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 Risk Factors.
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 and opportunities in the industry; industry demand for the December quarter; our production levels and capital expenditures; customer response to our product offerings; and our financial performance, including our financial results expectations for the December quarter. 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 19, 2013. 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 quarterly fact sheet posted in the Investor Relations section of our website. The forward-looking guidance we provide during this call excludes amortization of intangibles related to insurance proceeds related to the Thailand flooding and expenses related to the acquisitions of HGST, VeloBit, sTec and Virident. 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 participants 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.
Steve Milligan - President & Chief Executive Officer
Good afternoon and thank you for joining us. After my opening remarks, Wolfgang Nickl will provide additional commentary on our September quarter results and our outlook for the December quarter.
The Western Digital team performed well in the September quarter. Outstanding linearity again helped drive great operating results including strong free cash flow generation. We posted gross margins above the midpoint of our model range and our earnings per share were well above the high end of our guidance. These results reflect continued strong execution by both our HGST and WD subsidiaries.
We expect the TAM in the December quarter to be roughly flat with the September quarter. Longer term, we remain excited about the opportunity to address the 34 percent annual growth in data that we are forecasting through 2020.
Our strong financial performance has enabled us to invest in and execute on a strategic plan that we first outlined a little more than a year ago at our Investor Day. At that time, we identified growth opportunities in the cloud, in thin and light devices, and in the Connected Life for consumers’ and the small and home office market. In addition, we cited enterprise solid state storage as an evolving growth opportunity. We also defined a capital allocation program of returning 50 percent of free cash flow to shareholders and potentially investing the remainder in strategic growth opportunities.
We have advanced each of these intiatives over the last year, putting ourselves in an even stronger position to create additional value through innnovation and differentiation.
First, in our core business:
- We are on track to launch our new 7 disk helium based sealed drive this quarter to a select group of customers who value the total cost of ownership savings delivered by this innovative product.
- We are participating in the thin and light ultraportable device opportunity with a strong lineup of solutions, including our solid state hybrid drives as well as our 7 mm and 5 mm hard drives.
- We recently introduced our My Cloud™ family of personal cloud solutions, which enable users to organize, centralize and access their digital content from anywhere in the world, and
- To further strengthen our participation in the fast-growing SOHO NAS space, we recently expanded our industry-leading family of WD Red™ NAS drives to include a 3.5-inch 4 TB drive and a 2.5-inch form factor.
In returning capital to shareholders, we have delivered on our year ago announcement by allocating approximately $1.2 billion to share buybacks and dividend payouts.
On the strategic investment front, we recently strengthened our enterprise storage platform with several acquisitions related to the application of solid state storage in data center architectures. SSD in the enterprise and cloud is forecasted by IDC to grow from $2.5 billion in 2012 to $7.2 billion in 2017. We entered this space in 2008 through our joint development agreement with Intel® and since then have established a strong position in SAS SSD devices. Our recent acquisitions of sTec, VeloBit and Virident augment HGST’s existing Enterprise SSD resources—including the Intel JDA. Collectively these assets provide us with a powerful platform to address this evolving growth space with a broadened portfolio of products and technologies, including the full range of enterprise SSD devices—PCIe, SAS and SATA. Mike Cordano, who heads our HGST subsidiary, will be discussing their data center strategy in the keynote address at the annual Needham storage conference on November 6th.
I will now turn the call over to Wolfgang to review the first quarter results and our outlook for the December quarter.
Wolfgang Nickl - Executive VP Finance & Chief Financial Officer
Thank you, Steve.
We are very pleased with our September quarter performance, as we again demonstrated the consistency and strength of our business model, underpinned by great execution.
The hard drive industry shipped approximately 139 million units during the September quarter, up from the June quarter and flat with the year-ago period. The September TAM came in at the upper end of the guidance we gave in July. In our business, we saw strength in consumer electronics due to gaming, stable quarter-over-quarter performance in client and enterprise, and an anticipated seasonal pick-up in Branded Products.
Our Distribution and Retail channel inventory remains very lean and our analysis suggests that inventory levels at our OEM customers remain at reasonable levels.
Our revenue for the September quarter was $3.8 billion, including $106 million from Enterprise SSDs. Overall, 53 percent of our revenue came from non-PC applications.
We shipped a total of 62.6 million hard drives at an average selling price of $58. The quarter-over-quarter change in overall ASP was primarily driven by a change in business and product mix.
Our gross margin for the quarter was 28.6 percent. Non-GAAP gross margin was 29.8 percent, excluding $36 million of amortization expense related to intangible assets acquired from HGST, sTec and VeloBit as well as $11 million of fixed asset impairments and other charges. We exceeded our implied guidance for non-GAAP gross margin by 70 basis points primarily due to lower than expected price declines and better than expected cost improvements.
R&D and SG&A spending totaled $533 million for the September quarter. SG&A included the following items: charges of $13 million related to the acquisitions of sTec, VeloBit and Virident and $11 million of amortization expense related to acquired HGST and sTec intangible assets, offset by a gain of $65 million for a flood-related insurance recovery.
We incurred additional interest charges of $13 million in the September quarter relating to the accrued arbitration award.
Tax expense for the September quarter was $37 million, or 7.0 percent of pre-tax income.
Our net income for the September quarter totaled $495 million, or $2.05 per share. On a non-GAAP basis, net income was $514 million, or $2.12 per share. Our non-GAAP earnings per share excluding sTec was $2.14, exceeding the high end of our guidance by $0.09.
Turning to the balance sheet:
We generated $680 million in cash from operations and our free cash flow totaled $544 million. This marks the 7th consecutive quarter with free cash flow in excess of $500 million.
Our CAPEX for the September quarter totaled $136 million or 3.6 percent of revenue.
As part of our capital allocation program, we repurchased 2.3 million shares for $150 million during the September quarter.
We also declared a dividend in the amount of $0.25 per share or a total of $59 million during the quarter.
We exited Q1 with total cash and cash equivalents of $4.9 billion, of which $1.4 billion was in the U.S. During the quarter we drew down the $500 million available to us through our revolving credit facility.
I will now provide our guidance for the December quarter.
- The total available market to be flat with the September quarter.
- Revenue in the range of $3.775 to $3.875 billion.
- Gross margin approximately flat with the prior quarter excluding the amortization of intangibles.
- R&D and SG&A spending of approximately $595 million including a full quarter of sTec and VeloBit as well as 9.5 weeks of Virident and excluding the amortization of intangibles.
- A tax rate within our 7-10 percent model.
- A share count of approximately 242 million.
- Accordingly, we estimate non-GAAP earnings per share of between $1.95 and $2.10 for the December quarter. This EPS guidance includes a dilutive effect from our recent acquisitions of approximately $0.10.
- As a reminder, we expect the sTec, VeloBit and Virident acquisitions to be accretive early in calendar year 2015.
In summary, we are pleased with our continued strong performance and we are excited about our opportunity to play an increasingly strategic role in the evolving storage market.
In my final call as CFO of Western Digital, I want to say that I greatly value my 18 years of experience and relationships at the company, including relationships with many of you in the investment community. Most importantly, I want to extend a special thank you to my fellow employees for their great teamwork in building such an outstanding company with such great promise.
Operator, we are now ready to open the call for questions.
Steve Milligan - President & Chief Executive Officer
In closing I want to thank all of our employees for their dedication and outstanding performance in Q1, and our customers and our suppliers for their support. And on behalf of the board of directors and all of our employees, I want to thank Wolfgang very much for his outstanding contributions and service to the company and wish him the very best in his new venture which he begins in early December. Thank you.