Western Digital Q2 2011 Earnings Call Transcript

Western Digital (WDC)

Q2 2011 Earnings Call

January 18, 2011 6:00 pm ET


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 -


Richard Kugele - Needham & Company, LLC

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

Jayson Noland - Robert W. Baird & Co. Incorporated

Shebly Seyrafi - Capstone Investments

Sherri Scribner - Deutsche Bank AG

Steven Fox - Credit Agricole Securities (USA) Inc.

Bill Shope - J.P. Morgan

Mark Moskowitz - JP Morgan Chase & Co



Good afternoon, and thank you for standing by. Welcome to Western Digital Second Quarter Financial Results for Fiscal Year 2011. [Operator Instructions] Now I will turn the call over to Mr. Bob Blair. You may begin.

Bob Blair

Thank you. I want to mention that we will be making forward-looking statements in our comments and in response to your questions concerning a number of matters: the total available market for hard drives in the March quarter and in 2011, industry capital expenditures for 2011, our growth rate and growth plan for 2011, our growth opportunities in the medium to long term, our position within the storage industry, our inventory holding and supply and demand balancing in the March quarter, our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2011, our share repurchase plans, our financial results expectations for the March 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 October 29, 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 on this call are still valid. I also want to note that copies of remarks from today's call will be available on the Investors Section of Western Digital's website immediately following the conclusion of this call. I'll now turn the call over to President and Chief Executive Officer, John Coyne.

John Coyne

Thank you, Bob. Good afternoon, and thank you for joining us. With me on our Q2 call are Tim Leyden, our Chief Operating Officer; and Wolfgang Nickl, our Chief Financial Officer. Calendar 2010 was a year of tremendous opportunity for the hard drive industry with 651 million drives shipped. That's 330 million terabytes of storage capacity sold into a broadening set of applications and markets. At 16%, this was the industry's strongest full year unit growth in five years. Rotating magnetic storage remains the dominant technology solution for high-volume mass storage of digital content in both the consumer and commercial markets. Full year revenue for the industry expanded by some 13% to $34 billion. However, it was also a year of significant missed opportunity as the industry's supply-demand dynamic deteriorated as the year progressed, resulting in sharply declining ASPs, with the final quarter demonstrating a year-over-year decline in industry revenue of 7% on a unit increase of 4%, and an even sharper decline in profitability.

WD again outperformed the industry in calendar 2010. We grew units 23%, revenues by 19% and operating income by 12%. The operating income number reflected the significant challenge of the industry's ASP deterioration that emerged midyear. While we improved our financial performance sequentially in the December quarter, we are far from happy that we failed to monetize our growth throughout the year and generate the kind of return needed to sustain robust investment in technologies and products to improve our customers' future experience.

In the coming year, we expect the hard drive volume opportunity to approach 700 million units, representing a storage capacity of approximately 440 million terabytes. Our estimate of the investment required by the hard drive community, including our component suppliers, to support this growth is approximately $5 billion. So the need for the industry to perform well enough to sustain its critical role in the digital ecosystem should be clear to us, to our customers and to their customers. In reviewing how we can improve our future performance, we have identified a misalignment in how our industry typically begins the calendar year from a production standpoint, in contrast with the underlying demand trend of PCs, our largest served market. We are determined to start this year with the benefit of lessons learned from this analysis. And Tim and Wolfgang will elaborate on this approach later in this call.

In addressing the calendar year 2011 market opportunity, we expect to continue to grow faster than the overall market by providing greater customer value and satisfaction than competition. We will continue to leverage our cost advantage and our relentless focus on high quality, reliability and availability of product especially in the industry's fastest growing market segments. We believe we can achieve this growth plan while at the same time improving the way in which we approach the supply-demand dynamic from the outset of the year.

In the medium to long term, we are focused on multiple growth opportunities in both our core business and beyond. First, as I have said, we intend to continue to grow in our existing hard drive segments by providing superior availability, quality, reliability and value, a proven approach that has established us as a leading supplier in each of our served markets today.

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