on the NAND side, do you start thinking about investing more in the business? Or are you waiting for certain profitability targets?

Wissam Jabre

So for this year, we're still looking at a significant decline relative to last year. For the fiscal '24, basically, we still see a much lower -- significantly lower CapEx spend relative to fiscal '23. With respect to NAND CapEx, look, it all depends on the profitability of our business. We're looking to -- we are aiming to achieve that through cycle, 35% to 37%. And so what that means, we would like to see the profitability of our business improve above those levels before we're ready to invest more capital.

Joe Moore

Yes.

David Goeckeler

I think this is a really important point. We've been getting this question a lot, especially in the drive business as demand starts to return, how fast can we add capacity back, and that's really not our focus. I mean, our focus is getting to supply-demand balance. I mean, clearly, in NAND, we've got a way to go to until we get there. We've made a couple of good steps now, but we're coming from what, a 20-, 30-year low as far as the down cycle. So the recovery is going to look very different than anything than it has before. And we've got a ways to go before we see we want to see that through cycle model really have conviction in that going forward before we put capital back in the business.

Joe Moore

Yes. Okay. I mean that idea that on the hard drive side, your focus isn't on supply growth. Like what if demand comes back? I mean, it seems like it could be a very good backdrop for drives in the sense of what's your ability to respond to a pickup in demand. And because it's such a complicated supply chain with so many parts, and it's been bad for so long, frankly, that I would think some of your subcomponent suppliers have limited flexibility as well.

David Goeckeler

Yes. Well, remember that in the drive business, even you're coming back to more exabytes, but units, it's still going down, right? So we've sized the business for what we think the number of units we need going forward that will keep the market balanced and that's where we want to stay because every quarter you go forward, the mix moves forward to higher capacity drives, you're adding exabytes through more capacity per unit. But I think the drive business has been persistently oversupplied for what, maybe 15 years, 20 years.

I mean everybody talks about the Thailand flood, it's like more, I mean it's like the only time where we had supplied more demand than supply in the drive business was when we had a flood in Thailand. And I was just there like 3 weeks ago, and they still have the thing on the wall that tells you how high the water went, but I don't think the drive industry should be any different than any other industry in the data center, right? You can't just show up in the quarter, you need something and you get it. And that's the way the business has been run for a very long time because of this persistent oversupply.

And I talked about earlier, we've now the downturn was a brutal downturn it had impact on quite frankly, a lot of people's families that work in those places that we are underemployed. And so we want to set the supply at a certain level. And then when we get visibility and conviction on sustained demand, not demand that just shows up for 1 quarter or 2 quarters or 3 quarters. I mean sustained demand for a long time, then we can start talking about if we put supply back in the system. But we're -- we're not at that point yet. We'll see how quickly we get there. I do think we're -- I do think in the next several quarters, we'll get back to supply-demand balance drive industry for maybe the first time in a long time.

Joe Moore

Yes. Okay. And then you talk about the road map. I mean you said you're growing faster. The 26 and 28 terabyte UltraSMR road map seems pretty sound. The bear case always seems to come back to HAMR and being early on HAMR for its own sake. So I ask about that every year. And the answer is always the same, but like can you just talk to that concern that people have.

David Goeckeler

Yes. Look, I mean, HAMR is an extremely important technology to the drive industry because what HAMR says is the drive industry has got a long future of continued TCO improvements. And what we're in now, in the drive industry, again, we're -- this is not a software business. It's like the furthest thing from that, where it's like you're actually dealing with material science and physics and all kinds of things that are not necessarily quite as predictable as far as when they're going to -- big advances will emerge. So HAMR has been in development. I was in Japan I don't know, it was the end of last year, and I met the gentleman that wrote the original paper on HAMR and that was published in 2002, which is fantastic, right?

And now here we are, and we're talking -- and it's been under development since that time. We've been investing in it for years and years and years, well over a decade, 2 decades. And so what we're seeing right now is the endgame of that development process. And HAMR is going to be technology when we look 5 years forward, where there's a lot more deployment of it.

The question is just when does the transition happen, how does it happen at what pace? And I think our team -- I don't think, I know our team made -- they made a very difficult decision about 5 to 7 years ago where they had to bet when HAMR was going to be available. And they basically decided that like this mid-20 terabyte per disk per unit time frame, they didn't really think HAMR was going to be ready, right? And we're going to need to get up into that 30 to 40 terabyte range. And so they started a bunch of other projects, ePMR, OptyNAND, UltraSMR. And over the last 5 years, we've commercialized all of these technologies. And each one of these technologies gives us a little more capacity in our architecture. ePMR has more aerial density than PMR, right? That's why we commercialized it.

We've now shipped hundreds and hundreds, I think, more than 700 exabytes of ePMR. So it's a commercialized highly available, highly reliable technology, the largest, most sophisticated data center operators in the world bet their business on. Next came UltraSMR and SMR is a technology that's been around a long time, right? SMR is not anything new. The issue is it had never been adopted at the high end of the market because it was an additional 10% of capacity, but you have to do work on the host side so the customer has to do work in their infrastructure to adopt it? And why would you do that if you just thought you could wait another year and get a bigger drive anyway.

But about 2 years ago, 2.5 years ago, the most sophisticated data center operators in the world like a couple of things happen. One is we launched diversion of SMR that was 20% more capacity, not just 10% more. So now, that gets pretty interesting when you're talking about a 20-terabyte drive. The biggest, most sophisticated data center operators in the world looked at this whole road map and the whole technology landscape of hard drives, and they came to the conclusion that we need to adopt SMR because that's going to be the next leg of growth in the data center, and that's turned out to be true. And so the reality is, is maybe for the first time in a very long time, there's architectural differences in the road maps of the largest providers in this market.

We've taken a path that is predictable, we've commercialized it, we can produce it at scale, and that's going to give us a nice transition to HAMR when we get to the 40 terabyte range or the 4 terabytes per platter range when it economically makes sense. Other people have made other choices. That's okay. We're very, very confident with the choices we've made. It's very clear that the biggest operators in the world have looked at the same set of technologies and come to the same conclusion. Otherwise, they wouldn't be adopting UltraSMR and they are.

And so we're very comfortable with our road map. We're very comfortable with our HAMR development as well. And we will fold that into the road map when we get closer to that 4 terabytes per platter and it makes economic sense. Until then, HAMR adds cost per unit. And you -- in any technology business, I don't want to add more cost to your product unless you can get more value from it. And so on a like-for-like basis, we think we have a cost advantage with the road map we have, which is a nice bonus to the technology strategy we've taken.

Joe Moore

I appreciate the thoughtful answer there. In terms of the environment for nearline, you talked about drive units, kind of soft exabytes growing -- it seems like we've deferred a lot of the technology upgrade business in cloud to make room for more AI spending and stuff like that. Any indication that, that could change any indication that people start to invest more in storage in the cloud.

David Goeckeler

I really believe that the recovery right now is really inventory-driven. I don't think it's as much as the squeeze out of other spend because storage is important in the cloud, right? And I think that there has just been so much over-procurement in the drive industry that there was a lot of inventory to work through, especially at some -- some of the big cloud vendors. So I think that long term, 20% to 25% exabyte growth still holds. We're significantly below that. And now we're having this kind of reversion to the mean in that ordering as all this inventory has been worked through. I think we're going to have that return to normal ordering over the next several quarters.

And while we're going through that, we're going to see what impact AI has on our business, which we think is going to be substantial. We think all of this -- to your point, all of the spend that's going on to build out the compute infrastructure for AI so that all of us can be enabled by this cloud-driven technology is going to lead to more content creation. The vast majority of that is going to be in the cloud is going to be stored on hard drives. And of course, on the device, it's going to be stored on NAND. So we think we have those tailwinds behind both of these businesses.

Joe Moore

Great. So on the flashlight, can you talk about your technology road map there? When do we see BiCS8 starting to ramp?

David Goeckeler

BiCS8 is a great node. We can talk some about wafer bonding. It's a big innovation that allows us to really build a high-quality node. We will ramp that node at some point next year. We still have BiCS6 to get through, right? Most of our portfolio is on BiCS5 right now. BiCS5 is the highest yielding node in the BiCS road map. So cost downs continue to be -- still be very good, even though we're not rolling nodes forward, which usually what drives cost down.

So what -- you'll see our technology road map, we'll -- traditionally, we have moved the entire portfolio from node to node, right? All of the portfolio is on BiCS4, then all the portfolio's on BiCS5, we're going to change that now. Only part of the portfolio will go to b6, mainly QLC driven. We'll have a QLC client SSD coming out, which I think people are going to be very impressed with the performance of that. And then we'll take parts of the portfolio on to BiCS6, and then we'll move other parts of it on to BiCS8 as we move into next year.

Joe Moore

That should eliminate some of the volatility that you saw in like BiCS5, where initially, you're not qualified with some vendors and you end up selling to the lower cost customers?

David Goeckeler

Yes. That's a big issue, I think, in the NAND business, it's underappreciated. It's like which mix is on the leading node, which mix is on the trailing part of the node. A lot of it has to do if you have to build a controller or not. Usually, you tend to see the mobile providers on the leading edge of the node. You tend to see enterprise SSD on the trailing side of the node because the controller and the qualification is complicated. So yes, this will make all of that a little more of a natural progression.

Joe Moore

And then on the NAND cycle, I mean, there's no CapEx talking to 3 equipment suppliers in the last 2 days that doesn't seem likely to change this year. It's going to NAND spending will be up in most very modestly, which is like maintenance level to me. There's very little supply growth coming from that. The only anxiety I have is utilization. You took down utilization, others did as well, people are in various stages of acknowledging that they're going back to full utilization. But at these margins, it seems like it's pretty much just math that you run the factory full. So how do you think -- do you have any trepidation about the utilization coming back? And clearly, it's offset by very little underlying supply growth?

David Goeckeler

No. We have all that modeled out in our own internal models. And quite frankly, we're going to need that. I mean one of the things I'm excited about leading a NAND business, it's a great business. I mean it's a great there's elasticity, there's growth, like if you can continue to drive the cost down, you can -- there's more bits that are required every single year. It's a very dynamic market. And so we see fab out bit supply mid-single digits and so obviously, the thing that buffer on that is inventory and utilization.

And so we're working through the inventory now. We expect utilization to come back up, but the real story is CapEx because that's -- whether it's -- usually, the CapEx is for nodal transitions, right? It's not for greenfield starts. It's just when do the nodal transitions happen. And so we see very little CapEx, and it takes quite a while from when you start spending that CapEx you get the output from it.

Joe Moore

Yes. I mean it's very clear what's happening to me is that you have a lot of investing in specialty DRAM in areas like AI and it's siphoning away CapEx from NAND. And if the 2 companies who aren't in DRAM also aren't spending very much, which you aren't in your partner isn't, it seems like a very good cyclical backdrop to me.

David Goeckeler

I think that this downturn, I think, showed a lot of things about the NAND market that people believe going into it were not quite true, right? And so a lot about -- if you weren't in the enterprise SSD market, you couldn't have a great NAND business, turned out that's the worst part of the market. This -- there was just a whole bunch of stuff about the way that NAND -- that we could just like continue to put the CapEx in and elasticity would take care of demand.

Like I think there's been -- the formula of R&D in NAND, where you're focused on, how much bit output you're going to get, how much cost down with how much CapEx, right? That -- like how you solve that equation I think, is going to change going forward. It's not just about how much -- how many bits I can get. A lot of the discussion going into the downturn was whoever has the most layers is ahead on technology. Well, that didn't work out very well because that just means you have a lot of CapEx going in to produce a lot of bits can't be absorbed by the market. You need to focus on cost down as well and what -- how much CapEx you're putting in to get those bids.

So I think the industry, and certainly, we think about this very, very deeply about the economics of NAND in the 3D era, and how they're changing given this equation about how much CapEx you're going to provide, how much bits you're going to get out and how much cost down you're going to get out of the portfolio and how you think about that going forward, I think, is changing.

Joe Moore

I mean if you look over 20 years, SanDisk gross margins tended to bottom in the mid-teens, peaked in the mid-50s, which gets you through cycle to about the numbers that you're talking about as your long-term model. The last cycle, it was below that, both the last peak and the last trough. But we still have the 7 years since the acquisition, we modeled out the EPS you still have -- again, we'll find out where you're putting OpEx, but we still have $4 of EPS on average from NAND over the last 7 years, even with a bad cycle relative to the 4 prior cycles. So what do you think happened in this last cycle that it was a little bit weaker? And what gives you confidence that the next cycle will look more traditional?

David Goeckeler

Well, the last cycle, we got to kind of a mid-cycle level of like -- and then the pandemic hit and like all heck broke loose, like something we've never seen before. And we had this huge demand-driven downturn instead of supply-driven. And so I think there are also some people ramping very large nodes right into that downturn, which ended up with just a flood of bits that couldn't be absorbed. I think we've always -- look, I think the real key to our business is the fact that -- as I said earlier, you got to get 2 things right. You got to have the best fundamental technology like it's -- like the wafer coming out of the fab has got to be at the best cost point and the best product out there.

You can't make up for that with a great portfolio. But then you've got to marry that to a really, really strong portfolio where you have the most optionality possible to mix into where you're going to get the highest return because NAND is like a bunch of different markets that all require different amounts of investment. I mean, literally, you can take the wafer out of the fab and you can just sell the wafer or you can like cut the wafer up in the components and sell it into the mobile where you don't have to build the controller, so there's no OpEx involved or you can get into the enterprise SSD market where you have to have a very large engineering team that are building controllers that are extremely, extremely sophisticated. Each of those markets has a different growth rate, a different profitability, a different OpEx profile, how you solve that equation is extremely important.

And what we're able to do is have a portfolio that's very diverse with an anchor of the consumer business, you said earlier, right? You talked about that going way back. Like that consumer business is a real gem of the portfolio because the brands are very strong. I think everybody knows the SanDisk brand. SanDisk professional, WD BLACK and gaming now is a hugely valuable brand for us that we've built over the last 3 years. So you have that best-in-class core technology position. Why is it best-in-class? Because we invest with Kioxia. And between the two of us, we're the largest provider.

And the very high level, the amount of engineers you can invest in something is commensurate to the market share you have, right? So we have really, really bright engineers have been doing this for 24 years, and we have them at scale.

And then on the other side of that, we have a very unique portfolio with a lot of optionality and a big part of the business, which the consumer business, which provides through cycle, let's say, call it, resilience -- it's better profitability, less volatility, and we have the ability to build brands in that like in any consumer business that continue to accentuate that attribute.

Joe Moore

Great. So I think we have time for one question from the audience, if there are any. If there's not, a lot of focus on DRAM in AI because of HBM and some of the specialty technologies. But we're also hearing a fair amount of interest in NAND low latency inference at the edge requires a lot of SSDs and there's a lot of investment going on there. Can you just talk to whether or not AI can become a driver for your business?

David Goeckeler

I don't think there's any doubt that AI become a driver for our business, right? I mean we're already -- we're seeing data points of it all over the place, whether it's the corporate -- the traditional corporate PC, which is has the least amount of NAND of any PC that's sold like being re-specked with twice as much NAND going forward. We talked to device manufacturers. This is a consistent theme. And in an AI-driven world, we're going to have more NAND per device. So you kind of got that another driver of that elasticity lever in the NAND business. So 80% of the NAND TAM is devices, right? And that's gotten more concentrated in the downturn. And so we see the classic edge-driven device-driven refresh from AI coming to the business.

Joe Moore

Great. Well, I'm losing my voice. So we'll just wrap it up there. Thank you, Dave and Wissam.

David Goeckeler

All right. Thank you. Appreciate it. Thanks, Joe.