Western Digital Corporation (WDC)
F4Q10 Earnings Conference Call
July 21, 2010 5:00 PM ET
Bob Blair – VP, IR
John Coyne – President and CEO
Timothy Leyden – EVP and CFO
Richard Kugele – Needham & Company, LLC
Ananda Baruah -Brean Murray, Carret & Co., LLC
Craig [ph] – Merrill Lynch
Aaron Rakers – Stifel, Nicolaus & Co., Inc.
Kevin Hunt – Hapoalim Securities USA, Inc.
Keith Bachman – Bank of Montreal
Sherri Scribner – Deutsche Bank
Steve Fox – CLSA Limited
Mark Moskowitz – JP Morgan Chase & Co
Kay Huberty – Morgan Stanley
Previous Statements by WDC
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Good afternoon and thank you for standing by. Welcome to Western Digital's Fourth Quarter Financial Results for Fiscal Year 2010. Presently all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)
As a reminder this call is being recorded. Now I'll turn the call over to Mr. Bob Blair. You may begin.
Thank you. I want to mention as we begin, that we will be making forward-looking statements in our comments and in response to your questions concerning industry inventory, pricing and demand, our position in the industry, our growth and profitability, the impact of our entry into and our position in the traditional enterprise market, the impact of our acquisition of Hoya's magnetic media operations, the sufficiency of our cash to meet operating needs, our investments in technology and capacity, our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2011, our share repurchase plans, our long-term business model 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 April 30, 2010. 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.
I also want to note that copies of today's remarks from today's call will be available on the investor section of Western Digital's website immediately following the conclusion of this call.
I will now turn the call over President and Chief Executive Officer John Coyne.
Good afternoon and thank you for joining us today. Fiscal 2010 was another highly profitable growth year for WD. Ever increasing demand for cost effective and high capacity storage continues to provide opportunity for substantial growth and consistent value creation over an extended term when addressed with an effective business model. With a relentless focus on customer needs, quality, low cost and high asset efficiency, WD has become solidly and increasingly profitable throughout the last decade. Over the last five years, WD has profitably grown revenue at a compound annual rate of 22%. In this same period, we have grown operating income at a compound rate of 50% per annum.
For fiscal year 2010, we grew revenue 32% to $9.8 billion. We increased operating income by 194% year-on-year.
The hard drive demand growth story continues to be driven by the proliferation of multiple devices and applications that are resulting in the generation, utilization and storage either locally or in the cloud of massive amounts of digital content on low cost high capacity hard drives. We believe that the industry's growth trajectory will continue over the foreseeable future creating significant additional opportunity for WD with its well-honed business model and expanding product set to continue to generate growth on a sustained and profitable basis.
This growth opportunity has been created in large part by our ability to continually drive down average cost per gigabyte leading to attractive price points but have driven mass market adoption of devices incorporating hard drives. At the same time, we have gradually expanded gross margins while growing revenues by continuously increasing efficiencies and reducing costs.
Our assessment in late April of a June quarter time in the range of 157 million to 162 million proved overly optimistic. Actual demand for hard drives in the quarter was about 156 million units, down 4% sequentially but up 16% from the year ago period. The major factors leading to the lower time were weakness in Europe, destocking by OEM customers and a shift in OEM ordering patterns to take advantage of lower cost sea versus air freight. In hindsight, this expanded the March quarter at the expense of the June quarter.
Given the change in the demand during the June quarter, WD and others in the industry responded quickly to adjusted bill times, resulting in quarter ending inventory modestly increased but at manageable levels.
Chip inventory increased from seven to 10 days, while component distribution inventories increased slightly but remained at the midpoint of the normal four to six-week range including in transit.
Taking these market dynamics into account, we were pleased to deliver one of the strongest fiscal fourth quarter performances in company history. While market dynamics in the June quarter will tamper short-term growth rates and affect price levels in the September quarter, we believe that the second half of the calendar year and calendar year 2011 will continue to present substantial growth opportunities and rewards for hard drive industry participants with effective business models and compelling product offerings.
WD continues to generate substantial free cash flow while continuing to reinvest significantly in our business, both in expanding and enhancing our product offerings and in improving our operations.