WESTERN DIGITAL THIRD QUARTER ENDED MARCH 29, 2013 CONFERENCE CALL REMARKS, 4/24/13

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: growth in the storage industry and our position and opportunities in the industry; industry demand for the June quarter and calendar year 2013; our production levels and capital expenditures; customer response to our product offerings; and our financial performance, including our financial results expectations for the June 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 February 1, 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 Web site. The forward-looking guidance we provide during this call excludes certain items such as amortization of intangibles and other charges. 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 analysts 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 March quarter results and outlook for the June quarter.

I am pleased with our financial performance in the March quarter. We continue to execute well and capitalize on the ongoing secular growth in digital data. Industry demand was in line with our expectations and we expect volume in the June quarter to be flat to slightly down with the March quarter. We are cautiously optimistic about the potential for a modest seasonal uptick in demand for the second half of calendar 2013. Our production levels will continue to be adjusted to prevailing demand patterns.

In the March quarter, both the HGST and WD subsidiaries continued to deliver outstanding financial results, driving gross margin performance well within our model. We continue to effectively manage the diverse elements of our business with a keen focus on operational excellence and value creation for our customers, shareholders and employees. Customers continue to respond favorably to our breadth of product offerings and value-based engagement model.

It is important to note that we have established a leadership position in the fastest growing areas of the storage industry. These include our high capacity drives and solid state drives for the cloud, Branded Product solutions for the personal cloud and leading small form factor drives for thin and light mobile devices. Given our strong pipeline of innovative new products, we have the opportunity to sustain this favorable momentum for the foreseeable future. Currently, we are seeing strong market response to several new products, including:

  • Our new family of 5 millimeter 2.5-inch hard drives and solid state hybrid drives for ultra-portable devices,
  • Our 7 disk helium sealed drive platform aimed at delivering significant total cost of ownership benefits for hyper scale datacenters; and,
  • Our expanding range of SSD offerings for the enterprise space.

We continue to be excited about the long-term outlook for storage and our increasingly strategic position within this vast digital data ecosystem. Western Digital is one of the best-positioned technology companies to leverage the ongoing creation, transfer and storage of data — a trend linked directly to consumers’ increasingly ubiquitous experience with data in all aspects of their lives. We believe digital data growth will continue unabated for the foreseeable future with total exabytes shipped growing from six hundred exabytes in 2012 to at least five thousand nine-hundred exabytes by 2020, representing a 33 percent compounded annual growth rate. Consistent with other recent commentary, we believe exabyte growth is a better and more relevant measure of the growth potential for the industry and our company.

Western Digital is a market and customer driven company, focused on growth and innovation. We develop deep and collaborative relationships with customers, an approach that is being manifested in our role as a trusted advisor and market maker. We believe this approach will continue to be one of the key factors in helping us to achieve strong business performance.

The Western Digital platform is powerful, with growth drivers and unique competitive advantages that will continue to provide us the opportunity to expand our value-creation model within the storage ecosystem. I am confident that this approach will continue to result in strong and sustainable financial performance, further differentiating Western Digital as one of the world’s leading technology companies.

I will now turn the call over to Wolfgang.

 

Wolfgang Nickl - Executive VP Finance & Chief Financial Officer

Thank you, Steve.

I will first summarize the total market demand and our consolidated financial performance for the March quarter and then conclude with a range of our expected financial results for the June quarter.

As Steve mentioned, we are very pleased with our March quarter performance as it demonstrates the resilience and strength of our business model.

The HDD market shipped approximately 135 million units during the March quarter, flat to the December quarter and in line with our forecasted range in late January. In our business, we saw strength in Enterprise, stable quarter-over-quarter performance in client and consumer electronics, and anticipated seasonal softness in Branded Products.

Our Distribution and Retail channel inventory continues to be lean and our analysis suggests that inventory levels at our OEM customers are also in good shape. 

Our revenue for the quarter was $3.8 billion.

We shipped a total of 60.2 million hard drives at an average selling price of $61. We exceeded our revenue guidance due primarily to better-than-expected business and product mix and lower-than-expected like-for-like price declines.

The average capacity per drive we shipped in the March quarter was 810 GB a 35 percent year-over-year increase. This reflects strength in our Branded and Enterprise businesses as well as solid mix up in our client business to cope with the ever increasing amount of digital content.

Our gross margin for the quarter was 28.2 percent. Non-GAAP gross margin was 29.2 percent, excluding $38 million of amortization expense related to acquired HGST intangible assets. Non-GAAP gross margin was approximately 120 basis points better than our guidance as a result of better-than-expected cost improvements and product mix and lower than anticipated price declines.

Our broad based participation in the secular growth of digital data is resulting in a more diversified mix of our revenue. Over the last five years the revenue contribution of our non-PC related business has grown from 35 percent in fiscal year 08 and is projected to account for more than 50 percent of our revenue in fiscal year 13. As a reminder, our non-PC related business is comprised of our Branded Products, Consumer Electronics and Enterprise business which includes SSDs.

R&D and SG&A spending totaled $581 million for the March quarter. SG&A included $22 million of amortization expense related to acquired HGST intangible assets and other unrelated charges.

We incurred additional charges of $63 million in the March quarter reflecting continued alignment of our operations with anticipated market demand. As a reminder, we had already incurred total charges of $147 million in the prior three quarters reflecting ongoing infrastructure alignment as well as an evolution of our organization to address growth opportunities.

Tax expense for the March quarter was $15 million, or 4 percent of pre-tax income. The rate reflects the retroactive extension of the federal R&D tax credit.  

Our net income for the March quarter totaled $391 million, or $1.60 per share. On a non-GAAP basis, net income was $514 million, or $2.10 per share.

Turning to the balance sheet:

We generated $727 million in cash from operations during the March quarter and our free cash flow totaled $539 million.

Our CAPEX for the March quarter totaled $188 million. For the full fiscal year we expect to be at the upper end of our CAPEX model including approximately $200 million for expenditures related to the floods in Thailand. Excluding the flood-related spending, we would be close to the bottom end of our model range, reflecting our measured approach to capital spending in today’s environment.

As part of  our capital allocation strategy, we repurchased 5.2 million shares for $243 million during the March quarter.

In addition, we declared a dividend in the amount of $0.25 per share or a total of $60 million, which we paid on April 15 to shareholders of record as of March 29.  

We exited fiscal Q3 with total cash and cash equivalents of $4.1 billion, of which $1.5 billion was in the U.S.

I will now provide our guidance for the June quarter which anticipates sustained strong performance within our business model during what is typically the industry’s softest quarter:

We expect:

  • A flat to slightly down total available market when compared with the March quarter.
  • Revenue in the range of $3.55 to $3.65 billion, reflecting the current demand and pricing environment and a seasonal change in business mix;
  • Gross margin well within our model at approximately 28.5 percent, excluding the amortization of HGST intangibles; 
  • We expect R&D and SG&A spending to be approximately $550 million, excluding the amortization of HGST intangibles.
  • A tax rate  within our 7-10 percent model, and
  • A share count of approximately 243 million.
  • Accordingly, we estimate non-GAAP earnings per share of between $1.65 and $1.80 for the June quarter.

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

 

Steve Milligan - President & Chief Executive Officer

Closing Remarks:

I want to thank you again for joining us. In closing I also want to thank all Western Digital employees for their dedication and outstanding performance, and our customers and our suppliers for their support. We look forward to being in touch with you. Thank you.