WESTERN DIGITAL THIRD QUARTER ENDED MARCH 28, 2014 CONFERENCE CALL REMARKS, 4/30/14

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 position in the growth of data and the storage ecosystem; stabilization of demand in our business; demand trends in the enterprise space; our product offerings; our customers’ responses 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 January 31, 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 forward-looking guidance we provide during this call excludes amortization of intangibles related to the acquisitions of HGST, VeloBit, sTec and Virident, asset impairment and other charges, charges related to litigation, and expense due to the write-off of debt issuance costs.  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 March quarter performance and our outlook for the June quarter.

We achieved solid financial results for the March quarter with revenue in line with our expectations and gross margin and earnings per share exceeding our guidance. Cash generation remained strong. Our steady financial performance continues to demonstrate an ability to manage the business and deliver on-going value to our customers and shareholders.

Both of our subsidiaries executed well in the March quarter as we continue to participate in the ongoing growth of data, with an intense focus on helping our customers succeed in a rapidly changing environment. Our results reflect sustained strength in gaming, anticipated seasonality in client and branded products, and some softness in the enterprise space. The industry TAM was slightly higher than anticipated driven by the strength in gaming.

We continue to see demand stabilizing in the commercial side of our client business as part of a PC refresh cycle and we remain positive about the long-term demand trends in the enterprise space. The continued strength in gaming is due to consumers’ healthy demand for the newest game console designs, all of which have integrated hard drives. Overall, we believe industry supply and demand remain in balance.

We continue to be very excited about our unique position in the overall storage ecosystem, enabling a broad-based perspective on the dramatic changes that are underway. Customers are responding positively to a number of new products and technologies we are bringing to market to help them to be successful.

Specifically:

Our enterprise-class SSD business had another strong quarter.  We will continue to expand our full range of enterprise SSD products, including SAS, PCIe, and SATA in a range of form factors and capacity points as well as grow our software and solution offerings.

Several strategic OEM customers have qualified our 6TB Helium filled drive and we are shipping to them in volume. The product is generally available on a global basis resulting in broad adoption in all geographies. It is important to note that our innovative Helium technology platform is extendable to higher capacities and additional applications.

We recently began shipping a new family of high-performance, high capacity,
2.5-inch 15K hard drives. Our customers continue to use 15K hard drives with SSDs in tiered pools of storage, and this new product addresses the industry’s shift away from the 3.5-inch form factor to smaller 2.5-inch drives to help manage space requirements.

Customers have responded very positively to our Power of Choice lineup of hard drives, including the WD Red drives that ship primarily to value-added resellers who are configuring NAS systems for small and medium businesses. Likewise, the new WD Purple series addresses security surveillance NAS systems for the home and small businesses. Both of these are high growth segments, where storage is a value-added means to an end for the customer, which makes them attractive opportunities for us.

We continue to see opportunities with our My Cloud network attached storage solutions in the home and small office segment. Our My Cloud solution provides the opportunity to connect with billions of devices that create, store and display massive amounts of data.

All of these products reflect our highly focused strategy of helping our customers succeed through collaboration and innovation and are contributing to the favorable mix shift underway in our business to higher growth and higher
value-added segments of the market. 

Before turning it over to Tim, I wanted to address the topic of our discussions with China’s Ministry of Commerce. Consistent with our prior commentary, we had the opportunity to submit a request in March for MOFCOM to lift the hold separate restrictions on our business. We have done so and we continue to work with MOFCOM as they review our submission. In the meantime we continue to operate our HGST and WD subsidiaries separately and we will keep you informed of any material developments.

 

Tim Leydon - Chief Financial Officer

Thank you, Steve.

Our March quarter performance reflected healthy unit demand and solid execution.

The hard drive industry shipped approximately 137 million units during the March quarter, which was higher than the TAM implied in the guidance we provided in January. In our business, we saw continued strength in gaming, anticipated seasonal declines in client and branded products, and some softness in enterprise.

Aggregated channel inventories of Western Digital products remain at the low end of our 4 to 6 week range.  

Our revenue for the March quarter was $3.7 billion, including $134 million from enterprise SSDs. Our enterprise SSD revenue was slightly better than we had expected as some of the single source strength that we saw in the December quarter carried into the March quarter. We continue to expect that our SSD enterprise business will outpace the market’s revenue growth rate over the long term. Overall, 53 percent of our revenue came from non-PC applications. 

We shipped a total of 60.4 million hard drives at an average selling price of $58. The quarter-over-quarter decline in overall ASP was primarily driven by business mix.

Our gross margin for the quarter was 28.6 percent.

Excluding $39 million of amortization expense for acquired intangible assets  as well as $16 million of restructuring charges, our non-GAAP gross margin was 30.1 percent. We exceeded our implied guidance for non-GAAP gross margin by 60 basis points primarily due to operational efficiencies and better utilization.

R&D and SG&A spending totaled $628 million for the March quarter. SG&A included the following items: $11 million of amortization expense for acquired intangible assets and $4 million of restructuring and other charges. R&D included $8 million of restructuring charges.

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

Tax expense for the March quarter was $31 million, or 8 percent of pre-tax income. 

Net interest expense for the March quarter was $13 million and included $4 million of debt issuance costs that were expensed with the payoff of the prior credit facility.  

Our net income for the March quarter totaled $375 million, or $1.55 per share. On a non-GAAP basis, net income was $470 million, or $1.94 per share.

Turning to the balance sheet:

We generated $697 million in cash from operations and our free cash flow totaled $536 million.

Our CAPEX for the March quarter totaled $161 million or 4 percent of revenue.

We repurchased 2.8 million shares for $244 million during the March quarter.

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

We exited Q3 with total cash, cash equivalents and investments of $5.0 billion, of which approximately $2.3 billion was in the U.S.

I will now provide our guidance for the June quarter.  

We expect:

  • Revenue to be seasonally down and in a range of $3.5 billion to $3.6 billion.
  • Gross margin approximately at the mid-point of our 27 to 32 percent model excluding the amortization of intangibles.
  • R&D and SG&A spending of around $600 million also excluding the amortization of intangibles.
  • A tax rate of approximately 8 percent, and
  • A share count of approximately 242 million.
  • Accordingly, we estimate non-GAAP earnings per share of between $1.65 and $1.75 for the June quarter which includes a dilution impact of approximately 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 continue to execute well and we are well positioned to succeed in the evolving storage market.

In closing, I want to point out to investors and analysts that our fiscal year 2015 will consist of 53 weeks, with the first quarter ending October 3, 2014 consisting of 14 weeks, and the second, third, and fourth quarters at 13 weeks each.

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.