AI Data Surge Fuels Western Digital's Strong Q2, Drives High-Capacity Storage Demand

AI Data Surge Fuels Western Digital's Strong Q2, Drives High-Capacity Storage Demand

San Jose, Calif. – Western Digital (NASDAQ: WDC) posted strong fiscal second-quarter results for 2026, handily beating guidance as demand for high-capacity data storage, fueled by the relentless expansion of artificial intelligence, continues to accelerate. The company reported revenue of $3.0 billion, a 25% increase year-over-year, with earnings per share reaching $2.13.

CEO Irving Tan positioned the quarter's performance within what he termed a "seismic shift" in data infrastructure. "We are seeing accelerating adoption not just in generative AI training, but crucially in the inference phase—chatbots, virtual assistants, CRM tools—which creates persistent, growing datasets," Tan stated during the earnings call. He also highlighted emerging "physical AI" applications in robotics and autonomous vehicles as contributors to increasingly large, complex multimodal models.

The financial strength was notably concentrated in the cloud segment, which accounted for 89% of total revenue at $2.7 billion, up 28% year-over-year. Gross margin expanded significantly to 46.1%, a 770-basis-point improvement from the prior year, which CFO Kris Sennesael attributed to a product mix shift toward higher-margin, high-capacity drives and disciplined cost control.

Technology Roadmaps Accelerate

Central to the narrative was the rapid progress on next-generation storage technologies. The company shipped over 3.5 million units of its latest-generation ePMR drives, offering capacities up to 26TB. More notably, management disclosed that qualification of its groundbreaking Heat-Assisted Magnetic Recording (HAMR) drives with a major hyperscale customer has begun this month—roughly six months ahead of schedule—with a second hyperscaler expected to start the process imminently.

To bolster its HAMR development, Western Digital recently acquired key intellectual property, assets, and talent to develop internal laser capabilities, a move Tan said would improve drive reliability and energy efficiency.

UltraSMR Adoption Becomes a Profit Pillar

The company's UltraSMR technology, a software-defined shingled magnetic recording solution, emerged as a critical profitability driver. It now constitutes over 50% of the product portfolio mix. Tan noted that the top three customers are "fully on board," with several others in the adoption pipeline. The technology offers a significant capacity uplift over conventional drives and benefits margins due to its software-based nature.

Customer engagement has evolved, Tan explained, with dedicated teams for major hyperscalers improving roadmap alignment and demand visibility. The company has secured firm purchase orders with its top seven customers through 2026 and longer-term agreements with several key clients extending into 2027 and 2028.

Financial Discipline and Outlook

Western Digital generated $653 million in free cash flow during the quarter and continued its aggressive capital return program, repurchasing $615 million worth of shares. The board approved a quarterly cash dividend of $12.50 per share. For the fiscal third quarter, the company guided revenue to approximately $3.2 billion, with gross margin expected between 47% and 48%.

Separately, CFO Sennesael confirmed the company holds 7.5 million shares of SanDisk and plans to monetize them, likely via a debt-for-equity swap, to further reduce its net debt, which stood at $2.7 billion at quarter's end.

Market Voices

"The numbers are undeniably strong, and the HAMR acceleration is a real positive signal. It shows their key customers are validating the technology much faster than the street anticipated. The 75% incremental margin guide is the hidden gem here—it speaks to tremendous operating leverage as volume scales." – David Chen, Portfolio Manager at Horizon Capital.

"While the AI story is compelling, I'm watching the consumer segment, which was down 3%. It's a reminder that this remains a bifurcated market. Their success is entirely hitched to the hyperscaler wagon. Any slowdown in cloud capex would hit them disproportionately hard." – Maya Rodriguez, Senior Analyst at Clearwater Research.

"This is a classic case of too little, too late. They're finally catching up on HAMR after years of delays, while competitors have been making noise. The entire thesis rests on AI demand saving them, but what happens when that cycle eventually slows? The debt is still a millstone, and the dividend seems like a distraction from the core technological race they can't afford to lose." – Marcus Thorne, Independent Tech Analyst.

"The execution on cost-per-terabyte, down 10% year-over-year, and the UltraSMR mix crossing 50% are operational wins that shouldn't be overlooked. It shows they're not just riding a wave but actively steering the ship towards higher profitability. The long-term agreements provide exceptional visibility." – Priya Sharma, Director of Equity Research at Sterling Bank.