WESTERN DIGITAL VIRIDENT ACQUISITION CONFERENCE CALL REMARKS, 9/9/13

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:

  • failure to consummate, or delay in consummating, the pending acquisition of Virident;
  • the possibility that the expected benefits of the transaction may not materialize as expected;
  • failure to successfully integrate the products, technology, research and development capabilities, infrastructure and employees of HGST and Virident;
  • 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 segments;
  • business conditions and growth in the various hard drive segments; 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

Slides 1 & 2 – Virident Acquisition & Forward-Looking Statements
I want to mention that we will be making forward-looking statements in our comments and in response to your questions concerning: benefits expected from the Virident acquisition, the expected timing of the completion of the transaction and management’s anticipated plans and strategies for the Virident business.  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-K filed with the SEC on August 19, 2013. We undertake no obligation to update our forward-looking statements to reflect new information or events.

 

As a reminder, until our acquisitions of Virident and sTEC close, Western Digital, Virident and sTEC remain independent companies, so we will not be taking any questions about either Virident or sTEC’s business or financial performance beyond what is provided on the call. We ask that during the question and answer session of today’s conference call, questions be limited to those related to today’s announcement and our enterprise SSD strategy.  We also ask that analysts limit their comments to a single question and one follow-up question.  I also want to note that copies of remarks, an FAQ document and presentation slides from today’s call will be available on the Investor section of Western Digital’s website later this morning.

Steve Milligan - President & Chief Executive Officer

Slide 3 – Today's Speakers
Good morning and thank you for joining us. This morning, we announced the acquisition of Virident. Mike Cordano, president of our HGST subsidiary, and Wolfgang Nickl, CFO of Western Digital Corporation, are with me today. After remarks by me and Mike, we will open the call for questions related to today’s announcement and HGST’s Enterprise SSD strategy.

Slide 4 – Acquisition Highlights
We are very pleased to be acquiring Virident and we look forward to the Virident team playing a critical role in our enterprise business. We are acquiring Virident for $685 million in cash, representing approximately $645 million in enterprise value net of their estimated cash at closing. Virident CEO Mike Gustafson will continue to lead the Virident team as part of the HGST organization.

Almost a year ago at our Investor Day, we discussed our long heritage of embracing change and our track record of making intelligent and strategic acquisitions. We also cited new developments and challenges in cloud and datacenter storage as significant opportunities for our company to create additional value. We noted the strong position established by HGST in enterprise solid state storage through its successful joint development agreement with Intel®. 

After continued study of this space, HGST concluded that solid state memory for the enterprise and cloud is a strategic high growth opportunity for it and its customers. For example, IDC forecasts that enterprise SSD sales will exceed $7 billion by 2017, from an estimated $2.5 billion in 2012.* HGST has recently increased and broadened its commitment to this space, enabling it to become more deeply embedded in the rapidly expanding digital datacenter landscape. It is doing so with investments in several key assets, including acquisitions of enterprise SSD pioneer sTec, caching software innovator VeloBit, and today’s announced acquisition of Virident. These moves will augment HGST’s SSD portfolio with capabilities that will enable us to help datacenter customers solve their most significant data infrastructure challenges. Virident brings key experience, advanced technology, and leading products into the HGST fold to strengthen this effort.

We are a market and customer driven company and will continue to look for ways in which to innovate and add value in the changing digital data marketplace. As a leader in the technology space, we are focused on growing our presence in the fastest growing storage technologies. In the process, we intend to create additional value for our customers, shareholders and employees. Mike Cordano will now describe in more detail Virident and how it will augment HGST’s enterprise business.

Mike…

Michael Cordano - President HGST Subsidiary

Thank you, Steve.

Slide 5 – Virident Overview
While Steve has provided you with highlights of our agreement to acquire Virident, I'd like to now offer you more detail on the company and how it fits into HGST's strategy to help our customers evolve the enterprise storage layer through intelligent devices.

Virident is a developer of flash hardware and server software and was founded in 2006.

Its headquarters and primary operations are in Silicon Valley. They also have a substantial development team in Bangalore.

They have over 175 employees, about 120 of whom are engineers, including over 75 software developers.

Virident's products include a PCIe flash card, marketed under the name FlashMAX II, that is deployed in application servers.

They also have a suite of server software, which is marketed under the name FlashMAX Connect.

Together, their hardware and software accelerate application performance across multiple servers.

These Virident products have been deployed in a number of prominent enterprise and webscale datacenters, such as LinkedIn.

The company has over 70 patents issued or pending for its hardware and software technology.

I'll go into more detail about Virident's technology and product offerings, but first, I'd like to tell you more about why this acquisition is a valuable investment for HGST, and how it not only fits into our SSD strategy but how it fits into our commitment to drive the evolution of storage so that we can expand the value that we deliver to our customers.

Slide 6 – Commitment to Leadership
Our commitment to leadership in enterprise storage brings us value at multiple levels. One level is the success of our ongoing business. Another is in the insight that we gain through our broad footprint. That footprint includes hyperscale data center customers as well as traditional storage system and server OEMs, who serve enterprise data centers.

Overall, we have achieved a competitive position in enterprise-class hard disk drives, where we hold a 41% share position.

As an adjacent technology, we view enterprise solid state drives, or SSDs, as a significant opportunity for growth and expanded business. Enterprise SSDs represent a large and growing opportunity. In fact, IDC projects that it will reach $7.2B in size by 2017.

As we developed relationships with enterprise hard disk drive customers and earned their trust over the past several years, we saw the potential for enterprise SDDs when they were still in a nascent state. To create a presence and seize the opportunity, we entered into a Joint Development Agreement with Intel® in December of 2008.

As the space continued to grow, and the adoption and application of SSDs evolved, we continued to add technology assets to our portfolio through internal development and through acquisition. In June of this year, we announced the agreement to acquire sTec, another pioneer in enterprise SSDs. The following month we announced our acquisition of VeloBit, an advanced SSD caching software company. And today, we are announcing the agreement to acquire Virident.

As a result of our initiatives to date, we have established a competitive position in enterprise SSDs. Based on HGST's SSD revenue of $355M in FY'13 and IDC's estimates of enterprise SSD sales, we have achieved a 13% share position.

If we combine our share with that of sTec, we would have an overall share of 17%, with $477M in revenue corresponding to our FY'13.

By combining our competitive position with our recent acquisition resources, we believe we are poised for accelerated growth in this multi-billion dollar growth space.

Slide 7 – A New Wave of Data Center Evolution
The reason why this opportunity is so compelling, and why it's a focus for our continued investment, is that it is essential to a logical progression of evolutionary steps for enterprise and hyperscale data centers.

Slide 8
In short period of time, the industry has become fluent in the deployment and benefits of virtualized server and application environments.

Whether it's a public cloud service or a captive private cloud for enterprise users, the ability to dynamically provision, tune and run applications by blending the appropriate compute resources for each application has rapidly become a requirement for businesses that demand agility as a competitive advantage.

Slide 9
Coming immediately behind the wave of server and application virtualization is the need to virtualize the storage layer of the data center.

Over recent years we've seen the essential building block of flash memory earn a seat at the table in the enterprise datacenter as a standalone storage resource.

Datacenters are now ready to go beyond this initial step of deployment and move to a deeper level of integration. This will virtualize memory and storage resources to create a data storage environment that can be dynamically provisioned and tuned in the same way that the server and application layers have been virtualized for provisioning and tuning.

This new wave of data center evolution promises to provide even higher levels of efficiency, agility, elasticity and scale to businesses of all types and sizes.

Slide 10 – Increasing Value Through Intelligent Device Strategy
For HGST, this has meant a very deliberate progression of technology developments, partnerships and acquisitions.

As you know, the invention of the hard disk drive is in our corporate DNA. And our competitiveness in enterprise hard drives is a testament to our heritage as a leader in enterprise storage.

To enable our customers to fully realize the benefits of storage virtualization, we recognized the need to build upon the foundation of our hard drive business.

Slide 11
In 2008, we took our first step into enterprise SSDs with our Joint Development Agreement with Intel, giving us the ability to quickly offer a portfolio of products to early adopters.

Slide 12
Once closed, our acquisition of sTec will provide us with foundational intellectual property and enhanced controller technology to help strengthen the capabilities for our intelligent device strategy.

Through the acquisition, we will be adding PCIe and SATA SSD devices and technology to our existing portfolio of SAS SSDs.

Slide 13
The acquisition of VeloBit, in July, further broadened our solution capabilities with software that accelerates application performance with advanced caching technology.

The technology from VeloBit enables virtualization of server memory, SSD and HDD devices, to provide a highly efficient and resilient solution for applications that run within a single server.

Slide 14
Further building on HGST's capabilities, the acquisition of Virident will enable our customers to virtualize the storage layer at a broader level.

The PCIe flash hardware and advanced software help accelerate application performance by optimizing the SSD and HDD storage for each application, even if they run across multiple servers in a high availability environment.

The software also enables the sharing of valuable SSD storage capacity across multiple applications that are virtualized across multiple servers. This pooling of resources increases efficiency by decreasing the need for the wasteful practice of over provisioning.

To boost performance even further, Virident's flash-aware APIs can be leveraged by application and system software developers to provide native acceleration and virtualization of the storage layer.

From this progression of steps in enterprise SSDs, I hope you can see that we are thoughtfully and deliberately combining the technologies needed to play an increasingly significant role in the evolving storage ecosystem.

Slide 15 – Commitment to Leadership
To uphold our heritage as a leader in enterprise storage, we are committed to evolve so that we can increase value for our customers and the businesses that they serve.

As such, we are committed to a process of investment and innovation, which is the same approach that resulted in our proven leadership in enterprise hard drives.

It all starts with a willingness to make early investments to develop technologies and products for emerging market opportunities.

Those early investments bring us the technology and know-how to execute on bold innovations that can enable new offerings and support new applications.

In turn, these breakthrough innovations enable the market to realize rapid evolution of not only devices, but also of enterprise computing and data center architectures.

By demonstrating our ability to enable and lead rapid evolution, we gain an elevated level of trust with our customers and the market as a whole.

That trust in our technology and products allows us to accelerate growth in our target segments.

That growth expands our footprint, which results in deeper insights from our customers. Those deep insights, in turn, guide us to new opportunities for investment, which starts the cycle all over again.

Slide 16
I hope from our announcement today, and from this brief presentation of our strategy and the evolving storage ecosystem, that you have a strong sense of the value that we seek to deliver to our customers and our shareholders.

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

Slide 17 – Q&A

 


Steve Milligan - President & Chief Executive Officer

Closing Remarks:

That concludes our call. Thank you again for joining us and for your questions. We look forward to staying in touch with you as we continue to articulate and discuss our strategy and performance.


* Source: Worldwide Solid State Storage 2013–2017 Forecast and Analysis (IDC Doc # 240871, May 2013)