Western Digital reported its fiscal 2026 third-quarter results after the U.S. market closed on April 30. The company achieved revenue of $3.3 billion, a 45% year-over-year increase, surpassing the high end of its guidance. Earnings per share were $2.72, surging 97% compared to the same period last year, nearly doubling.
In terms of exabyte shipments, Western Digital delivered 222 EB of capacity to customers during the quarter, a 34% increase year-over-year. The cloud business was the primary growth driver, generating $3.0 billion in revenue, accounting for 89% of total revenue and growing 48% year-over-year.
On the profitability front, gross margin soared to 50.5% this quarter, an improvement of 1040 basis points year-over-year, driven by the shift towards higher-capacity drives in the product mix and the execution of pricing strategies. CFO Kris Sennesael noted during the call that the company achieved a strong gross margin, breaking through the 50% range.
The company expects revenue of approximately $3.65 billion for the next quarter, with gross margin projected to rise further to a range of 51% to 52%. Diluted earnings per share are forecasted to be $3.25.
CEO Irving Tan stated that data generation is at an inflection point as AI workloads extend from model training to large-scale inference, coupled with the rise of Agentic AI and physical AI frameworks. This is expected to drive a "step-function increase" in storage demand. The company expressed high confidence in long-term storage capacity growth exceeding 25% annually.
Beyond the strong quarterly results, management provided a deep analysis of the underlying data storage dynamics in the AI era. CEO Irving Tan emphasized that AI workloads are extending from "training" to "massive inference," marking a critical inflection point for data creation. He explained that inference generates data, AI agents consume and produce more data, and physical AI creates data and trains synthetic models that generate even more data, creating an accelerating cycle. He noted that inference is expected to account for two-thirds of all AI compute this year.
While the compute and memory resources used to create tokens are reusable, the generated data must be stored. Every token, prompt, and interaction creates data requiring persistent, scalable, and cost-effective storage, with the vast majority residing on hard disk drives (HDDs). Regarding future growth potential, Irving Tan expressed strong conviction that these forces create a compounding cycle, reinforcing the belief that long-term data storage will achieve a compound annual growth rate (CAGR) exceeding 25%.
Amid robust demand, Western Digital's order visibility and pricing power are undergoing a qualitative change. Management shared encouraging information regarding price trends and long-term agreements, which are highly watched by the market. The price per terabyte increased 9% year-over-year this quarter. Irving Tan stated that long-term visibility continues to improve, with agreement durations now extending into the 2028 and 2029 calendar years.
CFO Kris Sennesael emphasized that the company's pricing logic focuses on providing customers with "predictable pricing" to avoid volatility, as it enables clients to make long-term architectural decisions, forming the foundation for the anticipated structural changes in the HDD industry. Furthermore, incremental demand beyond the base capacity covered by long-term agreements is subject to a different pricing mechanism, providing the company with an opportunity for "incremental pricing upside."
On technology iteration and cost reduction, the cost per exabyte decreased by 10% year-over-year this quarter. To handle the data deluge driven by AI, the company stated it currently has no plans to increase unit capacity but is fully focused on boosting areal density. Irving Tan revealed that development pace is accelerating, with four customers currently undergoing certification for HAMR (Heat-Assisted Magnetic Recording), receiving very positive feedback. Certification for 40TB EPMR drives is also underway with three customers, with mass production expected in the second half of 2026.
The adoption rate of Ultra SMR technology is particularly notable. Irving Tan predicted that the company plans to have all major customers certified on Ultra SMR by the end of calendar year 2027. By the end of fiscal year 2027, nearly 60% of all exabyte capacity shipped is expected to be based on Ultra SMR.
On the balance sheet, Western Digital completed significant repairs in Q3. By monetizing 5.8 million shares of Sandisk stock, the company reduced debt by $3.1 billion, leaving only $1.6 billion in convertible debt outstanding. The company currently holds $2.0 billion in cash and cash equivalents, resulting in a net cash position of $450 million.
Bolstered by a strong free cash flow margin of 29%, which generated $978 million in free cash flow for the quarter, the board approved a 20% increase in the cash dividend to $0.15 per share. The company committed to continuing to return excess free cash flow to shareholders through dividends and share repurchases. Western Digital still holds 1.7 million shares of Sandisk stock and plans to complete their monetization by the end of calendar year 2026.