WESTERN DIGITAL FIRST QUARTER ENDED OCTOBER 2, 2009 CONFERENCE CALL REMARKS, 10/22/09

Special Note

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 recent uncertainty and volatility in global economic conditions;
  • supply and demand conditions in the hard drive industry;
  • 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;
  • changes in the availability and cost of commodity materials and specialized product components that WD does not make internally; and
  • other factors listed in our periodic SEC filings and on this website in Risk Factors.

Robert Blair - Investor Relations

Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning: macroeconomic and industry conditions, including industry pricing and demand; our response to changes in demand; our growth opportunities; our share repurchase plans; our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2010; and our financial results expectations for the December quarter, including revenue, gross margin, expenses, tax rate, share count, and earnings per share. 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 14, 2009, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today. We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments we make today are still valid.

John Coyne - President & Chief Executive Officer

Good afternoon and thank you for joining us today. 

For the second consecutive quarter, demand for hard drives was stronger than we expected as the positive industry conditions that first materialized in the June quarter continued throughout the September quarter.  The demand strength is primarily consumer driven, and we believe it is underpinned by the growing social media phenomenon.  This is creating strong demand in mobile and desktop PCs, near-line enterprise and external storage markets. We believe that overall hard drive industry shipments totaled 152 million units in the quarter, flat with the year-ago quarter and up 15% sequentially from the 132 million units in the June quarter.

Inventory of ATA drives in distribution was down from 33 to 30 days quarter-on-quarter, while drive manufacturer’s inventory was further reduced from a historically low 7 days of sales ending the June quarter to just under 6 days of sales at the end of September, reflecting both the unexpectedly strong demand and continued industry discipline in managing the vitally important supply/demand dynamic.

We are very pleased with our progress in fiscal Q1 in addressing our primary objective of sustained profitable growth.  For the second consecutive quarter, we increased our weekly production rate by over 18% in a supply constrained environment, providing strong support of our customers’ growth opportunities. Continued customer preference for WD products, upside in overall market demand and outstanding execution by the WD team generated record revenue on record unit shipments.  A moderate pricing environment, combined with our passionate focus on cost and efficiency, enabled gross margin above the high end of our model range. We contained operating expenses under the low end of our model, while growing our R&D investment 7% year-on-year and 8% sequentially.

We continue to realize tangible benefit from the substantial investments we have made in technology, products, processes and capacity over the last several years:  

  • We continue to lead the industry in time-to–market volume shipments of leading capacity points in all segments of the ATA drive market. In Q1 we began shipping our WD Scorpio® Blue™ 1TB, 750GB and 640GB hard drives utilizing 333 GB-per platter technology.  Additionally we led the market with shipment of our 2TB 3.5-inch hard drives to the near-line enterprise, external storage, desktop, and CE markets.
  • In Branded Products, we continued to grow our business in Q1, even as we simultaneously refreshed our entire external storage product line-up. Our stylish, new  offerings include smaller, smarter, more portable and secure My Passport™ and My Book® solutions that feature new WD SmartWare™ backup, synchronization and content visualization software, hardware encryption and our innovative e-label display--delivering additional value and ease of use to the consumer. This product-refresh positions us well for continued growth as we enter the holiday season and the year ahead.
  • We also expanded our line of media players with the introduction of the WD TV™ Mini, with support for the RealVideo™ format, providing an affordable and convenient way for consumers to play their stored digital content and the WD TV™ Live, featuring network connectivity and 1080p resolution.

Before I pass the call to Tim Leyden, I want to thank the WD team and our supply partners for outstanding execution in seizing the upside opportunities that emerged throughout the quarter. Once again we have further strengthened WD in our long-term mission of generating sustained profitable growth.

Closing remarks

Thank you all for joining us on today’s call. We look forward to keeping you informed of our progress in the quarters ahead.

Tim Leyden - Executive Vice President & Chief Financial Officer

Throughout the September quarter, hard drive industry demand exceeded supply. We again leveraged our agility in response to this unexpectedly robust demand.  As we enter the December quarter, demand remains strong and our product line-up, availability and low cost profile position us to benefit from the continuing growth opportunity.

As I discuss our quarter-on-quarter sequential changes, I would like to remind you that our September quarter consisted of 13 weeks, while the June quarter consisted of 14 weeks.

Revenue for our first fiscal quarter was $2.2 billion, up 5% from the prior year and 15% sequentially. Hard drive shipments totaled 44.1 million units, up 12% from the prior-year period and 10% sequentially. Non-hard drive revenue, including sales of WD TV™ Media Players, solid-state drives (SSD), media and substrates totaled approximately $36 million compared to $5 million in the prior year and $27 million in the June quarter.

Average hard drive selling price was approximately $49 per unit, down $4 from the year-ago quarter, but up $1 from the June quarter. Our Q1 ASP reflects a stable pricing environment, driven largely by the favorable market conditions. 

Demand for our HDD products in the September quarter was stronger sequentially than we would have expected based on historical seasonal-norms, and particularly so, when compared to what we had perceived was an already strong June quarter.  We believe the total number of hard drives sold was 152 million compared to our original assumption of 135 to 140 million units.

We shipped 19.2 million mobile drives in the September quarter, compared to 14.6 million in the year-ago quarter and 16.9 million in the June quarter.

During the September quarter, we shipped 3.1 million drives into the DVR market compared to 3.9 million in the year-ago quarter and 3.7 million in the June quarter. 

Revenue from sales of our branded products, including WD TV, was $382 million, flat with the year-ago quarter and up 20% sequentially from $318 million in the June quarter. Industry pricing was more rational in this market during the quarter as supply and demand became more balanced. 

Moving on to our sales channel and geographic results –

Revenue by channel was 52% OEM, 31% distribution, and 17% branded products in the September quarter, compared with 56%, 26% and 18% in the year-ago quarter and 54%, 29% and 17% in the June quarter, respectively.

There were two customers, Dell and HP, that each comprised more than 10% of our total revenue.

The geographic split of our revenue was 22% Americas, 22% Europe, and 56% Asia, as compared to 23%, 29% and 48% in the year-ago quarter and 24%, 22% and 54% in the June quarter.

Our gross margin percentage for the quarter was 23.3% up from 20.1% in the year-ago quarter and 19.2% in the June quarter. This improvement in gross margin was driven by stronger than anticipated demand leading to moderate price reductions, better factory and supply chain utilization and favorable product mix.

Total R&D and SG&A spending was $195 million, or 8.8% of revenue. This compares with $190 million, or 9.0% of revenue in the year-ago quarter, and $184 million, or 9.5% of revenue in the June quarter. Our current spending reflects increased investments in technological advancements, new products and programs, and includes our recently acquired SSD business.

Operating income was $319 million, or 14.4% of revenue.  This compares with $234 million, or 11.1% of revenue in the year-ago quarter, and $209 million, or 10.8% of revenue in the June quarter.

Interest and other non-operating expenses were approximately $2 million.

Tax expense for the September quarter was $29 million, or 9.1% of pretax income. For fiscal 2010, we expect our book effective tax rate to range between 7% and 10% as we take into account our expected continuing profitability and the global mix of income by region.  Our cash tax rate is expected to be between 1% and 2% for the fiscal year.

Our net income totaled $288 million, or $1.25 per share.  This compares with $211 million, or $0.93 per share, and $196 million, or $0.86 per share in the year-ago and June quarters, respectively.

Turning to the balance sheet, for the September quarter our cash conversion cycle was a negative 4 days. This consisted of 47 days of receivables outstanding, 21 days of inventory, or 17 turns, and 72 days of payables. We generated $434 million in cash flow from operations. Capital expenditures were $176 million and depreciation and amortization totaled $121 million. We also made our 2nd quarterly debt-repayment installment of $19 million. Cash and cash equivalents increased by $262 million, ending at $2.056 billion. 

We are carrying a healthy cash balance as we monitor the continuing macroeconomic uncertainty. The 44.1 million hard drives we shipped in the September quarter represent a new output record for the company. Consequently, in order to support continued customer demand for WD products and, thereby, maintain the pace of our profitable growth, we now expect capital expenditures for fiscal 2010 to be $650 million, compared with our original projection of $600 million. Depreciation and amortization for fiscal 2010 is now expected to be about $540 million.  Over the medium term, we believe that the HDD market offers us substantial profitable growth opportunities in the existing markets we serve as well as in market segments yet to be addressed and in new applications for storage. Over the longer term, we will also evaluate investments in product line expansion both internally and externally to develop further growth opportunities.  We have $466 million remaining in our stock repurchase authorization and we continue to weigh the merits of further repurchases against internal and external investment alternatives.

Now I will discuss our expectations for the second quarter of our fiscal year 2010. 

First, let me outline the market situation as we see it.

With the notable exception of last year, the December quarter has historically been the industry’s strongest demand period, driven by consumer spending during the annual holiday season. We are encouraged by the positive PC and consumer electronics demand commentary from related industry bellwethers and the continuing industry supply/demand discipline.  However, we expect that global macro economic conditions will remain challenging for both the consumer and the corporate buyer as unemployment remains high and credit availability remains tight in all major economic regions. Taking these various factors into account, we are modeling market volumes in a range of 152 million to 160 million units.  We remain focused on supply/demand equilibrium and we expect to use our flexible and agile business model to respond quickly to demand changes. We anticipate that pricing will be rational based on supply/demand balance in all markets. 

As a result, we expect current quarter revenue for WD to be in a range from $2.25 billion to $2.35 billion. 

We are modeling gross margins of 23.3%, flat with our September quarter.

R&D and SG&A are expected to total approximately $200 million. 

Our net interest expense is projected to be about $2 million.

We anticipate our tax rate to be about 9% of pretax income.

We anticipate our share count to be approximately 232 million.

Accordingly, we estimate earnings per share of between $1.26 and $1.36 for the December quarter.