Western Digital reported a profit of $3.195 billion in the first quarter, but how much did their hard drive business actually earn?

A Hard Drive's Profit Suddenly Looks Like an AI Chip.

The latest FY2026 Q4 earnings press release from the U.S. storage company Western Digital reported revenue of $37.47 billion. On a GAAP basis, the earnings per share were $8.21. According to the company's announcement, SanDisk's market value reassessment gain was also included in the income statement.

This gave Western Digital's performance two interpretations. The first is the core HDD hard drive business, which saw increased sales and profitability after the flash memory business spin-off. The second is the retained stake in SanDisk, which fluctuated in market value, pushing the GAAP profit to a level that is not suitable for directly measuring the hard drive business.

This Is Not a One-Quarter Surge

Let's start with the most basic question. Did this growth only occur in one quarter?

According to Western Digital's FY2026 Q4 earnings press release and the previous Form 10-Q, the revenue trend from FY2025 Q4 to FY2026 Q4 did not dip. It rose from $26.05 billion to $37.47 billion, with five consecutive actual quarters forming a continuous upward trend.

The reason why this trend is worth connecting is that the basis has changed. In February 2025, Western Digital completed the flash memory business spin-off, and the standalone SanDisk was no longer included in the ongoing operations. The latest earnings press release also restated the prior comparable periods on a pro forma HDD ongoing operations basis. The growth on the chart is not the result of reintegrating the SSD business but rather the purer expansion of the hard drive business.

According to the company's performance presentation on the same day, the cloud segment accounted for 89% of Q4 revenue. While this endpoint market label does not equate to AI revenue, it highlights that Western Digital's primary revenue focus is now on hyperscale cloud providers and cloud service providers. The role of hard drives in this chain is not to provide computing power but to offer high-capacity data storage.

As per the company's FY2026 Q4 earnings press release, the midpoint of the revenue guidance for FY2027 Q1 is $41 billion. For readers, the dotted line serves as a more important reminder than the solid line that guidance can only be considered the company's current judgment and not a fait accompli for the next quarter.

Selling More and Retaining More Profit

Increased revenue does not automatically mean a better business. This is especially true for the hard drive industry, where during an upturn in the cycle, shipments, prices, inventory, and capacity utilization all squeeze onto one income statement. What really matters is how much is left per $100 of revenue.

According to the company's financial report, the GAAP gross margin for FY2026 Q4 reached 54.1%. To put it more intuitively, for every $100 of storage product sold, more than half of the money left after deducting direct manufacturing costs.

Compared to a year ago, the gross profit left per $100 in revenue has increased by about $13. The other line in the graph also shows a similar upward slope of operating profit margin, indicating that R&D, sales, and overhead costs have not eroded the additional gross profit.

These two lines cannot be simplistically attributed to a specific product or customer. The performance press release only tells the market that the demand for cloud and other data-intensive workloads is expanding, driving up Western Data's product demand. It does not break down "AI" into an auditable revenue item. What can be determined is that revenue growth and margin expansion have occurred simultaneously over five quarters, and the increased revenue has clearly flowed through to the operating profit margin.

Cash flow provides an additional check on this improvement. The free cash flow for FY2026 Q4 was $1.281 billion, with operating cash flow bringing in $1.389 billion, according to the company's performance press release. Hard drives still require equipment, materials, and inventory turnover in manufacturing, and cash has kept pace with profits, providing another validation of this quarter's operating results. While it cannot prove that the trend will continue permanently, it is closer to the funds the company actually controls than just looking at the income statement.

Where Does EPS Really Come From?

So why does GAAP earnings per share appear more exaggerated than the improvement in the core business? The answer lies in the last chart.

The GAAP continuing operations net income attributable to Western Digital for FY2026 Q4 was $3.195 billion. In the company's defined Non-GAAP measure, this figure is $1.382 billion. The difference is not a mistake but rather the company excluding several items not intended for comparing day-to-day operating performance from the latter.

The largest item is the $2.05 billion SanDisk retention equity income. It comes from the fair value reassessment of SanDisk shares held by Western Digital, not directly generated revenue from selling more hard drives this quarter. The company also added back costs related to debt and equity transactions on the same reconciliation sheet and made adjustments for tax, equity incentives, and restructuring items.

This does not mean that Non-GAAP is the only "true profit." It is still a comparison measure defined by the company and needs to be read alongside GAAP. Its value lies in separating stock price changes from operating performance brought in by hard drive manufacturing and sales. If one only focuses on $8.21, it is easy to mistake two fundamentally different sources of income as the same thing.

The most interesting aspect of this Western Digital earnings report is not the sudden chip-like valuation of a hard drive, but the fact that after spinning off the flash memory division, the revenue and profit margin of the HDD core business did improve significantly. While the stake in SanDisk made the GAAP profit look brighter, peeling that off reveals that the remaining hard drive business is no longer what it was in the previous cycle.

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