Jay Iyer - Western Digital Corp. Stephen D. Milligan - Western Digital Corp. Michael D. Cordano - Western Digital Corp. Mark P. Long - Western Digital Corp..

Amit Daryanani - RBC Capital Markets LLC Mehdi Hosseini - Susquehanna International Group Aaron Rakers - Stifel, Nicolaus & Co., Inc. Sherri A. Scribner - Deutsche Bank Securities, Inc. Mark Moskowitz - Barclays Capital, Inc. Ananda Baruah - Loop Capital Markets LLC Vijay Raghavan Rakesh - Mizuho Securities USA, Inc. Mark Miller - The Benchmark Co.

LLC Rod Hall - JPMorgan Securities LLC.

Welcome to Western Digital's Fourth Quarter Fiscal 2017 Conference Call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded. Now, I would turn the call over to Mr. Jay Iyer. You may begin..

Thank you, Latif. And good afternoon, everyone.

This conference call will contain forward-looking statements within the meaning of the federal securities laws including statements concerning our expected future financial performance, our market positioning, expectations regarding growth opportunities, our financial and business strategies and execution, integration activities and achievements of synergy goals, demand and market trends, our product portfolio, product features, development efforts and expansion into new data storage markets by evolving relationships with customers, and our joint venture partnership and business ventures with Toshiba.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our quarterly report on Form 10-Q filed with the SEC on May 8, 2017.

Any applicable forward-looking commentary is exclusive of one-time transactions and does not reflect the effect of any acquisitions, divestitures or other transactions that may be announced after July 27, 2017. We undertake no obligation to update our forward-looking statements to reflect new information or events.

Further, references will be made during this call to non-GAAP financial measures. Reconciliations of the differences between the non-GAAP measures we provide during this call to the comparable GAAP financial measures will be posted in the Investor Relations section of our website.

We have not fully reconciled our non-GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are not in our control and/or cannot be reasonably predicted.

Accordingly, a full reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort. In the question-answer part of today's call, we ask you that you limit yourself to one question to allow as many callers as possible to ask a question. Thank you in advance for your cooperation.

With that, I will turn the call over to our CEO, Steve Milligan..

Good afternoon, and thank you for joining us. With me today are Mike Cordano, President and Chief Operating Officer, and Mark Long, Chief Financial Officer.

After my opening remarks, Mike will provide a summary of recent business highlights, and Mark will cover the fiscal fourth quarter and full-year financials and wrap up with our guidance for the fiscal first quarter before we take your questions. We reported strong financial performance in the June quarter to complete an outstanding fiscal 2017.

Our unique platform of diverse storage technologies and value-added products helped drive this performance, as we addressed a broader set of markets following the SanDisk acquisition. On a pro forma basis, we operated near the top of our revenue growth model with 7% year-over-year top-line growth, and we delivered very healthy margins.

As a result of our unique platform, relationships with our customers are more strategic in recognition of our changing role and the data storage ecosystem. For the June quarter, we reported revenue of $4.8 billion, non-GAAP gross margin of 41% and non-GAAP earnings per share of $2.93.

We generated strong operating cash flow reflecting continued healthy demand in many of our end markets. Our financial performance in fiscal 2017 demonstrates the differentiated value we can deliver as a comprehensive data storage solutions leader.

With industry-leading technologies and demonstrated ability to quickly productize them, we have been able to strategically fulfill the market's growing storage requirements.

Our flexible business model also allows us to realize differentiated financial performance in varied market conditions, giving us greater capability to navigate a range of market conditions than what our legacy companies could achieve on a standalone basis.

In addition to our strong financial performance, our team continues to execute very well on the ramp of 3D NAND technology and on the integration of HGST, SanDisk and WD, each of which Mike and Mark will elaborate on. I would also like to provide a brief update on our ongoing discussions with Toshiba.

Our goal has always been to protect and preserve the health and future of our successful joint ventures. We and our subsidiaries have operated the JVs with Toshiba for the last 17 years. It is a partnership that has been highly successful for both parties and for Japan.

As you may have seen in media reports, Mark and I were in Japan last week to continue our dialog with Toshiba and its stakeholders. Our discussions were constructive, and we will continue to work to seek a solution that is in the best interest of all parties.

Beyond that, we will not get into more detail on this matter until we have a material update to share with you. We know this is an important topic for the investment community and we are committed to keeping you apprised. Rest assured, this has the full attention of our team as we are committed to the continued success of the joint ventures.

In closing, I want to thank our employees for all that we have done and accomplished over the course of the last several years. We are building a great company with a strong foundation for our future as a differentiated leader in the storage industry. I will now turn the call over to Mike to provide business highlights in the June quarter..

Thank you, Steve. Good afternoon, everyone. To build on Steve's remarks, I'm very pleased with a strong finish to our fiscal 2017. With several milestones achieved across the various areas of our business, all of our reported revenue categories grew both sequentially and year-over-year in the fourth quarter.

Results from our NAND flash products were strong in the midst of a continued constrained supply environment, and HDD results were largely within our expectations. We made further progress towards our 3D NAND technology transition objectives, and our operational advancements remained on track.

Most importantly, our results since the close of the SanDisk acquisition last year illustrate the power of our platform. Our client devices business grew by 36% year-over-year on a pro forma basis, despite the PC market being slightly weaker than expected in the quarter.

This growth was driven by our progress in diversifying our customer base, and continued expansion of our product portfolio with the gains being most pronounced in mobility and client SSD. Combined revenue from emerging growth applications such as connected home, gaming and industrial also delivered strong sequential growth.

We have begun multiple sampling activities for embedded products designed for the automotive market, a compelling long-term growth opportunity.

In client solutions, the strength of our WD, HGST and SanDisk brands, combined with our global distribution capabilities, allowed us to deliver strong performance in what has historically been our relatively weaker period in retail. This enabled us to achieve a 14% year-over-year revenue growth in the June quarter on a pro forma basis.

The ability to serve customers with the broadest array of products and solutions is a key element of our strategy. Turning to data center devices and solutions. Shipments of our 10 terabyte helium drives increased significantly on a sequential basis as our industry-leading product made further inroads in hyperscale data centers.

The storage and efficiency requirements of data center customers are driving a sustained shift to the 10 terabyte capacity point, and we believe we further increased our market presence in this category. On a cumulative basis, since the launch of our helium platform four years ago, we have shipped more than 18 million helium drives.

Qualification activities for our 12 terabyte helium drives began at key hyperscale and OEM customers in the June quarter. With the success of our 10 terabyte platform and our expectation to continue our generational lead with the 12 terabyte platform, we are well positioned to maintain product leadership over the next several years.

For the nearline drive market, our expectation for the long-term industry exabyte growth at the 40% annual rate remains unchanged. Given certain industry-wide component shortages, we now estimate the industry exabyte growth to be approximately 30% for calendar 2017.

However, we expect our own growth rate will be approximately 40% given the strong adoption of our nearline offerings. In our JV fab operations, we continued the strong ramp on our 64-layer 3D NAND BiCS3 technology during the quarter with a significant portion of our product shipments now using this industry-leading technology.

Manufacturing yields of BiCS3 continue to meet our expectations, and we are maintaining our projection for the combined JV output of 64-layer 3D NAND to be the highest in the industry in calendar 2017.

Development work on BiCS4, our recently -announced 96-layer 3D NAND technology, is ongoing and we expect to begin sampling in calendar 2017 with meaningful production volumes in calendar 2018.

In addition to the solid progress on our BiCS portfolio, we are delivering innovative new technology capabilities such as the recently announced 4-bits-per-cell 3D NAND.

From a future fab perspective, we intend to participate in the JV's Fab 6 to provide additional clean room space to support the further conversion of our existing 2D NAND capacity to 3D NAND. We expect production output from the new clean room facility to begin in calendar 2018.

From a NAND industry supply standpoint, our estimate for bit growth rate for calendar 2017 remains at the low end of our long-term industry outlook of 35% to 45%, and for calendar 2018, somewhat higher than in 2017.

Combined with the secular growth drivers for NAND flash, we continue to believe that the favorable NAND industry conditions will persist at least through the first half of calendar 2018. In closing, our strong fiscal 2017 results highlight the power of our platform.

The various ingredients that make up this platform including technologies, products, go-to-market capabilities, and our team are helping us better serve our diversified customer base and manage our business to the best strategic and financial outcomes. I will turn the call over to Mark for the financial discussion..

Thank you, Mike. I'm very pleased with our financial performance in the June quarter. Our team executed well across a broad array of markets as we capitalized on our diversified product portfolio, increased gross margins and achieved cost and expense targets, all of which resulted in significant earnings growth.

We also finished the fiscal year with an improved liquidity position as a result of our continued robust cash flow generation. Our revenue for the June quarter was $4.8 billion, driven by strong performance in each of our end markets.

Revenue in data center devices and solutions was $1.4 billion, client devices was $2.4 billion, and client solutions was $1 billion. Our revenue for the June quarter was up 4% from our March quarter, and increased 21% year-over-year on a pro forma basis. All of my year-over-year comparisons cited today are on a pro forma basis.

Our data center business continues to be fueled largely by cloud-related storage demand. Our June quarter revenue for data center devices and solutions increased 7% year-over-year. We saw a sustained strength in capacity enterprise hard drives and enterprise SSDs, offset by a decline in performance enterprise hard drives.

Client devices revenue for the June quarter increased 36% year-over-year, primarily driven by significant growth in mobility and client SSDs. Client solutions revenue for the June quarter increased 14% year-over-year driven mostly by our valuable global retail brands in removable and other flash-based products.

The execution of our strategy and strength of our broad platform enabled us to achieve 7% year-over-year total revenue growth for our full-year fiscal 2017. Our non-GAAP gross margin was 41.3%, up 200 basis points quarter-over-quarter and up 950 basis points year-over-year.

This gross margin expansion resulted from a favorable supply-demand environment for flash-based products, product cost improvements, a higher mix of flash-based revenue, and the strength of our capacity enterprise HDD lineup. Turning to operating expenses. Our non-GAAP OpEx totaled $812 million.

We continue to make progress toward our integration synergy targets, while also making ongoing investments in product development, go-to-market capabilities and IT projects as part of our transformation to enable future growth.

Our non-GAAP interest and other expense for the June quarter was $197 million, inclusive of $201 million of interest expense. Our interest expense decreased from the previous quarter driven by the March repricings and was partially offset by the increase in LIBOR rates during the period.

Our non-GAAP effective tax rate for the June quarter was approximately 11%. On a non-GAAP basis, net income in the June quarter was $881 million or $2.93 per share. On a GAAP basis, we had net income of $280 million or $0.93 per share.

The GAAP income for the period includes intangible amortization, charges-related integration activities and stock-based compensation. Therefore, the net difference between our GAAP and non-GAAP net income is primarily a result of non-cash charges.

In the June quarter, we generated $939 million in operating cash flow, with $178 million spent on capital investments resulting in free cash flow of $761 million. We also had good working capital performance contributing to our significant operating cash flows in the quarter.

We paid the previously declared cash dividend totaled $146 million during the quarter and also declared a dividend in the amount of $0.50 per share.

We closed the quarter with cash, cash equivalents and available-for-sale securities totaling $6.5 billion, resulting in approximately $7.5 billion of liquidity available to us, including our $1 billion of undrawn revolver capacity.

Since the beginning of the fiscal year, our net debt has decreased approximately $2.1 billion to $6.9 billion at the end of the fiscal year, mostly driven by cash flow generated by the business. We remain committed to our long-term deleveraging plans while also assessing value-creating strategic investment opportunities as they arise.

We remain on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar 2017. As of the end of our fiscal fourth quarter this year, we achieved approximately $350 million of cost of revenue synergies and approximately $350 million of operating expense synergies, each on an annual run rate basis.

With respect to the SanDisk integration, as of the end of our fiscal fourth quarter, we have realized synergies of approximately $200 million on an annual run rate basis toward our 18-month target of achieving $500 million total run rate synergies on an annualized basis.

I will now provide our guidance for the first quarter of 2018 on a non-GAAP basis. We expect revenue for our September quarter to be approximately $5.1 billion, which would represent approximately 8% year-over-year growth. We expect gross margin to be approximately 41%. Turning to operating expenses.

We expect those to be similar to our June quarter results. Interest and other expense is expected to be approximately $208 million. We expect an effective tax rate in the 7% to 9% range. Our diluted shares are expected to be approximately $307 million, an increase from the June quarter driven mostly by a new accounting standard.

As a result, we expect earnings per share between $3.25 and $3.35. We believe our integrated product and technology platform is a key differentiator that will enable strong long-term growth and profitability.

Based on our current business outlook and capital structure, we now see the opportunity to achieve non-GAAP earnings per share that exceeds our prior guidance of $12 per share for the full calendar year 2017. I will now turn the call over to the operator to begin the Q&A session.

Operator?.

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. Our first question comes from Amit Daryanani of RBC Capital Markets..

Thanks a lot. Good afternoon, guys.

I guess I'll start off with – and I realize you guys don't break out your HDD financials in detail, but could you perhaps provide some color to help us differentiate your performance in sort of the classic Western Digital performance versus what your competitors saw in the June quarter and especially how that trends as you go forward in the nearline market, please?.

Sure. So let me start with a bigger picture. I think for some time, we've been adjusting both our product roadmap and our product investment to try to get that optimized versus how we see the market evolving over time. That is one dimension. The other dimension is how we're working on our cost basis and our factory footprint.

So we've been taking actions for some time to put ourselves in an optimal position given our broader strategy. But if we bring it down to some more sort of specific elements, we obviously feel very good about where we are with our 10 terabyte. We had significant quarter-over-quarter growth in terms of our output and our volume and our revenue.

And we think we're in a very good position, as I stated in my prepared remarks, to continue to gain momentum through the back half of the year and that's from 10 terabyte to 12 terabyte.

So to give you a little more color, I think one thing we've seen is the sort of top line of our hard drive business is showing more favorable flat to slightly up dimensions.

And just to give you a bit of a reference point (23:53) our legacy hard drive only model, we're operating somewhere near the higher end of that model, to give you a little more flavor..

Perfect. That's extremely helpful.

And I guess let me just follow up, on a broader basis when you look at the portfolio you have today with NAND and HDD and both sides seem to be doing well, is there an opportunity or are you seeing traction and able to get some revenue synergies in terms of perhaps into a enterprise customer who needs NAND, which is in tight supply, and trying to get higher allocations and drives, as well, or vice versa where you can have better NAND business and you can get more HDD market share.

Is that an opportunity, is that something that you're going after right now?.

Yeah. I think the way you should think about that is, customers see us in a very strategic fashion. It comes down to the breadth of our portfolio and their view of us as a long-term relevant partner. And so that translates to a more strategic engagement, which ultimately turns into a better commercial engagement over time..

Perfect. Thanks and congrats on the quarter, guys..

Thanks, Amit..

Thank you. Our next question come from Mehdi Hosseini of SIG. Your line is now open..

Yes. Thanks for taking my question. Just as a follow-up to the revenue mix, if you could give us an update on how you're tracking with the data center solution. Last December, you talked about the TAM of $23 billion by 2020, and I want to see where you are and what are the key milestones in the next 6 to 12 months, and I have a follow-up..

It's PCS, yeah..

Yeah. So I think the market size opportunity, we would see, is relatively the same and unchanged. We certainly see unstructured data and object storage, as the most optimum way to pursue that is a strategically viable path. We remain committed and convicted to that. As we've also said we're in a nascent phase of our business.

I think we're making good progress. You saw that we brought Phil Bullinger into the company to continue to evolve our capabilities in this area. I would say we're satisfied with progress, but it's a little too early to talk about the specifics..

Okay.

And then as a follow-up, just as we're trying to better assess the risk or think of the scenarios, what happens if you're not able to secure NAND wafer from the JV? What are the contingency plans?.

Well, right now, one of the things that I would emphasize, Mehdi, is that we continue to secure wafer output. We expect to continue to secure wafer output, and from a manufacturing and operations perspective, the JV remains very healthy..

And what about the what-if scenario?.

I don't think that that's a reasonable scenario to be considered. I would find that to be – and I'm not sure how to characterize it, but just highly unrealistic assumption to assume that..

Got it. Very helpful. Thank you..

Thank you. Our next question comes from Aaron Rakers with Stifel. Your line is open..

Yeah. Thanks for taking the questions, and I have two as well. Appreciating that you guys don't split out the HDD versus the flash business, I still believe a lot of investors will look at – kind of thinking about the dynamics between the two, in particular around gross margin.

And so my question is as we kind of progress – and last quarter, you talked about hitting a crossover on a cost perspective with 64 layer, how are we to think about that dynamic relative to what might be left and continued upside drivers to your flash business from a margin perspective?.

Yeah. So let me just talk about that. Our guidance does not assume any continued upward movement in bit cost. So what we've assumed is that we're in a fairly stable period on a go-forward basis. So obviously, as we – to the extent that remains ongoing, we would expect our margins in our flash business to stay at the current level..

Absent changes in mix and that sort of thing, or customers..

Okay. And then back to kind of the synergies, I mean when you look at it, you've got still quite a decent amount of synergies to flow through the model.

How are we thinking about, let's call it, that remaining $300 million of annualized synergies to be realized exiting calendar 2017 relative to the reinvestment of those synergies into the model?.

Well, two things. First, the synergies that we're providing are – those are net synergies, with respect to what we're doing specifically for the SanDisk integration. And as you know, those synergies are both at the expense level as well as at the revenue level.

So we see continued opportunity to achieve that $500 million a year run rate by the end of – it's really also the same time period, right? Eighteen months after the deal is about the end of this calendar year. So we feel very good about that.

And as we've said, one of the areas that we've had very good success from a revenue synergy standpoint is in the ability to drive greater revenue in the client SSD space, as an example, by leveraging our strength in the client HDD market. So that's been very successful..

Okay. Thank you..

Thank you. Our next question comes from Sherri Scribner of Deutsche Bank. Your line is open..

Hi. Thank you. We've heard a lot from a couple of companies about lower demand levels in enterprise based on higher NAND costs and higher DRAM costs. Clearly, your business benefited from the trends to higher costs, but are you seeing lower demand? You mentioned performance was weaker, and I know you guys have been deemphasizing that.

But are you seeing lower demand from customers because prices are elevated? Or are you not seeing that?.

Yeah. So I think particularly as we think about the nearline or capacity enterprise market, as I stated, we've revised down our outlook for exabyte growth this year. The reason for that is really twofold. It is component supply shortages and then correspondingly in some instances the cost of components.

So those two things are demand headwinds for us in the hyperscale market or for the industry. As I also stated, we think we will grow at the predicted 40% rate, and that's really based on our product portfolio and the advantage we have there. To some extent, we also would say it's a similar trend in PCs. We saw PCs being a little softer, maybe down 2%.

We think the same thing is in effect there. Both cost and availability is really creating some headwinds for PC makers..

Okay. That's very helpful. And then just to follow up on the gross margin line, you guys now have been above the gross margin targets for two quarters and guiding higher for next quarter. You've got significant cost savings to come.

I guess the question is, is your long-term target the right target because it seems like it should be higher or do you have the view that as things sort of level off in the NAND market that we'll go back to the prior targets in the high 30s for the gross margins? Thanks..

Well, you're certainly right that we've been operating above our long-term model. And I think at this point, we do feel it's a prudent model, and it does allow us to make the right investments to scale appropriately, but as we get more data and as we continue to ramp our 3D NAND technologies, we will always review the model.

But at this point, we do believe that's the right range. But it's not a ceiling, and we certainly do everything we can to ensure that we're operating at the right gross margin level, so that we're ensuring that the financial model is appropriately optimized for the environment, and that's what you're seeing right now..

So, I think Sherri, just to add a little bit of color, this is Steve. I mean we're obviously pleased and will continue to do everything that we can to operate outside our gross margin model from an upside perspective.

That being said, this is a factual comment and not meant to alarm anybody, the reality is that subsequent to when we acquired SanDisk, we have been dealing with very favorable market conditions as it relates to NAND. We all know that supply and demand will even out a bit more and it'll become less of a constrained environment.

Or historically, when that happens, is that puts a little bit more downward pressure on your margins. As we go through, call it, that sort of a cycle, we'll have a better idea of what happens in that kind of an environment. We'll use that information and then see if a revision of the margin ranges that we've indicated previously is appropriate.

And believe me, as the CEO of the company, we'd be happy to raise those margin levels if we think that makes sense as we move through a bit more time..

Very helpful. Thank you..

Thank you. Our next question comes from Mark Moskowitz of Barclays. Your line is open..

Thank you, and good afternoon. Continuing that thread, I just had a question, Steve or Mark.

Have you guys entered into any strategic agreements with some of your bigger customers to ensure they have adequate supply of NAND? And as a result, do they have to give you volume commitments as part of those agreements? And then the follow-up question is how should we think about 2018? I think a lot of investors are quite appreciative of how you're executing and what the model has been generating.

But can you still have a 40% or so gross margin from the balance of calendar 2018? Thank you..

Hey, Mark. This is Mike. Let me talk about the customer engagement. So I think for a number of reasons, customers have chosen to engage on a longer horizon. Some of it is technology access, some of it is supply assurance. And certainly, we are operating on a multi-quarter or, in some instances, well into 2018 basis with customers.

And that's some of the reason we feel comfortable making the statement that we've made, that we believe the flash market will stay constrained through the first half of 2018. It's really the way the market and customers are prepared to engage us..

Right. And as it relates to financial forecast for 2018, we just haven't provided that level of granularity although, as Mike points out, we expect to have the first half of calendar 2018 benefit from the strong NAND environment, and we would expect gross margin to benefit accordingly..

Thank you..

Thanks, Mark..

Thank you. Our next question comes from C.J. Muse of Evercore ISI. Your line is open..

Hi. This is Atica (36:46) calling in for C.J.

Can you talk a little bit more about your expected synergies from HGST and SanDisk and what still remains to be done there?.

Sure. Well, what still remains to be done is to close the gap between what we stated as the Q4 results, so roughly the $700 million in HGST synergies on an annual run rate basis, that by the end of the year, we have a $800 million target, so we expect to close that. And as we always do, our plans are to exceed the goals.

But at this point, it's the $100 million of incremental synergies that we need to close the gap to the goal..

Which we have plans to execute on that, by the way..

We have plans. We're highly confident. And if you think about the COG side of the equation, we have largely reached our internal goal to hit the $800 million, and we are working to close the OpEx side of it, just to provide a little more visibility. On the Schrader side....

You mean SanDisk..

On the SanDisk side – sorry. That's our codename..

You used the codename, just so you know..

On the SanDisk side, of the $300 million left to achieve the $500 million target, we're also very confident, we feel we have the plans in place and the momentum both on the revenue synergies that I talked about earlier and on the cost and more the OpEx synergies.

So we feel very confident that we'll achieve the $500 million in SanDisk synergies as well..

Thank you.

And then for my follow-up, can you talk a little bit about your view on further reducing your debt?.

Well, as we stated, we remain committed to our long-term deleveraging plan, and in addition to that, we will continue to review value creation opportunities as they arise.

So long term, getting to the investment grade status is still our objective, and we will continue to look for the best way to deploy capital from a strategic standpoint in addition to our deleveraging..

Thank you..

Thank you. Our next question comes from Ananda Baruah of Loop Capital. Your line is open..

Hey. Thanks, guys, for taking the questions, and congratulations on the strong results. Just one for me, just circling back again to the revenue synergy conversation, Steve and Mike – I think I've asked about it sort of a few quarters ago – revenue synergy potential. It seems like it's coming up as a point of topic already just a few quarters in.

And so I guess my question is, without – kind of knowing you're not going to give a guide around it and then maybe you aren't even able to yet, why wouldn't – I guess asking this way, why wouldn't the revenue synergy opportunity, as you guys have described it today, not ultimately be significantly bigger than the cost synergy side of things, the $500 million? Just in general it would seem – not when we see this kind of combination, I just think over the years it seems like a very classic, even less strategic than this revenue synergy for companies could be at least 5% or 10% kind of revenue synergy.

And the $500 million on the cost side is I think 2% of the combined company revenue.

So I guess, long-winded, why wouldn't there be an opportunity longer term to amplify this to a much more significant degree, like the billions of dollars?.

Yeah. So first of all, the $500 million mark reference is a combination of the two, and it's really timing relative to our original projections. So we would not disagree. We see revenue synergy as a very strong strategic opportunity. We're well on our pace to execute those synergies, and we see more in front of us.

So I would not disagree in general with your statements. But the $500 million is a combination of the two, as well as the further out targets that we gave at the time of the acquisition..

Right. And just to clarify, so the end of this calendar year is where we have the $500 million annual run rate synergies for the SanDisk acquisition. And then in 2020 we have $1.1 billion of total synergies. So you're right, we continue to drive all the different synergies, the cost synergies, the OpEx synergies, as well as the revenue synergies....

Right..

...for the long term..

Appreciate the clarification. And just a quick follow-up, same topic.

Where are you guys just in the process of engaging clients, holistically, enterprise clients and CSPs holistically with the portfolio? Where are you mechanically with that process, as in when do you think you'll sort of have that process complete?.

So it depends on the particular CSP. Some of them were more advanced than others, and it really depends on their product requirements. As we've stated, our enterprise SSD portfolio, although we have some competitive products, is not all that we would expect it to be. That portfolio gets stronger in 2018, which will further enable that process.

So that remains sort of a forward-looking positive lever for us as we engage, but we are well underway mechanically with all of them. It's really in some instances where we don't have all the product fits that we need..

Got it. Really helpful. Thanks a lot..

Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open..

Yeah. Hi. Thanks. Just a couple of questions on the NAND side.

How is the 64 layer progressing and what do you expect bit growth on the SanDisk side? And do you see any scenario where you could be blocked, or your supply of NAND could be blocked under any scenarios?.

Yeah. So I'll talk about that. We're making very good strong progress on 64-layer BiCS3 technology, and our yields are very strong, so it's consistent with Mike's prepared remarks. We're really pleased with the progress that we're making on BiCS3 as well as frankly the progress that we're making on our next generation, the 96-layer BiCS4.

So very pleased and hats off to the team in terms of the progress that's being made. In terms of bit growth, we have indicated that the industry growth will be towards the lower end of our longer-term expectation of 35% to 45% and that's for calendar 2017. And we would anticipate that our specific bit growth will be a little bit higher than that.

So we'll be slightly exceeding on the industry growth rate. And then, your comment or question with regards to, I guess, being cut off from a NAND supply perspective. It's similar to the question that we had earlier and that is a very unlikely scenario..

Got it. On the hard disk side, 10 terabyte, you guys have done very well, especially last quarter. Do you think there is a sustainable moat there where you can sustain that market share on your 10 terabyte and 12 terabyte going forward? Thanks..

Yes, we do. So I think it begins with the helium platform maturity. It's a complex technology to get right, to deliver reliable product in the field, to ramp at high-volume, and that's just the base. We also have a pipeline of other technologies that we think are well-situated to allow us to continue to maintain and protect that lead.

So we feel very good about the 10 terabyte, we feel good about the 12 terabyte, and frankly speaking, we feel good about products after that..

Thanks a lot..

Thank you. Our next question comes from Mark Miller of The Benchmark Company. Your line is open..

Following up on the last question where you believe you'll sustain your leadership in the 10 terabyte and 12 terabyte helium drives, your competitor has kind of led in the shingled media.

Do you see yourself pulling closer to them over the next year?.

Yeah. So I think relative to SMR technology, it's about, from our standpoint, when we deploy that and to what market. I would acknowledge that our competitor went earlier in client and they had a lead on us. We're in the process of closing that.

But our strategy has been from the beginning, deploy the technology where most value could be obtained from it and we see that happening frankly speaking at 14 terabytes and beyond and we'll be quite competitive at that point..

And you said the flash demand supply won't come back into balance until the middle of next year.

Do you have any ways – or do you believe there was any double ordering in the marketplaces?.

So there is always some of that in the world, but obviously, I referenced our engagement with customers and our ability to construct agreements with them that gives us confidence about our position into the first half of 2018.

And normally customers, if they believe the supply circumstances would be different, they would not entertain such agreements. So it's an affirming point of view to our general market expectation..

Thank you..

Thank you. Our next question comes from Rod Hall with JPMorgan. Your line is open..

Yeah. Hi, guys. Thanks for fitting me in. I just wanted to start off, you made the comments about Fab 6 and availability of output next year. We thought that in some of the filings you guys had made you'd said that negotiations over Fab 6 and Fab 7 had stopped.

So I wonder, have things progressed on that front? I mean is that – have there been developments since the filings on the positive on that? Could you just kind of update us on that? And then I have a follow-up..

Sure, Rod. And as – well, as I've said in my prepared remarks, we remain in constructive dialog with Toshiba and our stakeholders in Japan and that includes conversations with regards to Fab 6..

Okay. And just, I guess I'll follow up on the same question. And the thing is, Steve, you guys filed in core documents that negotiations had stopped and now you have a high level of confidence that output's coming in 2018. So it sounds like you're pretty confident on the situation there.

So I just wonder, has there been positive development in terms of the discussion or is there no development, no change from the core documents I guess is the question?.

Yeah, Rod. In all honesty, I am not familiar with the details of all the particular filings that you're referring to, so I can't comment on that specific filing.

Recognize that the discussions and various things that have been going on with Toshiba, there's been a lot of back and forth, and it's been a difficult situation for all of us including for Toshiba.

And rather than talking about the history in terms of the back and forth that's occurred, I can assure you and our shareholders that last week and ongoing we're having discussions with Toshiba regarding Fab 6 and the discussions are constructive..

Okay. That's great. I appreciate that, Steve.

And then I just – could you comment a little bit about the hard drive market expectations you have as we look into September? Do you guys expect the TAM to grow into September? Could you give us any idea, kind of color on what you think the overall market is going to look like?.

Yeah. So just a little more color to my earlier comments around both hyperscale and PC. We would expect there will be some seasonal – normal seasonal growth in the back half, but both of those will be muted somewhat by those factors I talked about. We had previously been looking at about a flat PC market for the year.

We now are projecting or planning for down about 2%, and then we also gave color or revision down on industry exabytes deployed in capacity enterprise, which we think will be around 30% which is down from the originally planned for 40%..

Great. Okay. Thanks a lot, guys. Appreciate it..

Sure..

So we want to thank everybody for joining us today, and we look forward to speaking with you going forward. Have a great rest of the day..

This concludes today's conference call. Thank you for joining. You may now disconnect..