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; HDD demand for the September quarter and fiscal 2013; and our financial results expectations for the September quarter and fiscal 2013. 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 May 9, 2012. 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 investor information summary 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 the dilutive impact of sales of drives to Toshiba in connection with our divestiture transaction. 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.
John Coyne - President & Chief Executive Officer
Thank you and good afternoon. With me are President Steve Milligan and Chief Financial Officer Wolfgang Nickl.
To begin, I want to thank our employees for their extraordinary achievements in one of the most challenging and exciting years in our 42-year history. While responding to two major natural disasters and completing the largest acquisition in the history of the industry we achieved revenue growth of over 31 percent and more than doubled earnings.
Turning to the market, June quarter demand was in line with our forecast of late April. Industry shipments reached 157 million units, bringing total hard drive shipments for the year to 599 million units. Our WD and HGST teams both performed ahead of plan in Q4, with consistent execution delighting customers with compelling and high-quality products and flexible service. As a result, we delivered strong revenue, gross margin and cash flows.
In formulating our outlook for fiscal 2013, which we will share with you today, we considered many factors:
We took into account several broad trends such as the soft macro-economic environment, the growing use of tablets and smart phones and a modest expectation for the initial acceptance of Windows® 8 and Ultrabooks™. Consequently, our planning assumption for unit growth in hard drive demand is 5 percent.
We considered several Western Digital-specific factors:
- First, due to the regulatory requirement to operate WD and HGST as separate subsidiaries for at least two years, we do not expect any significant opex synergies in that time frame.
- Second, our experience since completing the HGST acquisition has demonstrated customers’ continued appreciation of the respective strengths of our WD and HGST subsidiaries.
- Third, following four months of experience, we have confirmed the robustness and predictability of HGST’s business operations, processes and controls.
- Fourth, each subsidiary has multiple opportunities to further improve its cost structure
- by ramping newer areal density platforms throughout the fiscal year, and
- by making continued progress on cost optimization and recovery from flood related cost issues.
Taking all this into account, we believe that Western Digital can deliver non-GAAP earnings per share of $10 in fiscal '13.
Storage continues to be at the center of the evolving digital universe in entertainment, education, commerce and communication. WD and HGST continue to focus on serving this market with a broad and expanding portfolio of products. We believe a strategy of delighting customers, focusing investments in faster growing market segments and driving strong execution in both internal operations and our supply chain will continue to deliver consistent and superior financial performance.
Steve Milligan will now cover the operational highlights of our Q4 performance.
Steve Milligan - President
Thanks, John. When we announced the acquisition of HGST in March 2011, we emphasized the potential for strong financial returns. We believe the consolidated June quarter financial results provide a compelling early proof point.
Both WD and HGST have a heritage of developing strategic and collaborative customer relationships, underpinned by innovative products, great technology and consistent execution. We are very pleased with the momentum we have maintained in the marketplace as we continue to focus on helping our customers succeed by developing and delivering great products across all segments of our business.
We delivered strong financial performance in the June quarter, with consolidated revenue of $4.8 billion. Crisp execution and healthy profitability generated strong cash flows. Our subsidiaries also independently managed their build plans to the prevailing demand environment.
We shipped a total of 71 million units or 48 million terabytes of storage into the market in the June quarter. The segment mix of the consolidated results of the two subsidiaries demonstrates a very healthy balance. In total, Western Digital shipped 7.9 million hard drives into the enterprise market; 54 million hard drives into the client space, including notebook and desktop; 4.2 million hard drives into the consumer electronics segment, including DVR, gaming and automotive applications; and 5 million hard drives for branded products. We also shipped 1 million non-HDD units including solid state drives, media players and routers.
It is worth noting that our aggregate shipments of nearly 8 million hard drives to enterprise customers demonstrates continued momentum by both HGST and WD in this highly strategic space.
As expected, WD’s industry-leading branded products business rebounded in the June quarter from its post-flood downturn with exciting new products.
On the operations front, WD began production in its new slider fabrication facility in Malaysia and both subsidiaries improved efficiencies and reduced costs from flood-induced levels.
It is also important to note that both WD and HGST continue to invest in new product development. During the fourth quarter, several innovations were delivered to customers including some important new market entries.
- The WD branded products group advanced its connected home strategy with entry into the wireless home networking business, launching its family of My Net™ routers. It also added new software and services, including the WD 2go™ personal cloud mobile app with DropBox integration.
- On the component side, WD introduced its WD Red™ series, the industry’s first hard drives specifically designed for home and small office NAS systems.
- To address demand for thin and light devices, HGST continued to leverage its first-mover advantage with its 2.5-inch 7mm drives. More than 46 million of these particular drives have shipped since product inception.
- Continuing its leadership position in enterprise storage, HGST demonstrated the industry’s first 12 gigabit per second SAS solid state drive.
In a departure from Western Digital’s long-standing tradition of announcing new products only as they ship, we plan on providing a preview of some exciting innovations at our Investor Day on September 13th. I look forward to seeing many of you at that time.
I would now like to turn the call over to Wolfgang for his financial report.
Wolfgang Nickl - Senior VP Finance & Chief Financial Officer
Thank you, Steve.
I will first summarize our consolidated financial performance for last quarter and will then provide a range of expected financial results for the September quarter.
Revenue for the June quarter was $4.8 billion.
We shipped a total of 71 million hard drives into the market at an average selling price of $65. Both unit volume and average selling price exceeded the expectations that were implied in our guidance.
OEM sales represented 69 percent of revenue, distribution channel sales were 21 percent, and retail sales were 10 percent.
Our gross margin for the quarter was 31.0 percent. This includes $39 million of amortization expense related to acquired intangible assets. Excluding this, non-GAAP gross margin was 31.8 percent. Non-GAAP gross margin came in better than the implied gross margin in our guidance due to lower-than-expected price declines and better-than-expected shipment linearity.
R&D and SG&A spending totaled $584 million for the June quarter. SG&A included $12 million of amortization expense related to intangibles recorded through the purchase price allocation. Incremental OPEX versus our guidance reflects higher attainments on our variable compensation programs.
In order to better align our production with anticipated market demand, we took certain resizing actions that resulted in $80 million of restructuring charges in the June quarter, consisting of $72 million related to fixed assets and $8 million for severance.
Net interest and other non-operating expense was $7 million. This includes $4 million of gains on investments.
Tax expense for the June quarter was $56 million, or 7.0 percent of pre-tax income.
Our net income for the June quarter totaled $745 million, or $2.87 per share. On a non-GAAP basis, net income was $872 million, or $3.35 per share.
Turning to the balance sheet: We generated $1.1 billion in cash from operations during the June quarter and our free cash flow totaled $804 million, reflecting better-than-expected profitability, solid shipment linearity, a reduction in inventory and reduced capital expenditures.
Our conversion cycle was a positive 2 days. This consisted of 45 days of receivables, 34 days of inventory, or 11 turns, and 77 days of payables.
Capital spending and depreciation and amortization for the June quarter totaled $324 million and $339 million, respectively. Capital expenditures for fiscal '12 totaled $717 million. Depreciation and amortization for fiscal '12 totaled $825 million.
During the June quarter, we made a scheduled $58 million principal payment on our term loan and also repaid the $500 million line of credit that was drawn during the HGST acquisition. In addition, we used $604 million to repurchase 16.4 million shares.
As announced in May, our board approved an increase of $1.5 billion in our stock purchase authorization. As of the end of last quarter, $1.3 billion remained available for future purchases.
We exited fiscal Q4 with total cash and cash equivalents of $3.2 billion, of which $1.5 billion was in the U.S. Subtracting our total debt of $2.2 billion, results in a net cash balance of $1.0 billion.
I will now provide our guidance for the September quarter. We expect:
- TAM (Total Available Market) to be flat with the prior quarter;
- Revenue to be in the range of $4.2 to $4.3 billion;
- Gross margin to be 30 percent, excluding the amortization of intangibles and a 50 basis point dilutive impact of sales of drives to Toshiba;
- R&D and SG&A spending to be approximately $550 million, excluding the amortization of intangibles, as we continue to operate HGST and WD as independent subsidiaries;
- A tax rate of approximately 8.5 percent; and
- A share count of approximately 253 million.
Accordingly, we estimate non-GAAP earnings per share of between $2.45 and $2.55 for the September quarter.
Operator, we are now ready to open the call for questions.
Thank you all for your participation in today's call. I am very pleased with Western Digital's performance in fiscal '12, extending our ten-year record of compound annual revenue and EPS growth to 19 percent and 48 percent respectively.
I am excited to have such a strong and accomplished leadership team focused on the strategic development of our business to extend this long-term performance into the years ahead and look forward to sharing our strategy and introducing the leadership to you at our upcoming Investor Day here in southern California on September 13th. Thank you.