Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 27.4% year on year to $2.82 billion. Its non-GAAP profit of $1.78 per share was 12.9% above analysts’ consensus estimates.

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StockStory’s Take

Western Digital’s third quarter saw strong market approval, as the company’s results exceeded Wall Street’s expectations for both revenue and profit. CEO Tiang Yew Tan attributed the positive momentum to robust adoption of high-capacity hard disk drives (HDDs), fueled by expanding artificial intelligence (AI) workloads at hyperscale data centers. Tan highlighted that shipments of next-generation ePMR and UltraSMR drives surpassed 2.2 million units, noting, “Our ability to reliably scale our ePMR technology and transition customers to higher capacity drives is one of several ways we support the growing demand for exabytes.” Productivity improvements via AI-driven automation and manufacturing efficiencies contributed to significant margin gains.

Looking ahead, Western Digital’s outlook is shaped by continued demand from hyperscale customers and accelerated product qualifications. Management expects further revenue growth as large customers commit to multi-year purchase orders, particularly for next-generation ePMR and HAMR (Heat-Assisted Magnetic Recording) drives. Tan signaled that AI workloads will “continue to unlock opportunities” for the business, but also noted the need for “the highest level of reliability, quality and scalable performance” as the company brings new technologies to market. Ongoing cost discipline and customer partnerships are expected to underpin both top-line and margin expansion in upcoming quarters.

Key Insights from Management’s Remarks

Management credited the quarter’s outperformance to execution on high-capacity drive ramp, operational efficiency, and deepening customer commitments, while highlighting a shift in product mix and internal AI-driven process improvements.

• AI workload expansion: The surge in AI deployments is driving unprecedented data generation and storage requirements, with Western Digital’s nearline HDDs increasingly favored for large-scale cloud and enterprise workloads. Management noted that top hyperscale customers are extending purchase orders out to 2027, signaling enduring demand.

• High-capacity drive adoption: Shipments of ePMR and UltraSMR drives grew rapidly, with UltraSMR offering up to 20% more capacity than conventional drives. The company’s latest drives now reach 32 terabytes, and customers are shifting more quickly toward these higher-capacity units to optimize their data center footprint.

• Internal use of AI for efficiency: Western Digital is leveraging AI not only in its products but internally, realizing up to 10% productivity gains in manufacturing and 20% gains in firmware development, according to Tan. These initiatives are improving yields, accelerating diagnostics, and reducing costs across the supply chain.

• Long-term customer agreements: Five of the company’s top hyperscale customers have committed to full-year purchase orders for 2026, and one has signed for all of 2027. These contracts provide clearer visibility into demand and operational planning, supporting stability in production and revenues.

• Margin improvement from product mix: The shift to higher-capacity drives and tight cost controls led to substantially higher gross and operating margins. Management emphasized that the ongoing transition to UltraSMR and future HAMR drives is expected to further benefit profitability as customers adopt these technologies.

Drivers of Future Performance

Management’s outlook focuses on sustained AI-driven storage demand, continued shift to higher-capacity drives, and disciplined cost management to support revenue growth and margin expansion.

• Ramp of next-generation drives: The company expects the qualification and subsequent ramp of new ePMR and HAMR drives to be a core driver, as these products enable customers to manage larger data volumes efficiently. Management plans to begin ePMR qualification in early 2026 and HAMR with one customer, expanding to three by year-end.

• Customer commitments and supply discipline: Multi-year, firm purchase orders from cloud customers provide demand visibility but also place pressure on Western Digital to balance supply with evolving workloads. Management indicated that “no new unit capacity” is being added, prioritizing product innovation and manufacturing efficiency over aggressive expansion.

• Risks from capacity constraints and technology transitions: While demand remains strong, management acknowledged supply constraints through 2026 and the complexity of transitioning customers to new technologies. The company highlighted potential risks if customers accelerate adoption of solid-state drives (SSDs) in response to tight HDD supply, though it expects HDDs to remain the dominant storage medium in data centers.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will closely watch (1) the progress and customer adoption of ePMR and HAMR drive qualifications, (2) the pace at which hyperscale customers shift to higher capacity drives and extend purchase commitments, and (3) continued realization of internal productivity gains from AI-driven manufacturing and engineering initiatives. We will also monitor any shifts in customer storage architecture or competitive developments in SSD adoption.

Western Digital currently trades at $152.60, up from $138.18 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 for active Edge members).

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