WDC Q4 Deep Dive: AI and Cloud Storage Demand Shape Outlook Amid Margin Expansion

Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 25.2% year on year to $3.02 billion. On top of that, next quarter’s revenue guidance ($3.2 billion at the midpoint) was surprisingly good and 6.8% above what analysts were expecting. Its non-GAAP profit of $2.13 per share was 10.5% above analysts’ consensus estimates.

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StockStory’s Take

Western Digital’s fourth quarter results surpassed Wall Street’s expectations on both revenue and non-GAAP profitability, yet the market responded negatively. Management attributed the strong performance to robust demand for higher-capacity nearline hard drives, especially from cloud and hyperscale customers, as well as a favorable mix shift toward UltraSMR and ePMR products. CEO Tiang Yew Tan emphasized that “firm purchase orders with our top seven customers through calendar year 2026” signaled continued customer confidence, while CFO Kris Sennesael highlighted tight cost controls and manufacturing efficiency as key factors supporting margin expansion.

Looking forward, Western Digital’s guidance is being driven by expectations of ongoing AI and cloud adoption, which management believes will further accelerate data storage requirements. Leadership pointed to the ramp of next-generation HAMR and ePMR drives as a growth lever, with Tan stating, “We have started qualification of our HAMR and next-generation ePMR products, each with a different hyperscale customer.” The company also expects continued gross margin expansion, underpinned by a stable pricing environment and higher UltraSMR adoption, although leadership noted that supply chain execution and the pace of AI-driven demand will remain critical variables.

Key Insights from Management’s Remarks

Management credited the quarter’s outperformance to sustained hyperscale demand, improved product mix, and enhanced customer partnerships, which together supported both revenue growth and margin expansion.

• Hyperscale cloud demand: The majority of revenue growth came from large cloud providers, which accounted for 89% of sales this quarter. Management said deeper engagement with these customers enabled longer-term agreements, improving demand visibility and operational planning.

• UltraSMR and ePMR adoption: A higher mix of UltraSMR (shingled magnetic recording) and ePMR (energy-assisted perpendicular magnetic recording) drives—products offering greater capacity and efficiency—drove both volume growth and gross margin expansion. The company shipped over 3.5 million next-gen ePMR drives, with UltraSMR crossing 50% mix within the nearline portfolio last quarter and management seeing it increasing.

• Product innovation milestones: Western Digital accelerated its roadmap for new technologies, initiating qualification for HAMR (heat-assisted magnetic recording) and next-generation ePMR drives. HAMR is expected to support even higher areal density, a factor in sustaining future growth.

• Cost reduction discipline: Management highlighted a 10% year-over-year reduction in cost per terabyte, achieved through manufacturing efficiencies and the shift to higher-density drives. CFO Sennesael noted, “We continue to upshift our customers to higher capacity drives, which gives us a cost benefit.”

• Strategic partnerships and investments: The company expanded its ecosystem through a strategic investment in Qolab for quantum hardware, and broadened UltraSMR adoption via new JBOD (just a bunch of disks) platforms, supporting wider customer segments and future readiness.

Drivers of Future Performance

Western Digital’s outlook is anchored in continued demand for AI-driven storage and disciplined cost management, with margin expansion expected to accompany product innovation.

• AI and cloud storage growth: Management expects ongoing adoption of generative and agentic AI to drive new waves of data creation and storage needs. The company sees inference workloads as a major catalyst, particularly as hyperscale customers require higher-capacity drives to support these applications.

• Product mix and margin expansion: The shift toward UltraSMR and upcoming HAMR drives is projected to further improve gross margins. Leadership believes UltraSMR’s software-driven efficiencies and HAMR’s higher areal density will provide both capacity and profitability benefits. They also anticipate stable pricing, citing longer-term agreements and customer trust.

• Operational risks and investment: The company acknowledged that execution risks remain, especially around manufacturing scale-up for new products and the timing of customer qualifications. Investments in innovation and supply chain capabilities will continue, with CapEx as a percentage of revenue expected to stay within a 4–6% range as HAMR ramps.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be monitoring (1) the scaling and qualification of HAMR and next-generation ePMR drives with hyperscale customers, (2) the pace of UltraSMR adoption and its impact on product mix and gross margins, and (3) progress in securing additional long-term agreements with major cloud providers. The ability to execute on new product ramps and sustain cost reductions will remain essential to Western Digital’s trajectory.

Western Digital currently trades at $273.98, down from $283.70 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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