WESTERN DIGITAL SECOND FISCAL QUARTER ENDED JANUARY 2, 2015 CONFERENCE CALL REMARKS, 01/27/15

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. Risks and uncertainties may cause actual results to differ materially from those currently expected. These potential risks and uncertainties include:

  • volatility in global economic conditions;
  • business conditions and growth in the storage ecosystem; pricing trends and fluctuations in average selling prices; the availability and cost of commodity materials and specialized product components;
  • actions by competitors;
  • unexpected advances in competing technologies;
  • our development and introduction of products based on new technologies and expansion into new data storage markets; 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 position and opportunities in the growth of data and the storage ecosystem; the growth areas in storage; our investment focus; our product offerings and our customers' responses to our product offerings; and demand outlook 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 November 4, 2014 and those listed in our registration statement on Form S-3 filed with the SEC on November 5, 2014. 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 non-GAAP forward-looking guidance we provide during this call excludes amortization of intangibles related to the acquisitions of HGST, sTec, VeloBit and Virident, and employee termination, asset impairment, litigation-related and other charges.  Because we currently cannot fully quantify future amounts for these excluded items, 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, Olivier Leonetti will provide additional commentary on our December quarter performance and our outlook for the March quarter.

I am pleased with our financial results in the December quarter. We achieved strong revenue, gross margin, and earnings performance. We also generated significant cash flow from operations in the quarter, excluding the impact of the Seagate arbitration award. The diversified nature of our business, together with ongoing secular growth in data and crisp execution by our HGST and WD subsidiaries, continue to enable us to consistently deliver strong financial performance.

Market dynamics in the December quarter were in line with our expectations. In our business, we saw particular strength in demand for capacity enterprise and video surveillance hard drives, and for enterprise SSDs. As anticipated, there was a seasonal demand uptick for branded products.

We expect ongoing hyperscale cloud deployments, coupled with our expanding product portfolio and customer engagement model, to continue fueling our growth in capacity enterprise for the foreseeable future. Petabyte growth in this category is expected to remain strong.

Our Flash Platform Solutions business, which includes our expanding portfolio of enterprise-class SSDs, maintained its growth trajectory in the quarter, delivering revenue of $187 million.

The demand outlook for the March quarter reflects a normal seasonal decline, with moderation in client, branded products and performance enterprise with stable demand in capacity enterprise. We believe overall supply and demand and associated inventory levels remain balanced.

I continue to be encouraged by the ongoing stabilization of the PC market, where demand has been in line with our expectations. Furthermore, I am encouraged by the market's response to our strategic growth initiatives which we believe position the company to thrive in the evolving data storage ecosystem. We have strengthened our value proposition by enhancing our technical expertise, expanding our product portfolio, and investing in our go-to-market capabilities. We will continue to prudently evaluate investment opportunities to advance these initiatives.

We gained traction in key markets during the December quarter:

  • Our broad lineup of high-capacity hard drives, including those based on our proprietary HelioSeal platform, continue to be embraced by both traditional enterprise and hyperscale datacenter customers.
  • We continue to invest in high growth vertical market applications. Specifically, we have seen strong customer acceptance of our WD Purple hard drives in the security surveillance market. We launched a 6TB model in the December quarter that has been well received by customers. We expect strong ongoing growth in this space, given the rapid adoption of digital video cameras and security surveillance systems worldwide.
  • There continues to be strong growth momentum in branded with our portfolio of My Cloud solutions addressing both the consumer and prosumer markets. The My Cloud Software and Apps have now been downloaded by more than 4 million users worldwide.
  • We are engaged with customers and partners on our recently announced Active Archive Platform. Proof-of-concept systems are up and running, and initial customer feedback has been positive. This new category of storage solution will feature high-density peta-scale capacities in a single rack, and deliver entirely new levels of storage efficiency and value.
  • And as a reminder, we expect revenue growth from our Flash Platforms business to outpace that of the industry.

Before turning it over to Olivier, I would like to thank and recognize our employees worldwide for helping to deliver a strong second quarter. Our consistent financial performance is a testament to the strength of our team, a well-diversified business, leading products, and a customer-centric engagement model.

Olivier Leonetti - Executive VP Finance & Chief Financial Officer

Thank you, Steve.

Expected seasonal demand and consistent execution helped us exceed financial expectations in the December quarter.

Industry shipments were in line with the TAM implied in our guidance provided in October. In our business, we saw continued strength in capacity enterprise, the anticipated seasonal increase in branded products, as well as continued steady demand in performance enterprise.

Aggregated channel inventories of Western Digital products remain within our 4 to 6 week range.

Our revenue for the December quarter was $3.9 billion dollars. This included $187 million dollars in revenue related to our Flash Platforms Solutions group.

We shipped a total of 61.0 million hard drives at an average selling price of $60 dollars. The quarter-over-quarter increase in overall ASP was driven by strength in capacity enterprise, survelliance along with the seasonal improvement in client and branded products. Our gross margin was 29.1 percent.

Our non-GAAP gross margin was 30.5 percent, which was better than our implied guidance due to business mix. This excludes $55 million dollars of amortization of intangibles and other non-recurring charges.

Operating expenses totaled $644 million dollars.

Our non-GAAP operating expenses were $620 million dollars, excluding amortization of intangibles, restructuring charges, and a flood insurance recovery. Expenses were higher than our implied guidance due to incentive compensation and stock appreciation rights.

Tax expense for the December quarter was $20 million dollars, or 4 percent of pre-tax income. The tax rate reflects the retroactive extension of the U.S. federal R&D tax credit that was signed into law during the December quarter. 

Our net income totaled $460 million dollars, or one dollar and ninety-three cents per share.

On a non-GAAP basis, net income was $539 million dollars, or two dollars and twenty-six cents per share. This includes a seven cents per share tax benefit from the R&D tax credit.

Turning to the balance sheet:

In the December quarter we generated $243 million dollars in cash from operations and our free cash flow totaled $97 million dollars. As a reminder, we paid a total of $773 million dollars related to an arbitration award in the December quarter.

Our CAPEX totaled $146 million dollars or 4 percent of revenue.

We repurchased 3.2 million shares for $309 million dollars.

We also declared a dividend in the amount of .40 cents per share.

We closed Q2 with total cash and cash equivalents of $4.9 billion dollars, of which approximately $1.4 billion dollars was held in the U.S.

I will now provide the guidance for the March quarter.

We expect:

  • Revenue to be in the range of $3.6 billion dollars to $3.7 billion dollars.
  • Gross margin percentage roughly flat with our Q2 performance, excluding the amortization of intangibles.
  • R&D and SG&A spending of approximately $610 million dollars, excluding the amortization of intangibles.
  • A tax rate of approximately 7.5 percent, and
  • A share count of approximately 237 million.
  • Accordingly, we estimate non-GAAP earnings per share of between one dollar and ninety cents and two dollars for the March quarter.

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

Steve Milligan - President & Chief Executive Officer

Closing Remarks:

Thank you again for joining us today. In closing, I want to thank all of our employees and suppliers for their commitment and outstanding execution and our customers for their continued business.