WESTERN DIGITAL FIRST QUARTER ENDED SEPTEMBER 28, 2012
CONFERENCE CALL REMARKS, 10/22/12
Statements in these posted remarks that relate to future results and events, and other forward-looking statements in these remarks, are based on Western Digital Corporation's current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. These risk factors include:
- the impact of continued uncertainty and volatility in global economic conditions;
- supply and demand conditions in the hard drive industry;
- uncertainties concerning the availability and cost of commodity materials and specialized product components;
- actions by competitors;
- unexpected advances in competing technologies;
- uncertainties related to the development and introduction of products based on new technologies and expansion into new data storage markets;
- business conditions and growth in the various hard drive markets; pricing trends and fluctuations in average selling prices; and
other factors listed in our periodic SEC filings and on this website in
Robert Blair - Investor Relations
I want to mention that we will be making forward-looking statements in our comments and in response to your questions concerning: growth in the storage industry and our position in the industry; our investment and capital allocation plans; HDD demand for the December quarter and fiscal 2013; and our financial results expectations for the September quarter and fiscal 2013. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-K filed with the SEC on August 20, 2012. We undertake no obligation to update our forward-looking statements to reflect new information or events.
In addition, references will be made during this call to non-GAAP financial measures. Reconciliations of the differences between the historical non-GAAP measures we provide during this call to the comparable GAAP financial measures are included in the investor information summary posted in the Investor Relations section of our Web site. The forward-looking guidance we provide during this call excludes certain items such as amortization of intangibles and the dilutive impact of sales of drives to Toshiba in connection with our divestiture transaction. Because the amount of these items is not fully known to us at this time, we are unable to provide guidance for, or a reconciliation to, the most directly comparable GAAP financial measures. The impact of these excluded items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures.
We ask that analysts limit their comments to a single question and one follow-up question. I also want to note that copies of remarks from today's call will be available on the Investor section of Western Digital's website immediately following the conclusion of this call.
John Coyne - Chief Executive Officer
Good afternoon and thank you for joining us today. I have with me our president Steve Milligan and our chief financial officer Wolfgang Nickl.
In this, my last earnings call, I am happy to report another quarter of strong financial performance, continuing our track record of consistent execution.
During my six year tenure as CEO we have experienced and successfully addressed many different challenges and opportunities. Throughout, we have continued to hone our time-tested and flexible business model, delivering outstanding returns and value under varying scenarios. The results include a doubling of market share, a tripling of revenue and a five-fold increase in profits.
I am proud of this sustained performance by the team and am confident as I pass the leadership of the company to Steve, ably supported by Tim Leyden, Mike Cordano and Wolfgang, that they will continue to build on that momentum.
While the macroeconomic environment is dampening near term demand, we remain confident in the continued long-term growth in the creation, storage and management of digital content. This is being seen in every aspect of our lives and monetizing it provides a compelling long term opportunity for the company.
We have built strong relationships with customers in all of our markets by consistently delighting them with high quality, reliable products, based on superior technology and delivered through the industry’s most efficient supply chain. We have developed a tremendously broad product portfolio, great depth and breadth in our people and technology resources and a powerful platform. Western Digital has never been better positioned to succeed as it continues to thrive on change and deliver great value to all its constituents.
I want to take this opportunity to thank our customers, our supply partners and our investors for their support; and I especially want to thank our employees around the world who have consistently delivered such outstanding performance.
With that, I will turn the call over to Steve Milligan…
Steve Milligan - President
We are very pleased to report strong financial results for our September quarter, demonstrating our continued ability to deliver value under varying market conditions.
There are several dynamics currently limiting market demand:
- First, global macroeconomic weakness which is impacting overall IT spending
- Second, product transitions in the PC industry, and
- Third, the continued adoption of tablets and smartphones which is muting PC sales growth
These headwinds notwithstanding, the Western Digital team remains focused on creating outstanding economic value, building on our strong multi-year track record. There is a tremendous opportunity as we innovate and enable customers to store, manage and connect the massive and growing amounts of digital data in their personal and professional lives. This opportunity extends well into the future.
Looking across our markets, the needs of customers are becoming more diverse, resulting in greater market segmentation. Computing is no longer a general purpose proposition and that evolution plays to the strengths of Western Digital, with our technology breadth, people and product portfolio.
Currently, we are focused on three key initiatives to broaden our portfolio to meet the evolving needs of our customers, enabling continued value creation.
First, the delivery of innovative and cost-effective storage products including hybrid drives for thin and light mobile devices.
Second, a portfolio of enterprise products that fit the varying needs of the public and private cloud environments, including high performance SSD systems and high performance and large capacity hard drives with the lowest total cost of ownership.
Third, providing easy to use integrated solutions for the personal cloud environment in our connected lives.
We have received very positive customer feedback on our latest differentiated solutions to address these trends:
All major PC OEMS have shown strong interest in our 5mm and 7mm hybrid designs as an alternative to solid state and dual drive configurations.
In the cloud environment, our new 7-disk high capacity sealed drive announcement has been extremely well received, confirming the need to seek better total cost of ownership solutions for this growing market.
For the connected life, we introduced today the My Passport Enterprise, one of the industry’s first portable hard drives designed specifically for use with Microsoft’s Windows To Go, enabling corporate customers to provision a fully featured Windows 8 workspace on a USB drive.
For fiscal 2013, we remain focused on realizing the $10 EPS target established in July of this year, despite a significant change in underlying industry growth assumptions. We will continue to manage closely those aspects of our business that we control. Namely, delighting our customers, executing to our product roadmap, remaining diligent with regards to managing costs and expenses and strategically allocating our capital.
Looking forward, I am very excited about the future of Western Digital. We have the people, platform, technology and financial resources to continue to invest in growth opportunities, while at the same time returning approximately 50 percent of our free cash flow to shareholders.
Wolfgang will now provide a report on our Q1 performance and our Q2 outlook.
Wolfgang Nickl - Executive VP Finance & Chief Financial Officer
Thank you, Steve.
I will first summarize our consolidated financial performance for last quarter and then provide a range of expected financial results for the December quarter.
Revenue for the September quarter was $4.0 billion.
Excluding shipments to Toshiba under our divestiture agreement, we shipped a total of 62.5 million hard drives into the market at an average selling price of $62.
OEM sales represented 63 percent of revenue, distribution channel sales
24 percent and retail sales 13 percent.
Our gross margin for the quarter was 29.6 percent. Excluding $38 million of amortization expense related to acquired HGST intangible assets, non-GAAP gross margin was 30.5 percent.
R&D and SG&A spending totaled $575 million for the September quarter. SG&A included $11 million of amortization expense related to acquired HGST intangible assets.
In order to align our production with anticipated market demand, we incurred charges of $26 million in the September quarter.
Net interest and other non-operating expense was $14 million.
Tax expense for the September quarter was $59 million, or 10.2 percent of
Our net income for the September quarter totaled $519 million, or $2.06 per share. On a non-GAAP basis, net income was $594 million, or $2.36 per share.
Turning to the balance sheet: We generated $936 million in cash from operations during the September quarter and our free cash flow totaled $554 million.
We used $218 million to repurchase 5.2 million shares. As of the end of September, an authorization of $2.6 billion remains available for future repurchases.
We declared the first dividend in company history in the amount of $0.25 per share or a total of $61 million, which we paid on October 15 to shareholders of record as of September 28.
We exited fiscal Q1 with total cash and cash equivalents of $3.5 billion, of which $826 million was in the U.S. Subtracting our total debt of $2.1 billion, our net cash balance was $1.4 billion.
I will now provide our guidance for the December quarter.
- A total available market of approximately 140 million units.
- Revenue in the range of $3.55 to $3.7 billion, reflecting the muted demand environment, a seasonal reduction in our gaming business and a planned reduction of our 3.5-inch contract manufacturing for Toshiba.
- Gross margin of approximately 28 percent, excluding the amortization of HGST intangibles; which is within our new business model despite continued cost challenges stemming from the floods in Thailand last year.
- We expect R&D and SG&A spending to be approximately $525 million, excluding the amortization of HGST intangibles.
- A tax rate of approximately 8.5 percent; and
- A share count of approximately 248 million.
- Accordingly, we estimate non-GAAP earnings per share of between
$1.65 and $1.85 for the December quarter.
Operator, we are now ready to open the call for questions.
Steve Milligan - President
That concludes today’s call. Thank you everyone, we appreciate your questions and look forward to being in touch in the months ahead through our investor relations activities. I want to finish with an expression of thanks, admiration and congratulations to John Coyne for his 30 years of dedicated service to Western Digital, including the last six as CEO. He and his team have put Western Digital on a course to create significant additional value for our customers, employees and shareholders in the years ahead and I look forward to being part of that next phase in the company’s rich history.