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; HDD demand for the March quarter and calendar year 2013; and our financial results expectations for the March 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 November 2, 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 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, CFO Wolfgang Nickl will provide additional commentary on our December quarter results and outlook for the March quarter.
I am pleased with our financial performance in the December quarter. The quarter exhibited continued soft industry demand driven by macroeconomic uncertainty, weak PC demand and inventory rebalancing by our customers. Over the last several quarters, both of our subsidiaries have done an excellent job of managing through challenging market conditions. This is particularly noteworthy given our company-specific cost challenges associated with the recovery from the Thailand floods. We have continued to focus intensely on those variables we control, allowing us to produce better than expected revenue and profitability and strong cash generation.
In calendar 2013, we have several opportunities to improve our business. We believe that the overall market for hard drives is beginning to stabilize. We expect demand for the first half of calendar 2013 to be flat to slightly down compared with the back half of 2012. However, we are cautiously optimistic for the back half of 2013 for the following reasons:
- Worldwide economies continue to expand, albeit at a slow pace, with signs of further improvement in developing regions;
- OEM customers have largely worked through their inventory rebalancing. Accordingly, we have improving visibility with regards to true customer demand;
- Our customers are accelerating their product innovation with thinner and lighter designs coupled with touch-enabled features; and
- There are early indications of consumers’ stronger intentions to purchase new PCs this year.
I am most pleased with Western Digital’s leadership position in the storage industry -- we sit at the center of a vast ecosystem where data growth continues unabated. In this context, we continue to have multiple opportunities to create value for our shareholders, customers and employees.
We are working to develop and bring to market innovative solutions in three areas – the public and private clouds, Thin and light client systems, and the Connected Life, or personal cloud, for homes and small businesses. Specifically:
- In the cloud environment, demand for our high capacity drives remains strong. Total cost of ownership is a significant issue for our customers in the high capacity market and we have seen broad interest in our new 7-disk, helium filled drive. This innovative solution will deliver 40 percent energy savings over current offerings. Our expanding portfolio of enterprise-class solid state drives continues to gain increasing acceptance with our customers. For the third consecutive quarter, we had double digit revenue growth with our SSD enterprise drives.
- In the thin and light category, customers are increasingly deploying our 7 millimeter hard drives and enthusiasm for our new 5 millimeter and solid state hybrid drive platforms is high, and
- For the Connected Life, we continue to develop solutions that help consumers manage, store, access and experience their personal and professional content seamlessly. With more ways to create and share content, consumers are increasingly turning to external drives as the best storage choice. For example, we see tablets with USB ports driving adoption of direct attach devices. We are also seeing tablet users increasingly adopt our network attached storage for added capacity.
In my new role as the CEO of Western Digital, I am excited to be leading this great company at such a compelling time of change and opportunity in the storage industry. With our HGST and WD teams, we have the people, the platform, the technology and the financial engine to innovate and address changing customer needs.
We will continue to lead by innovating, executing and allocating capital in a thoughtful way.
Wolfgang will now provide our report on Q2 and our outlook for Q3.
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 December quarter and then conclude with a range of our expected financial results for the March quarter.
The HDD market shipped approximately 136 million units during the December quarter, slightly less than the 140 million units we anticipated in our guidance.
We saw continued inventory rebalancing at our OEM customers and our Distribution and Retail channel inventory continues to be lean.
Despite challenging market conditions both from a macro and IT perspective, we delivered very strong financial results.
Revenue for the quarter was $3.8 billion.
Excluding shipments to Toshiba under our divestiture agreement, we shipped a total of 59.2 million hard drives.
Our average HDD selling price was $62, flat with the prior quarter. Favorable mix offset modest like-for-like price declines.
Our gross margin for the quarter was 27.7 percent. Excluding $38 million of amortization expense related to acquired HGST intangible assets, non-GAAP gross margin was 28.7 percent. Non-GAAP gross margin was approximately 70 basis points better than what was implied in our guidance which was a function of lower than anticipated price declines and better than expected mix.
R&D and SG&A spending totaled $540 million for the December quarter. SG&A included $11 million of amortization expense related to acquired HGST intangible assets.
We incurred charges of $41 million in the December quarter reflecting continued discipline in aligning our operations with anticipated market demand. As a reminder, we had already incurred charges of $80 million and $26 million in the June and September quarters, respectively.
Net interest and other non-operating expense was $10 million.
Tax expense for the December quarter was $133 million, or 28 percent of pre-tax income. Tax expense included a one-time charge of $88 million due to the passage of Proposition 39 in California. Without this one-time charge, tax expense would have been $45 million, or 8 percent, of non-GAAP pre-tax income.
Our net income for the December quarter totaled $335 million, or $1.36 per share. On a non-GAAP basis, net income was $513 million, or $2.09 per share.
Turning to the balance sheet:
We generated $772 million in cash from operations during the December quarter and our free cash flow totaled $526 million.
Our CAPEX for the December quarter totaled $246 million. For the full fiscal year we expect to be at the upper end of our CAPEX model of 5-7 percent 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.
Consistent with our capital allocation strategy announced in September, we repurchased 4.2 million shares for $146 million during the December quarter. As of the end of last quarter, an authorization of $2.4 billion remained available for future repurchases.
In addition, we declared a dividend in the amount of $0.25 per share or a total of $60.2 million, which we paid on December 26 to shareholders of record as of December 14. On October 15 we also paid out the first dividend in company history in the amount of $0.25 per share or a total of $60.9 million, which our board declared during the September quarter.
We exited fiscal Q2 with total cash and cash equivalents of $3.8 billion, of which $1.4 billion was in the U.S. Subtracting our total debt of $2.1 billion, our net cash balance was $1.7 billion.
I will now provide our guidance for the March quarter.
- A total available market flat to slightly down when compared with the December quarter.
- Revenue in the range of $3.55 to $3.65 billion, reflecting the current demand environment, a seasonal change in business mix and the conclusion of our 3.5-inch contract manufacturing arrangement with Toshiba.
- Gross margin of approximately 28 percent, excluding the amortization of HGST intangibles;
- We expect R&D and SG&A spending to be approximately $540 million, excluding the amortization of HGST intangibles.
- A tax rate of approximately 7 percent; and
- A share count of approximately 244 million.
- Accordingly, we estimate non-GAAP earnings per share of between $1.65 and $1.80 for the March quarter.
Operator, we are now ready to open the call for questions.
Steve Milligan - President & Chief Executive Officer
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.