Western Digital (WDC) Q2 2026: Cloud Revenue Climbs 28% as UltraSMR Mix Tops 50%
Western Digital’s Q2 2026 results highlight a decisive shift to high-capacity storage, with cloud clients driving record demand and UltraSMR adoption crossing the 50% threshold in nearline shipments. Operating leverage, disciplined cost control, and robust long-term agreements with hyperscalers are reshaping the company’s margin profile. Management’s guidance signals further margin expansion and volume growth as AI and inference workloads accelerate exabyte demand into 2027.
Summary
- Cloud-Centric Demand: Hyperscale customers are locking in multi-year agreements, reflecting deepening reliance on WDC’s high-capacity drives.
- UltraSMR Mix Expansion: Over half of nearline exabytes shipped are now UltraSMR, driving margin accretion and customer upshift.
- Margin Trajectory: Management projects sustained gross margin gains as cost-downs and mix shift continue into the next product cycle.
Performance Analysis
Western Digital delivered strong year-over-year revenue and earnings growth, propelled by surging demand from cloud customers for high-capacity nearline drives. Cloud now accounts for nearly nine out of every ten dollars in revenue, underlining the company’s strategic pivot away from legacy client and consumer markets. The client segment, while growing, remains a small contributor, and consumer sales continued to contract, reinforcing the company’s focus on enterprise data infrastructure.
Gross margin expansion remains a standout story, with a 770 basis point improvement year-over-year and further sequential gains. This was driven by a mix shift to higher-capacity solutions—especially UltraSMR, a software-managed recording technology that enables denser storage per drive—and disciplined cost execution. Operating leverage is increasingly evident, as operating expenses declined as a percentage of revenue. Free cash flow generation was robust, supporting aggressive capital returns through buybacks and dividends.
- Cloud Revenue Dominance: Cloud contributed 89% of total revenue, up sharply, with nearline product demand as the key driver.
- UltraSMR Penetration: UltraSMR surpassed 50% of nearline shipments, with top hyperscalers fully onboard and more customers transitioning.
- Cost Efficiency Gains: Cost per terabyte declined about 10% year-over-year, supporting margin expansion amid stable pricing.
Long-term agreements and firm purchase orders with major cloud players provide visibility and stability, positioning Western Digital to capitalize on the secular growth in AI-fueled storage demand.
Executive Commentary
"We have firm purchase orders with our top seven customers through calendar year 2026. We also have in place robust commercial agreements with three of our top five customers, two through calendar year 2027, and one through calendar year 2028. These agreements indicate a strong trust that we have built for our customers and confidence in our ability to meet their Exabyte needs."
Irving Tan, Chief Executive Officer
"We delivered 46.1% gross margin, up 220 basis points quarter over quarter, up 770 basis points year over year. And we are guiding to 47, 48%, so 47.5% at the midpoint, which is up 740 basis points on a year over year basis. The incremental gross margin is on about 75%. We continue to drive further gross margin expansion, and we believe in the next couple of quarters and beyond, we will continue to be able to do that."
Chris Senesal, Chief Financial Officer
Strategic Positioning
1. Cloud and Hyperscale Customer Focus
Western Digital’s business model is now overwhelmingly cloud-centric, with dedicated teams for major hyperscale customers and multi-year purchase agreements providing demand visibility. These relationships have enabled WDC to tailor product roadmaps and lock in both volume and pricing, supporting predictable revenue streams and mitigating volatility typical of commodity storage markets.
2. UltraSMR and High-Capacity Drive Leadership
UltraSMR, a software-managed shingled magnetic recording technology, now exceeds 50% of nearline exabytes shipped, delivering up to 20% more capacity over conventional CMR (conventional magnetic recording) drives. This transition is not only meeting customer needs for denser storage but is also highly accretive to gross margins due to its software-based enhancements and manufacturing efficiencies. The adoption curve is steepening, with additional hyperscalers transitioning in upcoming quarters.
3. HAMR and ePMR Roadmap Acceleration
HAMR (heat-assisted magnetic recording) and ePMR (energy-assisted perpendicular magnetic recording) are the next innovation vectors, with qualification pulled forward and ramping set for early calendar 2027. Recent IP acquisitions in laser technology are expected to reduce drive real estate and energy requirements, improving manufacturability and reliability. These advances will underpin the next wave of capacity and margin gains.
4. Cost Structure and Capital Allocation Discipline
Cost per terabyte continues to decline, driven by manufacturing execution, higher capacity mix, and ongoing innovation. Capital expenditures remain tightly managed, with capex as a percentage of revenue expected to stay in the 4% to 6% range even as new technologies ramp. Free cash flow is being returned to shareholders through buybacks and dividends, with $1.4 billion returned since program inception.
5. AI and Data Growth Tailwinds
AI inference workloads are accelerating exabyte growth, shifting storage requirements from model training to inference, which generates and stores ever-larger datasets. WDC’s solutions are positioned at the heart of this trend, with management citing hyperscalers’ need to optimize total cost of ownership as a key driver for high-capacity HDD adoption.
Key Considerations
Western Digital’s Q2 signals a business in transition, rapidly aligning operations, product mix, and customer engagement around the cloud and AI-driven storage economy. The following considerations frame the quarter’s strategic context:
Key Considerations:
- Multi-Year Demand Visibility: Long-term agreements with top hyperscalers provide revenue predictability and support strategic planning.
- Margin Accretion from UltraSMR: The ongoing shift to UltraSMR is both margin-accretive and a competitive differentiator as customers seek denser storage.
- Innovation Pipeline Execution: Acceleration of HAMR and ePMR qualification is critical to maintaining technology leadership and sustaining cost-down momentum.
- Capital Return Commitment: Aggressive buybacks and dividends reflect confidence in cash generation and balance sheet strength.
- AI-Driven Storage Demand: AI inference is creating a secular uplift in exabyte requirements, reinforcing the relevance of high-capacity HDDs over flash for cold and warm data tiers.
Risks
Key risks include potential delays or execution challenges in HAMR and ePMR ramp, customer concentration risk as cloud accounts for the vast majority of revenue, and cyclical swings in hyperscale capex. While pricing remains stable, any reversal could pressure margins. Management’s narrative downplays consumer and client segment weakness, which could limit diversification if cloud demand softens.
Forward Outlook
For Q3 2026, Western Digital guided to:
- Revenue of $3.2 billion, plus or minus $100 million
- Gross margin between 47% and 48%
- Operating expenses of $380 million to $390 million
- Diluted EPS of $2.30, plus or minus $0.15
For full-year 2026, management maintained an outlook of:
- Continued gross margin expansion and strong free cash flow generation
Management highlighted several factors that support the outlook:
- Firm long-term agreements and purchase orders with major hyperscalers through 2028
- Ongoing shift to UltraSMR and upcoming HAMR ramp as drivers of margin and capacity growth
Takeaways
Western Digital is executing a strategic transformation, leveraging hyperscale relationships, technology innovation, and disciplined capital returns to reposition itself as a leader in the high-capacity storage segment.
- Cloud and UltraSMR Mix: The pivot to cloud and UltraSMR is reshaping WDC’s revenue and margin profile, with further mix shift expected to drive accretion.
- Margin Expansion Path: Cost reductions, stable pricing, and innovation pipeline underpin management’s confidence in sustained margin gains.
- AI Storage Tailwind: Investors should watch for continued hyperscale exabyte growth and successful HAMR ramp as the next inflection points.
Conclusion
Western Digital’s Q2 performance and outlook reflect a business increasingly defined by cloud-centric, high-capacity storage solutions, with UltraSMR and upcoming HAMR innovations providing a runway for margin expansion and growth. The durability of demand visibility and cost-down execution are central to the investment case as AI-driven workloads reshape the storage landscape.
Industry Read-Through
WDC’s results and commentary provide a clear read-through for the broader storage and data infrastructure sector: The secular shift to AI and cloud workloads is accelerating demand for high-capacity, cost-optimized storage, favoring HDDs for cold and warm data tiers. Competitors lacking a robust UltraSMR or HAMR roadmap risk falling behind in both capacity and margin structure. The deepening of long-term contracts with hyperscalers signals a new era of collaborative planning and supply chain stability, likely to set the tone for industry pricing and investment cycles. As AI inference workloads proliferate, the storage mix across flash, HDD, and tape will continue to evolve, but high-capacity HDDs remain indispensable for scalable, economical data retention.