WDC

Western Digital Corporation (WDC)

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Western Digital (WDC)

Q4 2011 Earnings Call

July 21, 2011 5:00 pm ET

Executives

John Coyne - Chief Executive Officer, President, Executive Director and Chairman of Executive Committee

Timothy Leyden - Chief Operating Officer

Wolfgang Nickl - Chief Financial Officer and Senior Vice President

Bob Blair -

Analysts

Richard Kugele - Needham & Company, LLC

Keith Bachman - BMO Capital Markets U.S.

Aaron Rakers - Stifel, Nicolaus & Co., Inc.

Ananda Baruah - Brean Murray, Carret & Co., LLC

Mark Moskowitz - JP Morgan Chase & Co

Mark Miller - Noble Financial Group, Inc.

Katy Huberty - Morgan Stanley

Presentation

Operator

Good afternoon, and thank you for standing by. Welcome to Western Digital's Fourth Quarter Financial Results for Fiscal Year 2011. [Operator Instructions] As a reminder, this call is being recorded. Now I will turn the call over to Mr. Bob Blair. You may begin.

Bob Blair

Thank you. I want to mention at the offset that we will be making forward-looking statements in our comments and in response to your questions concerning industry conditions in the September quarter, including the total available market for hard drives, customer demand, supply constraints, capacity mix, average selling price and cost of components, expected benefits from and the timing of completion of our planned acquisition of Hitachi GST, growth in the near-line enterprise market, our product offerings in the traditional enterprise market, our position in the branded products market, our expected capital expenditures and depreciation and amortization for fiscal 2012, our investments in new products and markets and our financial results expectations for the September quarter, including revenue, gross margin, expenses, tax rate, share count and earnings per share.

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 2, 2011. We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to historical non-GAAP financial measures, as well as forward-looking estimates of non-GAAP financial measures that give effect to our planned acquisition of Hitachi GST. Investors are encouraged to consider the reconciliations of the differences between the historical non-GAAP measures to the comparable GAAP financial measures we provide during this call and those that are included in the investor information summary posted in the Investor Relations section of our website.

The forward-looking estimates of non-GAAP financial measures that give effect to our planned acquisition of Hitachi GST exclude acquisition-related expenses that we expect to incur in connection with the transaction and following the close of the transaction. Because these acquisition-related items will not be known to us until on or after the closing of the transaction, we are unable to provide information about 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.

Also as a reminder, until our acquisition of Hitachi GST closes, WD and Hitachi GST remain independent companies. So we will not be taking any questions about HGST's business or financial performance today.

I also want to note that copies of remarks from today's call will be available on the Investors section of WD's website immediately following the conclusion of this call.

I now turn the call over to President and Chief Executive Officer, John Coyne.

John Coyne

Thanks, Bob. Good afternoon, and thank you for joining us today. With me are Tim Leyden, our Chief Operating Officer; and Wolfgang Nickl, our Chief Financial Officer.

In the June quarter, we saw stronger-than-anticipated demand with the hard drive industry shipping over 165 million units. This 4% quarter-on-quarter increase contrasts with historical seasonal patterns of 1% to 2% sequential contraction. We believe that the stronger demand was driven by increased adoption of sea freight in the PC supply chain, which creates a long-term leveling of seasonal demand patterns, as well as supply continuity concerns in the aftermath of the Japan earthquake.

The industry grew fiscal year volumes 4% to 657 million units, while WD again grew faster than the market at 6%, shipping 207 million hard drives for the year, a 1% share gain reaffirming customer preference for WD's value proposition.

This was a tough comparison year for the PC and HDD industries, coming off the recession snapback year of 2010, combined with the slowdown in consumer spending and increased competition for share of consumer spend from devices like smartphones and tablets.

We believe that 2012 could be a stronger period for the industry and for WD for several reasons: An acceleration of the commercial PC refresh as part of an overall macro reinvestment cycle; the potential for better consumer confidence translating into stronger discretionary spending; the planned launch of redesigned, feature-rich PCs enabled by Windows 8 and our continued favorable standing with customers as one of the preferred suppliers of the world's most cost-effective storage solutions for the massive amounts of content being generated on the client and in the cloud.

In this context, it's important to consider some history. Throughout fiscal '11, we operated close to the bottom of our business model range. Others in the industry struggled even more, reporting results below their published models. Historical cycles show that prolonged periods of below model performance are typically followed by a return-to-business model parameters as suppliers and customers alike recognize the need for industry profitability to drive needed investment in both technology and capacity. WD has repeatedly outperformed as these cyclical corrections occur.

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