WESTERN DIGITAL THIRD QUARTER ENDED APRIL 2, 2010 CONFERENCE CALL REMARKS, 04/22/10

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: industry inventory, pricing and demand; our position in the industry; the impact of our entry into the traditional enterprise market; our investments in technology and capacity; our response to customer needs in existing and new markets; our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2010; our share repurchase plans; our financial results expectations for the June quarter, including revenue, gross margin, expenses, tax rate, share count, and earnings per share; and the impact of the European air traffic disruptions. 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 January 29, 2010. 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.

Overall demand for hard drives, in the March quarter, was stronger than we anticipated at 163 million units, as we saw sequential industry TAM grow two percent in contrast to a typical seasonal decline of 5% to 7%. This adds support to the growing body of evidence that, in the midst of significant economic uncertainty over the last 12 months, the creation, transmission, consumption and storage of digital content has become much more pervasive in our lives than anyone had previously appreciated.  Over the last year, we have seen increasing levels of demand for high capacity, cost effective storage. We believe this demand is, at core, driven by the ubiquitous role of digital content in everyday life, spurred in the consumer segment by increasingly versatile and powerful handheld devices and PCs with new and attractive price points and in the commercial sector by a drive for growth and efficiency especially in developing markets.

Industry inventory - OEM, distribution and retail combined - remains at just over two weeks of sales, reflecting continued strong demand, continuing spotty constraints in the industry supply chain and continued industry discipline in managing the supply/demand dynamic.

For more than eight years now, WD has generated sustained profitable growth and outstanding returns for our shareholders by consistently executing to our customer-centric business strategy with passion, focus, and perseverance.  

Customers continued to demonstrate a strong preference for WD products in the March quarter and this enabled us to again post record unit shipments and revenue with strong profitability.  We are very pleased that in such a dynamic environment we again helped our customers to succeed in their markets by responding quickly to their changing requirements for volume and mix.

A relatively moderate pricing environment, combined with our cross segment agility and our focus on cost and efficiency, once again enabled gross margins above the high end of our model range. Asset management remained crisp, resulting in record cash generation.

We continue to innovate and lead in multiple markets based on the significant investments we have made in people, products, processes, capacity and technology over the last few years, with several recent notable product achievements.

  • In our Client business,
    • We began volume shipment of the industry’s highest areal density standard two disk 2.5" drive -- the 750GB WD Scorpio® Blue™ hard drive for mainstream notebook computers.
    • We doubled the capacity of the WD VelociRaptor™, the world’s fastest SATA hard drive, to 600GB, delivering high performance and capacity for both enthusiast and enterprise customers.
    • We launched our first consumer-oriented solid state drive family, the WD SiliconEdge™ Blue™ in capacities up to 256 gigabytes.
  • In our Branded Products business,
    • This week we introduced a new app for the iPhone® called WD Photos, a photo viewer that gives our customers quick access to all their photos stored on their My Book® World Edition™ or WD ShareSpace™ network drives from their iPhone or iPod touch®.
    • Also, specifically designed for Mac users, we added a new high speed My Passport® Studio™ family and a 1TB My Passport SE to our range of popular portable hard drives.
  • In the CE market,
    • We launched the WD AV-25 range of 2.5" SATA drives, engineered specifically for demanding, always-on multimedia streaming applications such as DVR and surveillance.
    • We also introduced the My Passport AV Media Drive family, optimized for video storage and playback, and designed to work directly with select Sony® camcorders, Blu-ray players and other popular media players.
  • In the embedded market we introduced the WD SiliconDrive® N1x family of SLC-based solid state drives with capacities up to 128GB, delivering high performance and high reliability for embedded-system OEM applications.
  • Our participation in the traditional enterprise market, part of our portfolio diversification and expansion strategy, which started with the shipment of our 2.5-inch 10K SAS product line beginning in early November, is proceeding in line with our measured multi-year plan to establish solid experience and a representative share in this important market segment.

We remain committed to continued investments in the development of our people, technology, product breadth and appropriate capacity while enhancing the advantaged business model we have developed over the last several years. In responding to our customers’ needs and earning their business in the fastest growing markets, we provide a critical combination of quality and reliability, portfolio breadth, technology and product availability, underpinned by our low cost model, our vertical integration, our rapid inventory turns and our balance sheet strength. We believe this WD focus represents a sustainable advantage as we continue to respond to customer needs in our existing markets and as we move into new markets for WD.

We believe that calendar year 2010 will be an extremely strong year for storage and we are excited about the opportunity to continue to satisfy customer requirements to meet this demand.

Before I pass the call to Tim Leyden, I want to mention that tomorrow, Friday, April 23, WD will mark its 40th anniversary spanning four decades of innovation, passion, perseverance and success. I want to acknowledge the contributions of our thousands of employees, our customers and suppliers in helping us every step of the way. In particular I want to acknowledge the team's outstanding execution in seizing the customer opportunities that emerged throughout the most recent quarter which has further strengthened WD in our long-term mission of generating sustained profitable growth.

Closing Remarks
Thank you all for joining us today. We look forward to keeping you informed of our progress in the quarters ahead.

 

Tim Leyden - Executive VP Finance & Chief Financial Officer

As John noted, the overall market was stronger than anticipated during the March quarter.  Once again, our agile business model allowed us to scale up our supply and adjust our mix to respond to the demand in the more robust segments of the market.  This, combined with moderate price declines and our low cost focus, contributed to gross margin exceeding the upper threshold of our model range and our implied guidance.

Revenue for our third fiscal quarter was $2.6 billion, up 66% from the prior year and 1% sequentially. Hard drive shipments totaled 51.1 million units, up 62% from the prior-year period and 3% sequentially. Revenue from sales of WD TV™ Media Players and solid-state drives, totaled approximately $46 million, up 48% from the prior year and essentially flat with the December quarter.

Average hard drive selling price was approximately $51 per unit, up $1 from the year-ago quarter and down $1 from the December quarter.

Growth in emerging markets and a recovering commercial segment led to desktop growth being stronger than expected.  Pricing remained stable as a result of the unexpectedly strong demand.

We shipped 19.8 million mobile drives in the March quarter, compared to 10.1 million in the year-ago quarter and 21.2 million in the December quarter.  We reduced our mobile volumes in response to the expected seasonality in branded products and to balance the effect of competitors in the mobile market who diverted their capacity from the gaming segment.

During the March quarter, we shipped 4.6 million drives into the DVR market, compared to 3.5 million in the year-ago quarter, and 4.1 million in the December quarter.  Our strong product line-up led to revenue gains in both our OEM and channel businesses.

Revenue from sales of our branded products, including WD TV, was $467 million, up 36% from $343 million in the year-ago quarter and down 18% sequentially from $569 million in the December quarter reflecting the typical seasonality of the retail market. 

On the enterprise front, there was strong sequential demand for our near-line storage products, and our SAS products are making progress towards our multi-year plan to gain a representative share of the traditional enterprise market.   

Moving on to our sales channel and geographic results –

Revenue by channel was 49% OEM, 33% distribution, and 18% branded products in the March quarter, compared with 48%, 30% and 22% in both the year-ago and December quarters.

Relative to the geographic split of our revenue, the Asian market showed continued strength, increasing to 52% of revenue in the March quarter from 46% in the year-ago quarter and 50% in the December quarter.  The Americas and European regions performed as expected at 24% for the Americas and 24% for Europe in the March quarter, compared to 26% and 28% in the year-ago quarter and 25% and 25% in the December quarter.

Our gross margin for the quarter was 25.2%, up from 15.9% in the year-ago quarter and down from 26.2% in the December quarter.

Total R&D and SG&A spending was $224 million, or 8.5% of revenue. This compares with $174 million, or 10.9% of revenue in the year-ago quarter, and $214 million, or 8.2% of revenue in the December quarter.  Our R&D investment is focused on broadening our product offerings in response to customer needs, and developing technologies in order to maintain our market competitiveness.

Operating income was $441 million, or 16.7% of revenue.  This compares with $61 million, or 3.8% of revenue in the year-ago quarter, and $473 million, or 18.1% of revenue in the December quarter.

Interest and other non-operating expenses were approximately $1 million.

Tax expense for the March quarter was $40 million, or 9.1% of pretax income, within our model range of 7 – 10%.  Our cash tax rate is expected to be between 1% and 2% for the fiscal year.

Our net income totaled $400 million, or $1.71 per share.  This compares with $50 million, or $0.22 per share, and $429 million, or $1.85 per share in the year-ago and December quarters, respectively.

Turning to the balance sheet, for the March quarter our cash conversion cycle was a negative 3 days. This consisted of 43 days of receivables, 23 days of inventory, or 16 turns, and 69 days of payables. We generated $588 million in cash flow from operations. Capital expenditures were $177 million and depreciation and amortization totaled $128 million. We also made our 4th quarterly debt-repayment installment of $19 million, reducing our debt balance to $425 million. Cash and cash equivalents increased by $391 million, ending at $2.826 billion. 

On our January call, we updated our capital expenditure forecast for fiscal 2010 to between $650 and $750 million.  We now expect to be at the high end of that range as we put investments in place to support the expected strength in the market as well as continued customer preference for WD products.  Depreciation and amortization for fiscal 2010 is expected to be about $520 million.  As we have consistently demonstrated in the past, we remain focused on supply/demand equilibrium and ready to adjust capacity utilization in accordance with market needs.

Our strong cash position allows us to maintain an adequate buffer in times of continued global economic uncertainty, while still providing the operational flexibility to secure component supply, increase our investments in advanced technology and expand our product breadth through pursuing internal and external opportunities.

We have $466 million remaining in our stock repurchase authorization as we continue to evaluate the merits of further repurchases against internal and external investment alternatives.

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

Market indicators and customer inputs continue to strengthen our belief that demand for hard drives will be strong throughout the calendar year and beyond. WD remains ideally positioned to service these market needs due to our existing customer and supplier relationships, product line-up, operational agility, technology and financial resources.

Historically, June quarter demand has been flat to moderately down when compared to March volumes and we expect that seasonality pattern to continue. Consequently we are forecasting volumes in the 157 to 162 million unit range.

We anticipate that pricing will be competitive but will be rational based on advanced technology deployment, supply/demand balance and inventory positions in all channels.

I would note that our outlook is based on an assumption that the current disruption of European air traffic is short-lived, and that the economic activity is made up during the balance of the quarter.

Accordingly, we expect current quarter revenue for WD to be in a range from $2.475 billion to $2.575 billion. 

R&D and SG&A are expected to total approximately $230 million. 

Our net interest expense is projected to be about $1 million.

We expect our tax rate to be about 9%.

We anticipate our share count to be approximately 236 million.

We estimate earnings per share of between $1.40 and $1.50 for the June quarter.