Western Digital (NASDAQ:WDC) reported fiscal second-quarter 2026 results that management said reflected strong demand tied to AI-driven data growth and continued customer adoption of higher-capacity nearline hard drives. Executives emphasized that AI training and inference workloads are driving rapid expansion in data creation, fueling demand for higher-density storage and supporting a pricing and margin environment the company described as stable to improving.
AI and cloud demand shaping product strategy
Chief Executive Officer Irving Tan framed the quarter against what he called accelerating adoption of generative AI, “agentic AI,” and the growth of AI inference deployments such as chatbots, virtual assistants, and customer relationship management tools. Tan also pointed to momentum in “physical AI” use cases, including autonomous vehicles and robotics, which he said are contributing to increasingly large multimodal models.
Tan also said the company has begun qualifying HAMR drives with one hyperscale customer and next-generation ePMR drives with a different hyperscale customer. In the Q&A, management added that HAMR qualification was pulled forward by about half a year and began “this month,” with qualification with a second hyperscale customer expected to start “imminently.”
To support its HAMR roadmap, Tan said Western Digital recently acquired intellectual property, assets, and talent intended to help develop internal laser capabilities. While financial terms were not disclosed, Tan said the technology is expected to reduce the “real estate in the drive,” improve manufacturability and reliability, and reduce energy requirements relative to conventional laser diodes.
Q2 financial results exceed guidance
Chief Financial Officer Kris Sennesael said revenue for the second quarter of fiscal 2026 was $3.0 billion, up 25% year-over-year, driven by nearline demand. Earnings per share were $2.13, with both revenue and EPS coming in above the high end of the company’s guidance range.
Western Digital delivered 215 exabytes (EB) during the quarter, up 22% year-over-year, including 103EB tied to shipments of more than 3.5 million latest-generation ePMR drives. Sennesael said cloud revenue totaled $2.7 billion, representing 89% of total revenue and rising 28% year-over-year. Client revenue was $176 million (6% of revenue), up 26% year-over-year, while consumer revenue was $168 million (5% of revenue), down 3% year-over-year.
Gross margin was 46.1%, up 770 basis points year-over-year and 220 basis points sequentially, which Sennesael attributed to mix shift toward higher-capacity drives and “tight cost control in our manufacturing sites and throughout the supply chain.” Operating expenses were $372 million, and operating income was slightly above $1 billion, producing an operating margin of 33.8%.
Margins, pricing, and cost per terabyte
In response to analyst questions on incremental margins and the cost curve, Sennesael said he was “really happy” with gross margin performance and noted the company’s third-quarter gross margin guide implies incremental gross margin of around 75%, depending on the comparison period. He said Western Digital continues to see a stable pricing environment, with pricing per terabyte described as “flattish to slightly up,” and cited a 2% to 3% increase in ASP per terabyte in the prior quarter.
On costs, management said the company continues to benefit from shifting customers to higher-capacity drives and from execution in manufacturing and the supply chain. Sennesael said cost per terabyte was down about 10% year-over-year in the quarter. When asked if cost-down could improve beyond that level, he said continued innovation, higher capacities, and greater UltraSMR adoption should drive further reductions, adding that “only about 10% is a good number,” with potential upside if roadmaps are accelerated.
Management also provided yield and reliability color. Tan said yields for ePMR products are “in the low 90s% yield range,” and that customer feedback on reliability and quality has been strong, citing the quarter’s shipment volume as evidence of customer confidence.
Customer agreements and UltraSMR adoption
Tan said Western Digital’s customer engagement has become more “customer-centric,” including dedicated teams focused on major hyperscalers, which he said has improved technology roadmap alignment and visibility into demand. He said the company has firm purchase orders with its top seven customers through calendar year 2026 and has longer-term agreements with three of its top five customers—two through calendar year 2027 and one through calendar year 2028. In the Q&A, management clarified these longer-term agreements include both price and volume conditions.
UltraSMR adoption was highlighted as both a demand enabler and a profitability driver. Management said UltraSMR crossed 50% mix across the portfolio during the quarter and is expected to increase further. Tan said the company’s top three customers are “fully on board” with UltraSMR, with another two to three customers in the process of adopting it. He described UltraSMR as delivering a 20% capacity uplift over CMR and a 10% uplift over industry-standard SMR, and said the software-based nature of the solution is beneficial to margins. The company also said it announced UltraSMR-enabled JBOD platforms with software ecosystem partners to broaden adoption beyond its prior customer base.
Capital returns, balance sheet, and Q3 outlook
Western Digital ended the quarter with $2.0 billion in cash and cash equivalents and total liquidity of $3.2 billion, including undrawn revolver capacity. Debt outstanding was $4.7 billion, resulting in net debt of $2.7 billion. Operating cash flow was $745 million and capital expenditures were $92 million, producing free cash flow of $653 million, or a 21.6% free cash flow margin.
Sennesael said the company paid $48 million in dividends and repurchased $615 million of shares during the quarter (3.8 million shares). Since launching its capital return program in the fourth quarter of fiscal 2025, the company said it has returned $1.4 billion to shareholders through repurchases and dividends. Management also announced the board approved a quarterly cash dividend of $12.50 per share, payable March 18, 2026, to shareholders of record as of March 5, 2026.
For the third quarter of fiscal 2026, Western Digital guided to revenue of $3.2 billion plus or minus $100 million, with gross margin expected between 47% and 48%. Operating expenses are expected to be $380 million to $390 million, interest and other expense about $50 million, and the tax rate about 16%. The company guided to diluted EPS of $2.30 plus or minus $0.15 on a non-GAAP diluted share count of approximately 385 million.
Separately, Sennesael said Western Digital still holds 7.5 million SanDisk shares and intends to monetize them before the one-year anniversary of the separation, likely through a “debt for equity swap,” with proceeds intended to further reduce debt.
About Western Digital (NASDAQ:WDC)
Western Digital Corporation is a global data storage company that designs, manufactures and sells a broad range of storage devices and systems for personal, enterprise and cloud applications. Headquartered in San Jose, California, the company develops hard disk drives (HDDs), solid-state drives (SSDs), NAND flash components and finished storage products used in PCs, external storage, servers, network-attached storage (NAS) and embedded systems.
Its product portfolio spans consumer and commercial markets, including internal and external HDDs and SSDs, removable flash memory products and storage platforms for data center and enterprise environments.
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