WESTERN DIGITAL SECOND QUARTER ENDED DECEMBER 27, 2013 CONFERENCE CALL REMARKS, 01/22/14

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 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, among others: our participation in the growth, and our role in the future, of digital data; our position in the storage ecosystem; customer response to our product offerings; trends in the global economy and PC market; investments in the enterprise markets; and our financial performance, including our financial results expectations for the March 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-Q filed with the SEC on October 29, 2013 and our registration statement on Form S-3 filed with the SEC on October 30, 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 the acquisitions of HGST, VeloBit, sTec and Virident, employee termination benefits and other charges and charges related to litigation. 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, Tim Leyden will provide additional commentary on our December quarter results and our outlook for the March quarter.

We executed well in the December quarter as we continue to participate in the ongoing growth of data in all of our served markets. The industry TAM was slightly higher than anticipated driven by seasonal demand. We saw strength in gaming and branded products.

We exceeded our expectations on revenue, gross margin, and earnings per share in the December quarter, and our cash generation remained strong. The consistency in our financial performance reflects the reduced volatility in our business.

We continue to be very excited about our unique position in the storage ecosystem, enabling a broad-based perspective on the dramatic changes that are underway. We serve very large markets underpinned by strong data growth prospects. It is clear to us that most of the world’s data will be stored on hard drives and enterprise class solid state drives in tiered architectures as companies and consumers seek to optimize performance. Strategically, we are well positioned to play a leadership role by innovating and collaborating with our customers to define the future digital data landscape.

Total exabytes shipped and average gigabytes per drive continue to grow, reflecting strong customer response to our enterprise and branded products. These are two growing businesses where we have established leadership positions. Continued success in these markets offers us the opportunity to achieve even better financial results over time as we add more and more value to our solutions. As data becomes more strategic in the enterprise, companies are investing differently in IT infrastructure, looking to achieve optimal total cost of ownership. This is resulting in more fragmented solutions, allowing for more customization and value creation by storage providers. These trends are helping to drive the upward trajectory in our cloud related revenue.

Over the last few months, customers have responded positively to two of our newest products addressing the demand for innovative solutions in the personal, public and private clouds. Specifically,

  • We launched the WD My Cloud™, a comprehensive personal cloud solution for users to organize, centralize and secure their digital content and access it from anywhere in the world. This is an important element of our Connected Life initiative to improve the connectivity of the home.
  • We launched our 6 TB helium-based sealed drive which leverages our proprietary technology platform called HelioSeal™. Select strategic customers have already qualified the drive and we are shipping the product.

We have also seen continued customer preference for our portfolio of enterprise-class solid state drives. In the December quarter, our SSD enterprise revenue outpaced the growth rate in the overall SSD enterprise market as we continue to integrate our recently acquired talent and technology into the HGST SSD organization.

We are excited about the year ahead, tempered by the industry’s usual seasonality in the first half of the year. We see several potential drivers for a better demand environment including prospects for an improving global economy, a stabilizing PC market, and ongoing investment in both the traditional and capacity enterprise markets.

I will now turn the call over to Tim Leyden.

Tim Leyden - Chief Financial Officer

Thank you, Steve.

Our strong December quarter performance benefited from solid market demand, favorable channel and business mix, and continuing good execution.

The hard drive industry shipped approximately 142 million units during the December quarter, up from the September quarter and the year-ago period, and the TAM came in slightly higher than the guidance we gave on our October call. In our business, we saw strength in gaming, consistent quarter-over-quarter performance in client and enterprise, and the anticipated seasonal pick-up in branded products.

Our distribution and retail channel inventory remains lean.

Our revenue for the December quarter was $4.0 billion, including $155 million from enterprise SSDs. While we expect our enterprise SSD revenue growth rate to continue to exceed that of the industry, the upward trajectory in the December quarter was especially strong given a single source opportunity. Overall, 54 percent of our revenue came from non-PC applications. 

We shipped a total of 63.1 million hard drives at an average selling price of $60. The quarter-over-quarter increase in overall ASP was primarily driven by the seasonal uptick in branded products and strength in distribution.

Our gross margin for the quarter was 28.7 percent. Non-GAAP gross margin was 30.1 percent, excluding $40 million of amortization expense for acquired intangible assets as well as $15 million of restructuring charges. We exceeded our implied guidance for non-GAAP gross margin by 30 basis points primarily due to favorable business mix.

R&D and SG&A spending totaled $650 million for the December quarter. SG&A included the following items: $12 million of charges related to certain litigation, $11 million of amortization expense for acquired intangible assets, and $6 million of restructuring and other charges. R&D included $5 million of restructuring charges. As a reminder, the previous period included a flood-related insurance recovery of $65 million dollars.

We accrued interest charges of $13 million in the December quarter relating to the Seagate arbitration matter.

Tax expense for the December quarter was $37 million, or 8 percent of pre-tax income.

Our net income for the December quarter totaled $430 million, or $1.77 per share. On a non-GAAP basis, net income was $532 million, or $2.19 per share.

Turning to the balance sheet:

We generated $727 million in cash from operations and our free cash flow totaled $557 million.

Our CAPEX for the December quarter totaled $170 million or 4 percent of revenue.

As part of our capital allocation program, we repurchased 2.0 million shares for $150 million during the December quarter.

We also declared a dividend in the amount of $0.30 per share.

We exited Q2 with total cash and cash equivalents of $4.7 billion, of which approximately $700 million was in the U.S.

I will now provide our guidance for the March quarter.  

We expect:

  • Revenue to be seasonally down and in a range of $3.65 billion to $3.75 billion, reflecting the seasonally lower TAM.
  • Gross margin approximately at the mid point of our 27 to 32 percent model excluding the amortization of intangibles, reflecting the impact of lower factory utilization due to lower volumes.
  • R&D and SG&A spending of approximately $600 million excluding the amortization of intangibles.
  • A tax rate of approximately 8 percent, and
  • A share count of approximately 243 million.
  • Accordingly, we estimate non-GAAP earnings per share of between $1.80 and $1.90 for the March quarter which includes a dilution impact of ten cents from the sTec and Virident acquisitions.
  • As a reminder, we expect the sTec, VeloBit and Virident acquisitions to be accretive early in calendar year 2015.

Overall, we are pleased with our continued strong performance, and we are enthusiastic about our prospects to play an increasingly strategic role in the evolving storage market.

Operator, we are now ready to open the call for questions.

Steve Milligan - President & Chief Executive Officer

Closing Remarks:

 

Thank you all for joining us and we look forward to updating you as we go forward. Thank you very much.