Western Digital reports revenue gains and AI tailwind supporting pricing power in storage.

Western Digital concluded fiscal year 2026 with strong performance, driven by cloud and AI market demand for disk storage. Quarterly revenues reached $3.75 billion, at the high end of guidance and 44 percent higher than a year ago. GAAP net income was $3.2 billion, equating to 85 percent of revenues—though this figure was partially inflated by $1.7 billion from the Sandisk divestiture and investment interest. Full fiscal year revenues totaled $12.92 billion, up 36 percent year-over-year, with profits of $6.2 billion, representing a 230 percent increase from fiscal 2025.

CEO Irving Tan commented: "WD concluded fiscal year 2026 with strong performance. In our fiscal fourth quarter, revenue increased 44 percent year over year, gross and operating margins expanded, and earnings per share more than doubled."

CFO Kris Sennesael attributed the revenue increase to "strong exabyte growth and favorable pricing dynamics," with analysts noting that price per terabyte rose significantly—high teens year-over-year. Sennesael explained the pricing rationale: "In terms of the non-nearline space, particularly in our client and consumer space, we saw a higher opportunity to increase pricing, predominantly driven by the pricing structures on alternative products that are flash-based as well." As SSD prices increased, widening the cost-per-terabyte gap with hard drives, WD opportunistically raised its disk drive prices to narrow the differential.

Key quarterly metrics included gross margin of 54.4 percent versus 50.5 percent in the prior quarter, operating cash flow of $1.39 billion versus $1.12 billion, and free cash flow of $1.28 billion versus $978 million. Cash and cash equivalents stood at $1.57 billion compared to $2.05 billion the previous quarter, while diluted earnings per share reached $8.21.

This marked WD's first full fiscal year as a pure HDD manufacturer following the Sandisk spin-off. Market growth is being driven by hyperscaler and public cloud sales, heavily boosted by AI adoption. The nature of AI demand is shifting in WD's favor. Tan observed: "Training models create significant initial data requirements, but inference generates and retains data continuously." This shift toward inference, combined with the emergence of agentic AI, amplifies storage demand. Tan elaborated: "Agents generate data at every step of a workflow, increasing both the volume of data created and the amount that must be stored over time. This is why we continue to view agentic AI as a structural and step function driver of capacity-oriented storage demand." He also identified physical AI as an additional tailwind, noting that AI "is the underlying secular demand growth driver for our business."

Revenue by segment reflected broad-based strength. Cloud revenue reached $3.3 billion, up 43.3 percent year-over-year and representing 89 percent of total revenues. Client revenue was $225 million, up 60.7 percent year-over-year and comprising 6 percent of total revenues. Consumer revenue totaled $186 million, up 37.9 percent and accounting for 5 percent of total revenues.

WD shipped 231 exabytes of capacity, a 26.1 percent increase year-over-year. Of this, 209 exabytes went into mass-capacity nearline drives and 22 exabytes into the non-nearline category. Nearline drives accounted for 90.5 percent of total exabyte shipments, up from 89.5 percent a year earlier, a proportion that continues to rise. The company is becoming increasingly focused on a single disk product class.

WD is aggressively pursuing higher-capacity drives. Tan revealed: "We are on track to ship our 44 terabyte HAMR product in the first half of calendar 2027," with 50 terabyte products following in the second half of 2027. WD achieved volume production of 40 terabyte ePMR (Enhanced Perpendicular Magnetic Recording) drives in the June quarter and is now ramping with two customers.

The company is also advancing UltraSMR technology, which partially overlaps tracks to increase capacity while requiring customers to modify their write behavior. Capacity pressures are driving adoption. Tan noted: "We are currently ramping our UltraSMR technology with a third major customer. We expect that UltraSMR will make up around 60 percent of our nearline exabyte shipments as we exit fiscal 2027."

WD is making progress on drive performance and bandwidth. Tan stated: "We are making progress on improving drive performance with our high bandwidth drives and are now sampling with five customers. We are targeting up to eight times the throughput of today's drives without the corresponding increase in power draw. Exactly the kind of performance AI workloads require."

While most nearline drives target hyperscalers, demand is broadening. Tan observed: "The vast majority of the nearline bits that we're shipping are going to hyperscale customers. Increasingly, there's actually increased demand from enterprise OEM players in the storage space, especially as they are pivoting to more hybrid-based storage solutions, where most recently they were looking at all potentially 100 percent flash array systems. There's a shift back towards hybrid systems that's driving more demand for us."

Competition remains intense. Seagate, the only other HDD manufacturer, has generated more drive revenue than WD for ten consecutive quarters. During the earnings call, Cantor Fitzgerald analyst CJ Muse noted: "It's hard not to compare your results with your main competitor, where they're seeing better sequential top-line growth" and better gross margins. Tan expressed confidence about addressing this gap: "We feel very confident … in terms of the pricing structures that we have put in place with LTAs (Long Term Agreements), the introduction of our higher cap drives coming out in the second half of the year, and our ongoing operational efficiencies that will lead to stronger exabyte growth, continuous top-line growth, and obviously, ongoing margin expansion."

Long-term agreements show particular promise. Tan commented: "The last time we reported on LTAs, we talked about having one LTA of a large customer all the way up to calendar year 2029. We are very much in the throes of discussions with customers to establish LTAs for calendar year 2029, 2030, and 2031 as well. Visibility remains very strong. Customer-driven demand for LTAs extending all the way out to 2031 remains very strong."

Gross margin expansion appears achievable through product mix and cost management. Sennesael explained: "We're moving to higher capacity drives that provides more value to our customers, and that enables us to increase our price per terabyte while at the same time driving down the cost per terabyte. I think that's a great recipe for further gross margin improvements. … the mid to long-term cost per terabyte decline is on or about 10 percent year-over-year."

Sennesael summarized the year's achievements: "Fiscal 2026 was an outstanding year for WD, characterized by broadening demand, deeper customer engagement, and disciplined execution across all end markets. As the cloud and other data-intensive workloads continue to expand, we remain confident in the long-term growth trajectory of our business, further margin expansion, and strong free cash flow generation." He added: "We continue to operate in a strong demand environment, with improving longer-term visibility and favorable pricing dynamics across our cloud, consumer, and client end markets."

Looking forward, Tan stated: "We enter fiscal year 2027 with robust customer demand, increased visibility, and continued confidence in the durability of demand." For the first quarter of fiscal 2027, the company expects revenues of $4.1 billion, plus or minus $100,000—a 44.4 percent increase at the midpoint.

Despite sustained strong demand for disk capacity, WD is not increasing manufacturing unit volume. Sennesael explained: "Our industry-leading technology and product roadmaps, combined with strong operational execution, enable us to deliver substantially more exabytes to our customers. This does not require spending CapEx to add unit capacity, but we are making the necessary investments in our heads and media operations, as well as in automation to increase our productivity."