WDC

Western Digital Corporation (WDC)

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Western Digital Corporation (WDC)

September 13, 2012 12:00 pm ET

Executives

Robert Blair - Executive Officer of Investor Relations

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

Stephen D. Milligan - President

Michael D. Cordano - President of HGST

Timothy M. Leyden - President of Western Digital

Currie Munce

William Cain

Wolfgang U. Nickl - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Richard Kugele - Needham & Company, LLC, Research Division

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

Cindy Shaw - DISCERN Investment Analytics, Inc

John Phillip Ragard - Friess Associates, LLC

Robert Cihra - Evercore Partners Inc., Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Steven Bryant Fox - Cross Research LLC

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

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

Shebly Seyrafi - FBN Securities, Inc., Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Joe Yoo - Citigroup Inc, Research Division

Benjamin A. Reitzes - Barclays Capital, Research Division

Nehal Sushil Chokshi - Technology Insights Research LLC

Kathryn L. Huberty - Morgan Stanley, Research Division

Presentation

Robert Blair

Hi. Good morning. If everyone could take their seats. We're going to get underway in 1 minute, so if everyone could have a seat. Thank you.

Hi. Good morning. I'm Bob Blair, Western Digital's Vice President of Investor Relations. I'd like to welcome you all here. We're really appreciative of the terrific turnout that we have for our first investor day in quite some time. Many of you have come a great distance, and we appreciate your being here today.

Today's event is being webcast with the webcast link and presentations available on our website at wdc.com, under the Investor Relations section. Additionally, the webcast will be archived on our website and available for replay for a period of time.

This slide contains a disclaimer about the forward-looking statements we will be making in our presentations and comments today. Forward-looking statements will be made concerning growth opportunities on the storage industry, our expected financial results, business model and financial goals and our capital allocation strategy. These forward-looking statements are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our report on Form 10-K filed with the SEC on August 20, 2012. We undertake no obligation to update our forward-looking statements to reflect new information or events.

I just want to spent a couple of minutes or a minute going over a few logistic items. The agenda for the day is in your welcome kit folder at your seat. John Coyne will also be going through it in his opening remarks. We have a 10-minute break scheduled this morning at 10:20. There is a glossary of terms on your welcome kit as well as on the website at the back of the website version of today's presentation, which contains a lot of the terms and acronyms that we'll be using today for your reference. There is also bios of each speaker.

A file containing all of today's presentations will be given to each of the attendees today as you leave the event on a WD passport drive.

As far as Q&A, we've got 2 Q&A sessions scheduled, one this morning and one this afternoon, and we ask that you hold your questions until those sessions in the morning and afternoon. And during the Q&A sessions, we will provide microphones in the audience, and we ask that each of you state your name and firm before you ask your question and wait for the mic, so it can be -- the question can be heard on the webcast.

Also, a reminder, please, for everyone to put their cell phones on a silent mode. And a reminder that no pictures or videos are allowed at the product demos that we have today. We have product demos, as you've seen at the back of the room, and we have a specific time set aside for each of you to spend at least half an hour viewing those demos in the back of the room as well as in the foyer, where our branded products team has a demonstration. And then also, I think many of you have seen our stream machine outside, which is -- and this is the -- today's the first stop of a nationwide tour for that vehicle, showing off and marketing our new router products.

Just logistically, in terms of lunch and the demos, we've got 1 hour set aside and half an hour for each. And those of you with green badges will be attending the demos first. Those of you with red badges should have lunch first and vice versa after that first half an hour.

I'd now like to introduce the Chief Executive Officer of Western Digital, John Coyne.

John F. Coyne

Thank you, Bob. Well good morning, everyone. And my welcome to you and my thanks to you for attending today. We have, I think, a very exciting program, and we intend to demonstrate during the day the passion and the passion for change that has been the underpinnings of Western Digital's success formula in driving consistent and continuous profitable growth over the last many years.

The vision for the corporation is to empower people, to create and manage and experience and preserve digital content. Our core expertise over the years has been the preservation of digital content, but as that digital content has become completely pervasive in our lives and touches almost everything we do, whether in work or play, the sheer scale of that preserved data and that communicated data is requiring that we put our passions and our skills and our experience and capability to work, enabling people to manage simply and interact and access that information in a simple coherent way, and we see significant opportunity in building on our core preservation business to expand our role in the ecosystem and to ensure that we bring continued added value to customers as we move ahead. And you'll see some of the areas in which we're -- how we're thinking about that and how we're acting to achieve that expanded vision for the corporation.

Here we go. So I want to spend a few minutes of retrospection. If we look at the 50 years, the last 40 of Western Digital's life and the upcoming 10 years, you’ll see an underlying focus on understanding change, anticipating change in market needs and reacting within the company to position ourselves take advantage of those changing market requirements on a continuing basis. Back in 1970 when Western Digital was founded as a semiconductor designer and marketer, our first products were calculator chips. And through the 10 years, we evolved. And as we entered the PC age, we were primarily a designer and marketer of storage controller chips, floppy and hard drive controller chips, which were delivered to the market for hard drives as an interposer card. So we transformed ourselves from a chip company to a subsystem board level company and became an 80% market share leader in hard drive control.

We then developed the WD1010 [ph] , which was an SoC that combined all of that board-level logic onto a single chip, enabled it to go onto a hard drive. And in order to offer the market what it needed in terms of a solution for what was now a requirement for all PCs to have a hard drive embedded in them, we acquired a hard drive company and became a hard drive company through the '90s. And then we transitioned from drives to a broader product line throughout the last decade. And we’ll talk today about some of our ideas and our focus for the 10 years to come.

Let me look a little closer at the last 10 years and, again, to look at this theme of understanding market trends, acting in a timely and appropriate way to intersect those trends and to continue to delight customers with the product portfolio and the utility that enables them to succeed in their markets. And over the last 10 years, we started that 10 years as a strong desktop-focused market player. And we built a business model that was focused on quality, reliability, speed and cost leadership. And as we succeeded in that desktop market, we looked at the trends in the market and applied our business model and caught 2 major waves of change in market expansion throughout the decade. The first of those being the proliferation of mobile devices started initially with the laptop PC, and entering that market into 2004, and within 4 years becoming the market leader by applying customer-centric solutions. We listened to customers. We anticipated who the successful guys were going to be in the laptop PC business. We listened to what they needed to succeed, and we delivered that formula, which was a highly desired solution compared with the existing competitive solutions that were in the market at that time, and drove us from entry to market leadership in 4 years in the fastest-growing segment of the market.

Partly driven by that mobility was the need for personal cloud, which at that time was called external storage. And as we listened to customers in that arena, we made investments, very strange for a drive company. We made significant investment in industrial design. And in listening to customers, we understood they wanted things that were good to look at, good to feel as well as functional and utilitarian. We delivered that and created the biggest branded products external storage business in the drive industry, and that business went from -- came into existence and grew at a rapid pace. So anticipating where the market's going, coming up with solutions to intersect that market.

And then as we came to the end of the decade, we conceived of and executed the acquisition of HGST to further broaden the product portfolio, to deepen our technology capability, to expand our people resources, the experience and the passion and the capability of the teams to look forward and address the coming 10 years. So building out the existing Western Digital portfolio solutions that addressed mobility and personal requirements and significantly beefing up our capability and product portfolio to address the other side of that market, which is the infrastructure that supports all of that information transmission and information exchange in the enterprise environment.

So we feel very comfortable about our position as we now move into the beginning of the next decade of the company's evolution. And we see that we have a very solid, very broad platform on which to build a future. And you're going to hear today about the 3 pillars of that market as we see them evolving today, the trends in thin and light mobility in individual devices, the trends in the data center and the private and public cloud arena to service all of that data requirement, and then the personal cloud environment in the home and people's connected lives around the family unit. So you're going to hear about each of those 3 initiatives by the company.

And then we continue to look, as we have for the last 40 years, we continue to look at market trends to seek, to discern directions early and to work on having the right product portfolio, the right services and the right cost profile to intersect and actually enable those market trends as we go forward.

So the agenda for the rest of the day. Steve Milligan is going to follow me and talk about our overall opportunity in the marketplace as we see it and our strategy on a broad basis to address that. Mike Cordano, President of our HGST subsidiary, is going to address the market as we see it in the enterprise and cloud environment. And then Tim Leyden, who leads our WD subsidiary will follow Mike with a view of the mobility market and the opportunities that creates in the Connected Life. And then Bill Cain -- Dr. Bill Cain and Dr. Currie Munce, our chief technical folks in each of the subsidiaries, will do a joint presentation on the technology that underpins the business and the trends that we see both in our technologies and in competing technologies and how we view that affecting the market in the years to come. We'll then break for the demonstrations, which I believe if you spend some time, there's a lot to learn about not only what the products are that we're showing you and what -- but why they are and how they address the market needs that we perceive. And then in the afternoon, Wolfgang will talk about our business model and our capital allocation strategy.

So with that, I'd like again to thank you all for being here. I hope you see as we go through the morning a very capable, committed and passionate team that understands what they're doing and have a significant demonstration of doing it well.

And with that, I'd invite Steve Milligan to come up and talk to you about our strategy. Thank you.

Stephen D. Milligan

Good morning. Certainly an honor to be here. What I'm going to is I'm going to talk a little bit about what we're going to be doing as a company going forward. First off, I'm certainly honored with the privilege of in January being able to succeed John. John has absolutely done a fantastic job building this company. And some of the points that we will get at is that we have assembled, in our view, an extremely powerful platform in a number of different ways to address the challenges that we're dealing with as an industry. A very important point is that we are arguably at an inflection point, not only for ourselves, but within the broader landscape of what we are -- the environment that we exist in. And so we're going to talk about -- I mean, change to us represents opportunity. And that is really the essence of John's setup, is that Western Digital, not only Western Digital but the heritage of HGST, is that change is our friend, and that we've got to figure out what we're doing to address the challenges and the opportunities that, that presents. So let me get into some of the details.

So I'm not going to give you a history lesson. You're all well aware of what's happened over the last several years in terms of the evolution of the computing market. Some of the key points here really are that, number 1, it's all about data. And we know that as it relates to our personal lives. We know that as it relates to our professional lives. More and more of what we do, more and more of what we touch is becoming digital. Not only that, the devices that are either creating that content, interacting with that content, they're changing. And the needs are changing as it relates to that because of the various types of interactions with that data.

The other point is, is that if you look at what's happened in the industry, and sometimes we forget this, but the things that we have done in the storage industry and specifically what we've done in the hard drive industry have helped to enable all of these changes. We don't always talk about innovation, but we have by virtue of what we've done over the last 50-plus years is innovated in a number of different ways to enable that proliferation of devices, growth in data. And given where we're at from an industry standpoint, given where we're at from a broader landscape perspective, back to the point on inflection, innovation, in our opinion, and the ability to be able to adapt as we move forward is becoming more and more important. And it's presenting for us a very unique opportunity in terms of how we're positioned from a competitive standpoint, from a value perspective, within the broader landscape to take advantage of all of those changes.

So drilling down on that a little bit more. And again, most of what I'm telling you is not really news. On the left-hand side, we've got growth in devices and again, we all know this. We've seen a proliferation of devices, different kinds of devices, edge devices, smartphones, tablets, et cetera. We're also seeing, and again, what that’s doing is it's driving or enabling substantial growth in terms of data, and that data has to be stored some place. Increasingly, it is being stored in a lot of different ways, and we'll talk more about that specifically as we move through the day. But -- and it's -- and somewhat being ironic, the death of the disk drive has been predicted for 50 years, but the primary storage preference will continue to be, during this study period, hard drives. And we'll talk a little bit more about why that's the case. But we estimate that by 2020, that 85% of all of the data that is created that needs to be managed will continue to be stored on rotating magnetic storage. And to be clear, we have critically evaluated this. We have not gone into this from the perspective of, well, let's come up with data that helps support what we want to believe.

One of the key points of this conference, I believe, is that we are approaching, or viewing, or evaluating things very realistically, very critically to make sure that we understand, not only where our opportunities exist, but also where we perceive potential risks exist and what we need to do to meet those various different challenges. The other point is, and again, this debate has existed for a long time. I mean, I remember having these discussions when I was back as the CFO of Western Digital. Will SSD, will flash replace hard drives? And in some cases, the answer is yes. But the important point is, is that it's not necessarily an either/or. The storage media or devices that we're using are complementary. We're all facilitating this opportunity for all of us to create, manage, access pervasive amounts of data.

So there's a couple of other things that are going on that I think are critical to understanding the opportunity that we have as an industry, the opportunity that we have as a company, and not only that, the challenges that we have as a company. And what that is, and Mike will talk more about this when he talks about what's happening in the enterprise space and in the cloud. Tim will talk more about it in terms of what's happening in the mobility segment and in personal storage. But the landscape or the ecosystem that we exist in is changing. And it's changing for a number different ways. And we've highlighted some of those changes that are going on. I mean we've got changes in our customer set. We've got changes in terms of the overall standards kind of ecosystem.

It's not all about the Wintel world. The use cases are changing. We've highlighted Internet service providers, social media companies. Their use patterns are different than, say, a traditional data center. Their needs are different. So what do we need to do? What is the opportunity for us? Not only that, there have been changes. There has been consolidation in the supply base, right? That is providing, all of this is providing us an opportunity to drive deeper relationships, deeper different kinds engagements with our customers, call it more customized kind of solutions that help address the unique requirements, the unique needs that our customers have. And again, Mike will talk more specifically about what we're doing about it in the enterprise space. But this is a big opportunity for us. And that opportunity means that we can add value in different ways than what we've done historically.

It's not all about, let's get x number of vendors lined up. Everybody's got the same kind of device, minimal differentiation. Let's go figure out, we bid everybody off. I mean, these customers are willing to do different things. And with that opportunity, it provides us with the opportunity to derive value from an economic standpoint in a different way. And I don't know if that's a well understood concept, but that's a very important aspect of what's happening in terms of the broader changes that we're seeing within the industries that we compete.

Additionally, on the mobility in the personal storage side, we're seeing similar dynamics, not exactly but similar dynamics. We've got customers that are going through substantial changes from their standpoint, right? They're trying to figure out what all of this means to them. Value and what customers or what consumers are looking for is changing. Also, standards are changing. The ecosystem is changing. Again, it's not necessarily all about Wintel. We've got different devices interacting with data in different ways, creating different data in different ways. We’ve talked about the movement to thin and light. What are we doing, what do we need to do to not only address that but in fact to lead that change. And that's the key point that we're going to talk about as well today. And Tim will dive a little bit more deeper into some of this. And then as individuals, as consumers, we all know how the data that we're dealing with or that our families are dealing with. And how do we manage that content? How do we access that content? How do we do with that data and what we want to do with it and do it in a way that's easy.

Read the rest of this transcript for free on seekingalpha.com