Western Digital Corp.

Transcription

1 April 18, 2018 Equity Research Western Digital Corp. WDC: HDD Strength w/ An Undervalued Flash Business--F3Q18 Preview Outperform/$115 / IT Hardware & Communications Networking Market Weight Earnings Estimate Revised Down Our Call: We continue to recommend shares of WDC ahead of the company s upcoming F3Q18 earnings release (4/26, after market). Driven by expected strong HDD results in 1Q18 (most notably high-cap / nearline enterprise HDDs with estimates of >80% yr/yr capacity ship growth) and our model reflecting WD s total Flash / SSD capacity shipments declining more than 6% seq. with a blended ASP ($/GB) down over 9% sequentially, coupled with the impact of the company s debt / interest expense reduction during the quarter, we maintain our F3Q18 estimates at $4.94B / $3.35. This compares to WD s guide at ~$4.9B / $3.20-$3.30; consensus estimate at $4.93B / $3.30. We model F4Q18 at $5.04B / $3.35 (street: $5.05B / $3.29) with an estimated 41% GM% (note: we reduce our estimated Flash GM% by ~200bps seq. to 52%) and an adequately adjusted interest expense at $107MM (vs. $180MM in F2Q18) to reflect the company s debt / interest rate reduction (reminder: WD priced its new debt on March 2 nd ; reducing annum non-gaap interest expense to $410-$415MM from the prior ~$720MM/annum level). Most importantly, we maintain forward estimates solidly above consensus C2018: $21.3B / $14.46 (street: $20.5B / $14.09), C2019: $22.4B / $14.39 (street: $21.2B / $12.98), and C2020: $23.0B / $14.62 (street: $21.6B / $12.94). Below (page 3) we include an updated pluggable earnings scenario analysis based on NAND Flash vs. HDD bit and ASP ($/GB) assumptions (sendable upon request) illustrating an upside earnings scenario at +$16/sh. What Matters The Most (Continued on Following Pages): 1. HDDs vs. Flash Wells Guesstimates; Quarterly Details Would be Nice: A common point of frustration among investors has been Western Digital s lack of disclosures between HDDs and Flash across its reported segments (Client Devices, Client Solutions, & Data Center Devices and Solutions). We think incremental disclosures would be applauded. Our F3Q18 estimates reflect: (1) total HDD capacity shipments at ~86.2EBs, or roughly flat sequentially; high-cap / nearline enterprise HDD capacity shipped estimated at ~43-44EBs, or +20% seq. and now surpassing 50% of WD s total HDD capacity shipped (vs. 36% a year ago). We model total HDD blended ASP ($/TB) at -2% seq. and -16% yr/yr at ~$30/TB. (2) total estimated NAND Flash capacity shipped at ~8.5EBs, or -6% seq. with a blended ASP ($/TB) declining more than 9% sequentially (note: we view this as conservative - compares to NAND Flash contract pricing declining by ~7% seq. in 1Q18; our tracking of SSD pricing data implies a low single digit seq. pricing decline in 1Q18). As we consider our long-term modeling of Western Digital, we would again highlight the estimated TAM summary on page 5 as a helpful benchmark. We currently model WD s HDD capacity ship CAGR in the low/mid-teens; Flash capacity shipped growing at a ~40% CAGR; HDD and Flash ASPs ($/TB) declining at 10%-15% and mid-20% CAGR ranges. $ 2017A 2018E 2019E EPS Curr. Prior Curr. Prior Q1 (Sep.) A NC Q2 (Dec.) A NC Q3 (Mar.) Q4 (June) FY CY FY P/EPS 10.0x 6.4x 6.6x Rev.(MM) 19,093 20,495 21,400 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List Ticker Price Target/Prior: WDC $115/NC Price (04/18/2018) $ Week Range: $ Shares Outstanding: (MM) Market Cap.: (MM) $27,143.2 S&P 500: 2, Avg. Daily Vol.: 3,512,300 Dividend/Yield: $2.00/2.2% LT Debt: (MM) $12,051.0 LT Debt/Total Cap.: 107.0% ROE: NE 3-5 Yr. Est. Growth Rate: 19.0% CY 2018 Est. P/EPS-to-Growth: 0.3x Last Reporting Date: 01/25/2018 After Close NC = No Change Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters Aaron Rakers, CFA Senior Analyst aaron.rake rs@ we llsfargo.com Joe Quatrochi, CFA Associate Analyst joe.quatroch i@ we llsfargo.co m Jake Wilhelm, CPA Associate Analyst jake.wilh e lm@ we llsfargo.co m Please see page 10 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 04/18/18 unless otherwise stated. 04/18/18 20:22:47 ET Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

2 IT Hardware & Communications Networking Equity Research 2. NAND Flash Supply / Demand and Pricing 20%-25% yr/yr Flash Price Declines ($/GB) + 40%+ Demand Growth = Support of our High-40% / Low-50% NAND Flash GM% Estimates? Investor sentiment on Western Digital remains hyper-sensitive to NAND Flash industry cyclicality and thus incremental bit supply data points as the industry fully ramps 3D NAND contributions (65% of total NAND Flash bits in 4Q17), looks to add incremental capacity, and begins to execute on the next technology transitions (96-Layer 3D NAND and Quad-Level Cell, or QLC, 3D NAND). Western Digital has noted that it expects industry bit supply to grow at the high-end of its target long-term model of +35%-45% per annum. Micron slightly tempered its comments on 2018 bit supply growth during its recent earnings call to somewhat higher than 45% vs. prior approaching +50% forecast. Samsung is currently guiding C2018 bit supply to be ~40% yr/yr. With an expectation of consistent industry supply growth commentary, we believe Western Digital will maintain its guidance of executing on a ~20% per annum cost down / price curve; optimization of bit placement across a broad portfolio remains a strategic focus. We remain positive on the WD / Toshiba joint venture (Flash Ventures) operations, from which we are increasingly focused on the company s execution on BiCS4 96-layer 3D NAND with sample shipments commencing in the December quarter (well ahead of Micron s report that it would commence sample shipments of 96-Layer in 2H2018). 3. High-Cap / Nearline HDD Demand; Sustained 10/12TB Share & Share Gains in 4/6/8TB Air- Filled HDDs? When Will MAMR vs. HAMR Matter? As we have previously reported, IDC s preliminary 1Q18 HDD estimates imply high-cap / nearline HDD capacity shipped totaled 91.7EBs, or up over 20% sequentially and +87% yr/yr (note: this compares to WD s prior expectation of +60% yr/yr bit shipment growth in 1H2018; +50% yr/yr for the full year). We estimate WD s high-cap / nearline HDD capacity shipments at ~43.8EBs, up 20% seq. and +82% yr/yr. We will be interested in WD s comments on: (1) trends in 10TB / 12TB supply vs. demand and industry checks have highlighted supply constraints (some upstream supply chain challenges at WD) through the March quarter, (2) WD s thoughts on capturing incremental share in 4-8TB air-filled HDDs during 1Q18; we would note that these capacity points accounted for ~39% of total high-cap / nearline HDD capacity shipped in 4Q17 (vs. 10TB+ at ~55% of total capacity per TrendFocus estimates). (3) WD s thoughts on the progression toward commercializing its next-generation Micro-Wave Assisted Magnetic Recording (MAMR) based high-cap enterprise HDDs looking into We think the competitive positioning / difference between Seagate s use of Heat-Assisted Magnetic Recording (HAMR) versus WD s MAMR HDDs will be a focus i.e., cost differential via aluminum versus glass finished media, incorporating nanoscale laser with the read/write head versus spin-torque technology, and drive endurance / reliability characteristics remain focal points. 4. Enterprise SSDs Increasing Focus on Competitive Positioning; Share Recapture into Mid/2H2018. Positive overall NAND Flash trends have overshadowed WD s share declines in enterprise SSDs over the past several quarters a trend that we remain focused on as key areas of needed improvement looking through 2018 and beyond. According to IDC s estimates, Western Digital exited 2017 with a 10.9% revenue share in enterprise SSDs, a notable decline from the Western Digital + SanDisk having a more than 28% revenue share in 4Q15. TrendFocus estimates that Western Digital s capacity shipment share in total enterprise SSDs stood at 11.7% in 4Q17, down from the peak of 23.9% in 3Q16. In 2017 Samsung shipped 18.4x more PCIe enterprise SSD capacity than Western Digital; Intel shipped nearly 8x more capacity than Western Digital. Western Digital s positioning in the NVMe / PCIe enterprise SSD will likely be a key focus as we think this remains the market that will exhibit the most price / demand elasticity going forward (note: 70%+ of this market is driven by hyper-scale / cloud demand). 5. Capital Structure / Return Discussion: Western Digital completed the pricing / reduction of its debt in early March taking its gross debt to $11.4 billion with a 3.6% weighted interest rate with the completed redemption of 10.5% and 7.375% senior unsecured and senior secured notes. The company reduced its annual interest expense to $410-$415MM/annum) from the prior $720MM/annum level. With what we believe to be an attractive debt structure, a debt-to-adjusted EBITDA comfortably below 2.0x, and our expectation of +$3B/annum in FCF generation, we think Western Digital could (or has) become active on return capital via share repurchases. 2 Wells Fargo Securities, LLC

3 3 Wells Fargo Securities, LLC Western Digital Scenario Analysis Wells Fargo Est. C2018E Pluggable Model C2020 Est. $ Millions; Except per Share C2017A C2018E Bear Base Bull Wells Est. Implied P/E Implied Stock Price EV/EBITDA Implied Stock Price Calendar 2018 Key Inputs (Red = Plugs) E NAND Flash: Multiple Bear Base Bull Multiple Bear Base Bull Bear Base Bull CAGR% / % NAND EBs Shipped x $55 $85 $ x $40 $60 $70 NAND EBs Shipped - Yr/Yr % 25.0% 40.0% 45.0% 35.0% Yr/Yr - % 28.2% 34.0% 25.0% 40.0% 45.0% 40% 35% 7.00x $64 $99 $ x $55 $80 $93 Blended NAND $ per TB - Yr/Yr % -35.0% -25.0% -25.0% -20.0% Blended NAND $ per TB $319 $235 $207 $239 $239 $141 $ x $73 $114 $ x $70 $100 $116 Flash Revenue Yr/Yr Growth -18.8% 5.0% 8.7% 55.0% Yr/Yr - % 6% -26% -35% -25% -25% -24% -20% 9.00x $82 $128 $ x $86 $121 $139 HDD EBs Shipped - Yr/Yr % 8.0% 15.0% 25.0% 15.0% Flash Revenue $9,879 $9,780 $8,027 $10,373 $10,743 $11,932 $12, x $91 $142 $ x $101 $141 $162 Blended HDD $ per TB - Yr/Yr % -8.0% -8.0% -5.0% -10.0% 11.00x $100 $156 $ x $116 $161 $185 HDD Revenue Yr/Yr Growth -0.6% 5.8% 18.8% 11.6% Hard Disk Drives (HDDs): 12.00x $110 $170 $ x $131 $181 $208 Total Revenue Yr/Yr - % -9.4% 5.5% 13.8% 31.1% HDD EBs Shipped x $119 $185 $ x $146 $202 $231 Flash / Other Gross Margin - % 45.0% 49.0% 51.5% 48.0% Yr/Yr - % 13.0% 23.0% 8.0% 15.0% 25.0% 15% 15% Hard Disk Drive Gross Margin - % 31.0% 32.0% 32.5% 31.0% Blended HDD $ per TB $33 $30 $30.25 $30.25 $31.24 $23 $24.0 Current vs. 5-Yr P/E Multiples Current vs. 5-Yr EV/EBITDA Multiples Total Gross Margin - % 36.9% 40.0% 41.2% 39.5% Yr/Yr - % -4.3% -8.6% -8.0% -8.0% -5.0% -11% -10% Current Min Median Max Current Min Median Max Operating Expense - % of Revenue 17.0% 16.0% 15.5% 15.5% Hard Disk Drive Revenue $10,089 $11,337 $10,025 $10,674 $11,981 $10,795 $11,186 W. Digital 6.34x 6.12x 9.22x 13.44x 5.38x 1.51x 5.11x 7.31x Average Debt Balance $11,618 $11,386 $11,270 $10,819 Other Revenue $157 $175 $175 $175 $175 $ Seagate 13.68x 6.32x 10.11x 12.60x 8.75x 4.40x 6.58x 8.63x Debt Paydown - % n/a 2.0% 3.0% 3.5% Total Revenue $20,125 $21,292 $18,226 $21,222 $22,899 $22,987 $23,891 Micron 5.60x 4.15x 8.84x 35.16x 3.74x 3.03x 4.31x 6.23x Annualized Interest Rate - % 4.0% 3.6% 3.6% 3.6% Flash / Other Gross Profit $5,211 $5,148 $3,612 $5,083 $5,533 $5,746 $5,973 Average 8.54x 5.53x 9.39x 20.40x 5.95x 2.98x 5.33x 7.39x Tax Rate - % 10.0% 9.0% 9.0% 10.0% Gross Margin - % 51.9% 51.7% 45.0% 49.0% 51.5% 47.1% 48.0% FD Shares Outstanding % Change 2.5% -2.0% -3.0% -2.0% HDD Gross Profits $3,111 $3,611 $3,108 $3,416 $3,894 $3,317 $3,468 Western Digital Sum-of-the-Parts Simple Summary (Using Base Revenue Estimates) Gross Margin - % 30.8% 31.9% 31.0% 32.0% 32.5% 30.7% 31.0% W. Digital HDDs: W. Digital NAND Flash / Other: WD's Expectations / Notes: Total Gross Profit $8,322 $8,760 $6,720 $8,498 $9,427 $9,063 $9,441 HDD Revenue $10,674 Flash / Other Revenue $10,373 - CY2018 revenue growth at high-end of +4%-8% yr/yr long-term revenue growth target Gross Margin - % 41.4% 41.1% 36.9% 40.0% 41.2% 39.4% 39.5% HDD GM% 32.0% Flash / Other GM% 49.0% - CY2018 gross margin above long-term target model of 33%-38% (sustainable trend?) Total Operating Expenses $3,307 $3,424 $3,098 $3,396 $3,549 $3,620 $3,703 HDD Opex % of Rev. 16.0% Flash / Other Opex % of Rev. 20.0% - W. Digital has a long-term model target with operating expenses at 14%-16% of revenue % of Revenue 16.4% 16.1% 17.0% 16.0% 15.5% 15.7% 15.5% HDD Depreciation Expense $600 Flash / Other Depr. Expense $271 - FY2018 non-gaap EPS estimated at $13.50-$14.00/sh. (vs. prior >$13/sh.); excludes debt reduction Operating Income $5,015 $5,335 $3,621 $5,103 $5,877 $5,443 $5,738 Implied HDD EBITDA $2,308 Implied Flash / Other EBITDA $3,279 - W. Digital expects its F2019 tax rate to be at the high-end or slightly above LT range of 7%-12% EBIT - % 24.9% 25.1% 19.9% 24.0% 25.7% 23.7% 24.0% - Seagate EV / EBITDA Multiple* 8.29x - Implied Flash / Other EV/EBITDA Multiple: 4.35x - W. Digital reauthorized share repurchase plan in December; $2.1B in current authorization Depreciation Expense $897 $871 $871 $871 $871 $952 $952 WD's Implied HDD Ent. Value $19,140 WD's Implied Flash / Other Ent. Value: $14,248 - Flash industry bit growth in +35%-45% yr/yr range in 2018 (Micron est. ~50% yr/yr; Samsung at ~40%) EBITDA $5,912 $6,206 $4,492 $5,974 $6,748 $6,395 $6,690 - W. Digital's capital return allocation became unrestricted below 2.0x debt-to-adj. EBITDA. Total Interest Expense + Other $783 $469 $469 $469 $406 $390 $389 * Using Seagate EV/EBITDA Multiple for W. Digital's HDD Business; Implied Flash / Other Multiple - 3D-to-3D NAND Flash cost reductions estimated in 15%-25% range. Pretax Income $4,232 $4,866 $3,152 $4,634 $5,471 $5,054 $5,349 * Excluding $2B in Ripple investment value in Seagate's Enterprise Value - W. Digital reporting that 3D NAND at 70% of bits exiting CY2017; 64-Layer at +90% of 3D NAND Tax Rate - % 8.0% 7.7% 10.0% 9.0% 9.0% 10.0% 10.0% - 96-Layer (BiCS4 ) shipments commenced in mid-december; ramp through Non-GAAP Income $3,894 $4,490 $2,837 $4,217 $4,979 $4,548 $4,814 - Western Digital has highlighted Quad-Level Cell (QLC, or X4) on roadmap - ahead of competitors? Non-GAAP EPS $12.83 $14.46 $9.13 $14.20 $16.94 $14.63 $ We expect a focus on improved enterprise SSD positioning / execution / solutions in 2H2018 FD Shares Outstanding P/E Multiple Scenario Wells Fargo Notes / Considerations: - Confidence in normalized GM% is key to investor sentiment; SanDisk non-gaap GM% averaged 46% for 3-yrs prior to acquisition (range: 42%-51%). We believe the investor fear is that NAND Flash GM% declines to sub-30%. - Key NAND Flash GM% variables: (1) pricing versus production costs ($/GB) declines; implications of yield ramps and next-gen. 3D NAND transitions (2) W. Digital's portfolio mix - embedded / mobile Flash vs. client and enterprise SSDs. (3) vertical integration in enterprise SAS SSDs (vs. Intel Flash) * We will remain focused on W. Digital's commentary on the anticipated ramp of 96-Layer 3D NAND - (1) expected cross over for enterpris SAS SSD integration, (2) a disclosed 35% die size shrink, and (3) checks point to single stack (vs. string stack) - its all about producting at teh lowest $/GB. - SanDisk's standalone quarterly non-gaap operating expense as a percentage of revenue averaged 21% for the 3-years pre-acquisition. - W. Digital's ability to improve / increase its participation in the enterprise SSD market should be an important focus - TrendFocus data implies W. Digital's essd capacity shipped grew 20% yr/yr for TTM ending 3Q17 vs. the market growing at >70% yr/yr; WD capacity ship share in essds declining to sub-13% in 3Q17 vs. 24% a year ago. - With it being unlikely that W. Digital would look to take out its 7.4% and / or 10.5% debt in the open market (note: callable in April 2019), we continue to think share repurchases could become a more relevant part of W. Digital's capital allocation strategy. - Investors should consider the significant difference in spot and contract pricing versus WD's pricing trends - e.g., we estimate W. Digital's blended Flash $/GB is in the high-single digit / low-double digit yr/yr range in 2017 vs. avg spot and contract MLC / TLC pricing at +23% / +75% and +40% / +74%, respectively. - IDC and DRAMeXchange (TrendForce) data shows NAND Flash blended pricing ($/GB) at +15% for YTD ending 3Q17 - well below the implied spot and contract pricing trends. - We expect positive results / forward comments on high-cap / nearline HDDs during F2Q18 earnings; expect focus on W. Digital's positioning with Microwave-Assisted Magnetic Recording (MAMR) vs. Seagate's Heat-Assisted Magnetic Recording (HAMR) to be increasingly debated through 2018 with productization looking into Source: Company data, FactSet; Wells Fargo Securities, LLC Estimates C2020E EV / EBITDA Multiple Scenario Does This Make Sense When Considering? * W. Digital acquired SanDisk for $15.588B total consideration; $10.9B excluding cash & marketable securities acquired, or >6x traling non-gaap EBITDA. * W. Digital has a higher contribution of solutions versus trade NAND sales versus Micron. * We believe W. Digital has executed extremely well / on-track with 3D NAND, which will include the progression to 96-Layer (BiCS4) 3D NAND in 2018 * Bain-led consortium to acquire Toshiba Memory Corp (TMC) for approximately $18 billion, or nearly 6x TMC's trailing twelve-month operating income (period ending 3Q17). * Based on IDC data, Western Digital's enterprise and client SSD revenue totaled $1.67B and $1.72B in 2017 vs. Toshiba at $1.16B and $1.16B, represectively. Western Digital Corp. Equity Research

4 IT Hardware & Communications Networking Equity Research Highlighted Charts 4 Wells Fargo Securities, LLC

5 5 Wells Fargo Securities, LLC Estimated Total Addressable Market Summary: Wells Fargo Estimates Estimated Estimated 2017 / E % of % of Implied '17-'21E HDD / SSD / Flash Revenue TAM ($MM) Exabytes Shipped Yr/Yr % Change CAGR-% Core Revenue Core Capacity $ per TB $/TB Addressable Segments: E E Rev. ($MM) Cap. Ship Rev. ($MM) Cap. Ship E E E CAGR Client HDDs $8,470 $7,614 $3, (10.1%) (19.1%) (15.8%) (10.0%) 14% 10% 5% 25% 18% 5% $47.0 $52.1 $37.4 (8%) CE / Gaming HDDs $4,000 $4,236 $6, % 20.7% 9.5% 20.0% 7% 6% 8% 15% 16% 15% $37.3 $32.7 $23.4 (8%) Total Client HDDs $12,470 $11,850 $9, (5.0%) (4.2%) (4.6%) 4.8% 20% 15% 13% 39% 34% 20% $43.3 $43.0 $27.1 (9%) Client SSDs $8,710 $12,000 $12, % 21.2% 7.7% 35.0% 14% 16% 16% 4% 5% 7% $283.6 $322.5 $102.0 (25%) Embedded Flash + Components $13,750 $19,500 $20, % 30.7% 8.3% 35.0% 23% 25% 26% 8% 9% 13% $245.2 $266.0 $84.2 (25%) Total Client Devices Flash (cssds + Embedded) $22,460 $31,500 $33, % 27.3% 8.1% 33.4% 37% 41% 43% 12% 14% 20% $258.8 $285.0 $90.2 (19%) Total Client Devices $34,930 $43,350 $42, % 3.1% 4.2% 14.3% 57% 56% 55% 51% 48% 40% $93.3 $112.3 $58.7 (9%) Branded HDDs $3,677 $3,750 $2, % (1.2%) (4.0%) 5.0% 6% 5% 4% 14% 13% 7% $35.5 $36.6 $24.0 (10%) Branded Flash (USB & Wireless Solutions) $4,850 $7,250 $4, % 15.2% 0.5% 30.0% 8% 9% 6% 3% 3% 4% $223.5 $290.0 $69.6 (30%) Total Client Solutions $8,527 $11,000 $7, % 1.7% (1.4%) 9.3% 14% 14% 10% 17% 16% 11% $68.0 $86.3 $40.6 (10%) Mission-Critical Enterprise HDDs $2,974 $2,579 $ (13.3%) (1.0%) (20.4%) (18.0%) 5% 3% 1% 3% 2% 0% $155.9 $136.5 $111.2 (5%) Nearline (High-Cap) Enterprise HDDs $6,462 $7,114 $10, % 25.1% 9.3% 33.0% 11% 9% 13% 27% 30% 42% $33.2 $29.2 $13.2 (18%) Total Enterprise HDDs $9,436 $9,693 $11, % 22.8% 3.1% 29.2% 15% 13% 14% 29% 33% 42% $44.2 $36.9 $14.3 (20%) Enterprise SSDs $7,991 $12,856 $15, % 73.1% 14.4% 50.0% 13% 17% 20% 2% 3% 7% $532.3 $494.6 $118.8 (30%) Total Data Center Devices $17,427 $22,549 $26, % 26.1% 8.9% 31.6% 29% 29% 34% 31% 36% 49% $76.2 $78.2 $29.5 (17%) TOTAL CORE ADDRESSABLE MARKETS: $60,884 $76,899 $77, , % 10.1% 5.0% 20.2% 100% 100% 100% 100% #DIV/0! 100% $83.6 $95.9 $42.4 (13%) Data Center Solutions (Systems / Software) $4,200 $4,600 $23,200 n/a n/a n/a 9.5% n/a 40.7% n/a TOTAL ADDRESSABLE MARKETS: $65,084 $81,499 $100,779 n/a n/a n/a 25.2% n/a 9.1% n/a HDD Addressable Markets $25,583 $25,293 $23, , % 5.8% (1.4%) 18.4% 42% 33% 31% 83% 80% 69% $42.3 $39.5 $19.0 (15%) SSD / Flash Addressable Markets (ex-solutions) $35,301 $51,606 $53, % 30.8% 1.0% 37.1% 58% 67% 69% 17% 20% 31% $285.8 $319.5 $94.2 (20%) SSDs / Flash % of Total; $/TB Premium vs. HDDs Client SSDs % of Total Client HDDs + SSDs 51% 61% 78% 15% 20% 56% Client SSD vs. PC HDD $/GB Multiple 6.04x 6.18x 2.73x Client SSDs + Embedded Flash & Components % of Total Client 64% 73% 77% 23% 29% 50% Client SSD + Embedded vs. Total Client HDD $/GB Multiple 5.97x 6.63x 3.33x Branded Flash % of Total Client Solutions 57% 66% 62% 17% 20% 36% Branded SSD vs. Branded HDD $/GB Multiple 6.30x 7.93x 2.90x Enterprise SSDs % of Total Enterprise 46% 57% 59% 7% 9% 15% Enterprise SSD vs. Total Enterprise HDD $/GB Multiple 12.06x 13.39x 8.31x Enterprise SSDs % of essds + Mission-Critical Ent. HDDs 73% 83% 94% 44% 58% 94% Enterprise SSD vs. Mission-Critical Ent. HDD $/GB Multiple 3.42x 3.62x 1.07x Source: Company Results / Estimates; Wells Fargo Securities, LLC Estimates Enterprise SSD vs. Nearline / High-Cap Ent. HDD $/GB Multiple 16.03x 16.93x 8.99x Western Digital Corp. Equity Research

6 IT Hardware & Communications Networking Equity Research 6 Wells Fargo Securities, LLC

7 Western Digital Corp. Equity Research 7 Wells Fargo Securities, LLC

8 8 Wells Fargo Securities, LLC Western Digital Income Statement Summary ($ in Millions; Except per Share) Last Wells Fargo Rptd == Estimates ==> FY2017 FY2018E FY2019E FY2020E FY2021E Calendar Estimates F1Q17 F2Q17 F3Q17 F4Q17 Total F1Q18 F2Q18 F3Q18E F4Q18E Total F1Q19E F2Q19E F3Q19E F4Q19E Total F1Q20E F2Q20E F3Q20E F4Q20E Total F1Q21E F2Q21E F3Q21E F4Q21E Total C2016 C2017 C2018E C2019E C2020E Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Jun-20 Jun-20 Jun-20 Jun-20 Revenue $4,714 $4,888 $4,649 $4,842 $19,093 $5,181 $5,336 $4,937 $5,040 $20,495 $5,417 $5,897 $5,048 $5,037 $21,400 $5,785 $6,549 $5,500 $5,446 $23,279 $6,101 $5,940 $5,034 $5,241 $22,316 $16,410 $20,008 $21,292 $22,419 $22,987 Cost of Sales $3,115 $3,096 $2,823 $2,844 $11,878 $2,989 $3,030 $2,841 $2,976 $11,836 $3,196 $3,521 $3,063 $3,068 $12,848 $3,502 $3,944 $3,342 $3,317 $14,104 $3,670 $3,595 $3,093 $3,203 $13,561 $10,959 $11,686 $12,533 $13,577 $13,923 Gross Margin $1,599 $1,792 $1,826 $1,998 $7,215 $2,192 $2,306 $2,096 $2,065 $8,659 $2,222 $2,377 $1,985 $1,969 $8,552 $2,283 $2,605 $2,158 $2,129 $9,175 $2,431 $2,345 $1,940 $2,039 $8,755 $5,451 $8,322 $8,760 $8,842 $9,063 Operating Expenses Research & Development $599 $542 $571 $564 $2,276 $550 $588 $558 $572 $2,268 $582 $613 $586 $579 $2,361 $596 $629 $605 $599 $2,429 $641 $653 $579 $566 $2,439 $1,905 $2,273 $2,326 $2,389 $2,498 Sales, General, & Administrative $264 $255 $241 $248 $1,008 $269 $277 $285 $262 $1,093 $271 $280 $263 $264 $1,078 $272 $301 $292 $289 $1,153 $275 $267 $252 $262 $1,056 $923 $1,035 $1,098 $1,100 $1,122 Total Operating Expenses $863 $797 $811 $812 $3,283 $819 $865 $843 $834 $3,361 $853 $893 $848 $844 $3,439 $868 $930 $897 $888 $3,582 $915 $921 $831 $828 $3,495 $2,828 $3,307 $3,424 $3,489 $3,620 Operating Income (EBIT) $736 $995 $1,015 $1,186 $3,932 $1,373 $1,441 $1,253 $1,231 $5,297 $1,369 $1,483 $1,137 $1,125 $5,114 $1,415 $1,675 $1,262 $1,241 $5,593 $1,516 $1,424 $1,110 $1,211 $5,261 $2,623 $5,015 $5,335 $5,352 $5,443 EBITDA $1,002 $1,232 $1,251 $1,413 $4,898 $1,587 $1,661 $1,472 $1,457 $6,176 $1,576 $1,702 $1,367 $1,355 $6,000 $1,643 $1,920 $1,502 $1,480 $6,545 $1,754 $1,658 $1,333 $1,438 $6,183 NM $5,912 $6,206 $6,284 $6,395 Net Interest Expense Other Income $227 $221 $206 $197 $851 $200 $180 $156 $107 $643 $103 $103 $103 $102 $411 $102 $101 $100 $99 $403 $97 $93 $88 $85 $362 $664 $705 $579 $553 $0 Pretax Income $509 $774 $809 $989 $3,081 $1,173 $1,261 $1,097 $1,124 $4,654 $1,265 $1,380 $1,034 $1,023 $4,703 $1,313 $1,574 $1,162 $1,142 $5,191 $1,419 $1,332 $1,022 $1,126 $4,898 $1,958 $4,232 $4,866 $4,945 $5,054 Taxes $61 $99 $93 $108 $361 $84 $53 $66 $79 $281 $108 $124 $103 $102 $437 $131 $157 $116 $114 $519 $142 $133 $102 $113 $490 $162 $338 $376 $494 $505 Net Income (Non-GAAP) $448 $675 $716 $881 $2,720 $1,089 $1,208 $1,031 $1,045 $4,373 $1,158 $1,256 $931 $921 $4,265 $1,182 $1,417 $1,045 $1,028 $4,672 $1,277 $1,199 $920 $1,013 $4,408 $1,796 $3,894 $4,490 $4,450 $4,548 EPS (Non-GAAP; Headline) $1.54 $2.30 $2.39 $2.93 $9.16 $3.56 $3.95 $3.35 $3.35 $14.20 $3.71 $4.05 $3.00 $2.97 $13.74 $3.83 $4.58 $3.37 $3.32 $15.10 $4.09 $3.84 $2.95 $3.23 $14.11 $6.53 $12.83 $14.46 $14.39 $14.62 Fully Diluted Shares Margin Summary Gross Margin 33.9% 36.7% 39.3% 41.3% 37.8% 42.3% 43.2% 42.5% 41.0% 42.2% 41.0% 40.3% 39.3% 39.1% 40.0% 39.5% 39.8% 39.2% 39.1% 39.4% 39.8% 39.5% 38.5% 38.9% 39.2% 33.2% 41.6% 41.1% 39.4% 39.4% Operating Margin (EBIT) 15.6% 20.4% 21.8% 24.5% 20.6% 26.5% 27.0% 25.4% 24.4% 25.8% 25.3% 25.2% 22.5% 22.3% 23.9% 24.5% 25.6% 22.9% 22.8% 24.0% 24.8% 24.0% 22.0% 23.1% 23.6% 16.0% 25.1% 25.1% 23.9% 23.7% -- Operating Expenses - % of Rev. 18.3% 16.3% 17.4% 16.8% 17.2% 15.8% 16.2% 17.1% 16.6% 16.4% 15.8% 15.2% 16.8% 16.8% 16.1% 15.0% 14.2% 16.3% 16.3% 15.4% 15.0% 15.5% 16.5% 15.8% 15.7% 17.2% 16.5% 16.1% 15.6% 15.7% EBITDA Margin 21.3% 25.2% 26.9% 29.2% 25.7% 30.6% 31.1% 29.8% 28.9% 30.1% 29.1% 28.9% 27.1% 26.9% 28.0% 28.4% 29.3% 27.3% 27.2% 28.1% 28.8% 27.9% 26.5% 27.4% 27.7% NM 29.5% 29.1% 28.0% 27.8% Pretax Margin 10.8% 15.8% 17.4% 20.4% 16.1% 22.6% 23.6% 22.2% 22.3% 22.7% 23.4% 23.4% 20.5% 20.3% 22.0% 22.7% 24.0% 21.1% 21.0% 22.3% 23.3% 22.4% 20.3% 21.5% 21.9% 11.9% 21.2% 22.9% 22.1% 22.0% Tax Rate 12.0% 12.8% 11.5% 10.9% 11.7% 7.2% 4.2% 6.0% 7.0% 6.0% 8.5% 9.0% 10.0% 10.0% 9.3% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 8.3% 8.0% 7.7% 10.0% 10.0% Net Income Margin 9.5% 13.8% 15.4% 18.2% 14.2% 21.0% 22.6% 20.9% 20.7% 21.3% 21.4% 21.3% 18.4% 18.3% 19.9% 20.4% 21.6% 19.0% 18.9% 20.1% 20.9% 20.2% 18.3% 19.3% 19.8% 10.9% 19.5% 21.1% 19.8% 19.8% Yr/Yr Growth % Revenue 21.5% 41.6% 9.9% 9.2% 6.2% 4.1% 7.3% 4.6% 10.5% 2.2% -0.1% 4.4% 6.8% 11.0% 9.0% 8.1% 8.8% 5.5% -9.3% -8.5% -3.7% -4.1% 22.3% 21.9% 6.4% 5.3% 2.5% Gross Profit 57.8% 81.5% 37.1% 28.7% 14.8% 3.3% 20.0% 1.4% 3.1% -5.3% -4.7% -1.2% 2.7% 9.6% 8.7% 8.1% 7.3% 6.5% -10.0% -10.1% -4.2% -4.6% 38.5% 52.7% 5.3% 0.9% 2.5% Operating Margin (EBIT) 106.3% 129.4% 86.5% 44.8% 23.4% 3.8% 34.7% -0.3% 2.9% -9.3% -8.6% -3.5% 3.4% 12.9% 11.0% 10.3% 9.4% 7.1% -15.0% -12.0% -2.5% -6.0% 56.5% 91.2% 6.4% 0.3% 1.7% -- Operating Expenses 17.5% 44.2% -5.1% 8.5% 4.0% 2.7% 2.4% 4.2% 3.3% 0.6% 1.1% 2.3% 1.7% 4.1% 5.7% 5.2% 4.2% 5.5% -1.0% -7.4% -6.7% -2.4% 25.1% 16.9% 3.5% 1.9% 3.7% EBTIDA 58.4% 34.8% 17.6% 3.1% 26.1% -0.7% 2.4% -7.1% -7.0% -2.9% 4.2% 12.8% 9.9% 9.2% 9.1% 6.8% -13.6% -11.3% -2.8% -5.5% 5.0% 1.3% 1.8% Pretax Income 170.2% 110.0% 130.5% 62.9% 35.6% 13.6% 51.1% 7.9% 9.4% -5.7% -9.0% 1.0% 3.8% 14.1% 12.3% 11.6% 10.4% 8.0% -15.4% -12.0% -1.4% -5.6% 19.1% 116.1% 15.0% 1.6% 2.2% Net Income 125.9% 92.5% 143.1% 79.0% 44.0% 18.6% 60.8% 6.3% 4.0% -9.7% -11.9% -2.5% 2.1% 12.8% 12.3% 11.6% 9.5% 8.0% -15.4% -12.0% -1.4% -5.6% 16.9% 116.8% 15.3% -0.9% 2.2% EPS 97.4% 56.5% 130.4% 71.9% 39.8% 14.4% 55.0% 4.3% 2.6% -10.3% -11.2% -3.3% 3.1% 13.2% 12.3% 11.5% 9.9% 7.0% -16.2% -12.6% -2.6% -6.5% -0.2% 96.4% 12.7% -0.5% 1.6% Seq. Growth % Revenue 18.3% 3.7% -4.9% 4.2% 7.0% 3.0% -7.5% 2.1% 7.5% 8.9% -14.4% -0.2% 14.8% 13.2% -16.0% -1.0% 12.0% -2.6% -15.3% 4.1% Gross Profit 26.3% 12.1% 1.9% 9.4% 9.7% 5.2% -9.1% -1.5% 7.6% 7.0% -16.5% -0.8% 16.0% 14.1% -17.2% -1.4% 14.2% -3.5% -17.3% 5.1% Operating Margin (EBIT) 28.0% 35.2% 2.0% 16.8% 15.8% 5.0% -13.1% -1.8% 11.2% 8.4% -23.4% -1.0% 25.8% 18.4% -24.7% -1.6% 22.1% -6.0% -22.1% 9.1% -- Operating Expenses 24.9% -7.6% 1.8% 0.1% 0.9% 5.6% -2.5% -1.1% 2.3% 4.7% -5.1% -0.5% 2.8% 7.2% -3.6% -1.0% 3.1% 0.6% -9.8% -0.3% EBTIDA 23.0% 1.5% 12.9% 12.3% 4.7% -11.4% -1.0% 8.2% 7.9% -19.7% -0.8% 21.2% 16.9% -21.7% -1.5% 18.5% -5.5% -19.6% 7.9% Pretax Income 39.1% 52.1% 4.5% 22.2% 18.6% 7.5% -13.0% 2.5% 12.6% 9.1% -25.1% -1.1% 28.4% 19.9% -26.2% -1.7% 24.2% -6.1% -23.3% 10.2% Net Income 14.9% 50.7% 6.1% 23.0% 23.6% 10.9% -14.7% 1.4% 10.8% 8.5% -25.9% -1.1% 28.4% 19.9% -26.2% -1.7% 24.2% -6.1% -23.3% 10.2% EPS 4.2% 48.6% 4.3% 22.2% 21.6% 10.9% -15.2% 0.1% 10.8% 9.2% -25.9% -0.9% 28.6% 19.9% -26.4% -1.7% 23.4% -6.1% -23.3% 9.5% Source: Company Data, Wells Fargo Securities, LLC Estimates IT Hardware & Communications Networking Equity Research

9 Western Digital Corp. Equity Research Price Target Price Target: $115 from NC Using a weighted valuation methodology based on our C2019 estimates as well as an 8.0x P/E and 6.7x EV/EBITDA, we arrive at a price target of $115/share. Risks to our price target include: (1) Potential related operational disruption following now settled arbitration with Toshiba / Toshiba Memory. (2) HDD Cyclicality - the HDD industry has historically been volatile and highly cyclical - increased exposure to lumpy cloud data center spending. (3) Execution risk related to the integration of SanDisk. (4) Flash/SSD/SanDisk - SSDs continue to cannibalize HDDs; SanDisk's transition from 2D Planar NAND to 3D NAND could adversely impact the company's NAND business. (5) Increased competition and pricing pressures affect Western Digital's results as often times competitors act irrationally in the market place (HDD and flash markets). (6) Impacts from the Japanese Yen will also be a consideration related to SanDisk's purchase agreements with Toshiba. Investment Thesis Our positive thesis on Western Digital reflects: 1.) Western Digital's broad-based product portfolio (Flash and HDDs) to address the positive growth in digital content. 2.) Our expectation of continued strong growth and margin trends in WD's high-cap / nearline enterprise HDDs, 3.) Continued synergies from WD's integration of SanDisk, 4.) Western Digital's technology positioning - 3D NAND Flash ramp, as well as high-cap / nearline enterprise HDDs, and 5.) Western Digital's positive execution track record. Company Description Western Digital, headquartered in Irvine, California, is a leading provider of Hard Disk Drives (HDDs) and NAND Flash products addressing the desktop, notebook, enterprise, and consumer electronics markets. The company sells its products to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for use in computer systems, subsystems, or consumer electronic devices and to distributors, resellers and retailers, and directly to internet cloud providers. In May 2016 the company closed its acquisition of SanDisk, further positioning itself in the NAND Flash industry. Wells Fargo Securities, LLC 9

10 IT Hardware & Communications Networking Equity Research Required Disclosures Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. 10 Wells Fargo Securities, LLC

11 Western Digital Corp. Equity Research Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 0.5% or more of any class of the common stock of Western Digital Corp.. Western Digital Corp. currently is, or during the 12 month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Western Digital Corp.. Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Western Digital Corp. in the past 12 months. Wells Fargo Securities, LLC, or any of its affiliates, intends to seek or expects to receive compensation for investment banking services from Western Digital Corp. in the next three months. Wells Fargo Securities, LLC, or its affiliates, managed or co-managed a public offering of securities for Western Digital Corp. within the past 12 months. Wells Fargo Securities, LLC maintains a market in the common stock of Western Digital Corp.. Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Western Digital Corp. in the past 12 months. Western Digital Corp. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided non-investment banking securities-related services to Western Digital Corp.. Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Western Digital Corp.. WDC: Risks to our price target include: (1) Potential related operational disruption following now settled arbitration with Toshiba / Toshiba Memory. (2) HDD Cyclicality - the HDD industry has historically been volatile and highly cyclical - increased exposure to lumpy cloud data center spending. (3) Execution risk related to the integration of SanDisk. (4) Flash/SSD/SanDisk - SSDs continue to cannibalize HDDs; SanDisk's transition from 2D Planar NAND to 3D NAND could adversely impact the company's NAND business. (5) Increased competition and pricing pressures affect Western Digital's results as often times competitors act irrationally in the market place (HDD and flash markets). (6) Impacts from the Japanese Yen will also be a consideration related to SanDisk's purchase agreements with Toshiba. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading. As of: April 18, % of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform. 50% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform. 2% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform. Wells Fargo Securities, LLC has provided investment banking services for 41% of its Equity Research Outperform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 29% of its Equity Research Market Perform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 26% of its Equity Research Underperform-rated companies. Wells Fargo Securities, LLC 11

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