威騰電子 (WDC) 2002 Q4 法說會逐字稿

Welcome to the Western Digital fourth quarter financial results for fiscal year 2002. Presently all participants are in a listen only mode. Later we will conduct a question and answer session. As a reminder this call is being recorded. Now I will turn the call over to Mr. Bob Blair. You may begin.

Thank you. As we begin I would like to remind you that during the course of this call we will be making forward-looking statements in our comments and in response to your questions concerning growth in new market product for desktop hard drives, conditions in the hard drive industry, our technology deployment strategy, our development of 60gb and 80gb profiler products, our expectations of growth in the Desktop PC and consumer electronics markets, expected ramp of Serial ATA technology in our business and financial outlook for the next quarter. These forward-looking statements are based on current expectations and actual results could differ materially as a result of several factors including the company's ability to execute future production ramp, uncertainties related to the development and introduction of products based on new technologies. Overall supply and customer demand in the industry, pricing trends and other competitive factors, changes in products and customer mix, business conditions in growth in the PC industry. Our successful entry into emerging markets overall economic conditions and other factors within our recent SEC filings and in our fourth quarter press release issued earlier today. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances.

I would now like to turn the call over to Matthew E. Massengill, Chairman and Chief Executive Officer of Western Digital. Math.

Thank you Bob. Good afternoon every one. Thank you for joining us with me are President and Chief Operating Officer, Arif Shakeel, and CFO, Scott Mercer. Western Digital continues to execute in our fourth fiscal quarter. As we forecasted in our last conference call in late April, the quarter was marked by aggressive pricing in the 7200 rpm space, and relatively softer demands for hard drives in the PC industry. These conditions were particularly acute in the early part of the quarter. To briefly summarize the fourth quarter results announced earlier this afternoon, we reported revenues of 540.7 million dollars on unit shipments of approximately 8 million. Net income including the final losses from our discontinued new venture operations was 13.1 million dollars or 7 cents per share. And income from continuing operations was 16.2 million or 8 cents per share. Our ability to sustain profitability and generate positive cash flow from operations in a quarter when

revenues were sequentially softer is attribute to our solid execution, business model, strategy, and focus. For this performance I would like to acknowledge the entire Western Digital organization. The fourth quarter results represented 19 percent revenue growth and 51 percent unit volume expansion over the year ago quarter when we reported revenues of 455.7 million dollars on unit shipments of approximately 5.3 million. The Q4 2002 operating profits from the hard drive business of more than 17 million dollars representing six-fold increase from 2.8 million dollars in the year ago quarter.

With that as the backdrop, Western Digital performed at its best level in four years. Additionally, the last 12 months demonstrate that those companies that execute and have an effective model in this business can succeed. For the fiscal year ended June 28, 2002, we recorded revenues at 2.15 billion dollars, up 10 percent year-over-year. Net income of 33.5 million dollars or 17 cents per share before nonrecurring gains. These results included an operating profit of the hard drive business of 59.4 million dollars. For the prior fiscal year, we posted revenue of 1.95 billion dollars with a net loss of 67.4 million dollars or 40 cents per share before non-recurring items. And an operating loss of 3.6 million dollars for the hard drive business. In fiscal 2002 we also made

on our commitment to eliminate losses associated with our new venture activity by year-end, through a combination of divestiture or restructuring. While we remain committed strategically to penetrating additional market for our core set of technology, we will do so only when we see imminent rewards of profitable growth. On that note, more than 10 percent of the 29 million units we shipped in fiscal 2002, went into hard drive applications that essentially did not exist one year ago, the Game console and Personal video recorder market. Our success in delivering a high quality, low cost device to the gaming market also enabled us to participate in a high volume 5400 rpm value segment of the desktop PC business to a greater degree than even before with more cost effective design. Contrary to popular belief, it is interesting to consider that the hard drive industry in general and the desktop

segment in particular are enjoying some decent growth, in spite of the sluggish performance of the PC industry. Consider this, according gartner data

approximately 104 million hard drives shipped in first half of calendar 2002, up 11.5 percent from approximately 93 million shipped in the first six months of calendar 2001. For desk top hard drives alone, gartner data

estimate that 77m units shipped so far in calendar 2002 compared to 69 million units in the first six months of 2001over a growth of 11.6 percent. One of the key factors behind our progress in fiscal 2002 was smart deployment of aerial density. Our technology strategy over the last 12 months was designed to assure our customers predictable and consistent supply of high quality products at a reasonable price. We have both upside and downside flexibility. By focusing on these requirements, we took a technology path that earned us business with the industry leaders and at the same time enabled us to increase our gross margins. We did so in partnership with a set of independent and diversified merchant component suppliers, these collective resources, ability and technology gave us high confidence in our ability to continue this technology deployment strategy in the year ahead. To that point, we feel very good about our ability to deliver new products based on both 60 GB

and

device for platter technology. As noted in our recent products announcements we continue to provide the industry's highest capacity 7,200 rpm drive with our 200 gigabyte offering based on 60 gigabyte for

technology, which is now shipping.

This is the fourth successive generation of 7,200 RPM product leadership by Western Digital. Looking at the current environment, we saw both pricing and OEM demand conditions improved in the month of June and these conditions have continued during the month of July, coupled with decent sell through in the distribution channel. In fact there have been anecdotal reports of price increases by some of our competitors and we ourselves have raised prices on certain capacity points. We are comfortable with our current inventory position. As we look ahead, Western Digital is poised with a business model that is highly leveraged the top line growth. If the industries we serve do not deliver that opportunity in the near term, we have demonstrated an ability to make money and generate cash during leaner times. However, it is, I believe that the fourth calendar quarter this year would bring a seasonal uptick in both our PC and consumer of electronics and markets, and we believe that our core PC markets will provide some level of single digit growth in calendar 2003, coupled with the opportunity represented by consumer electronics, and the roll out of serial ATA technology in the enterprise. We are cautiously optimistic about our prospects for the next calendar year. Scott Mercer would now provide further details on our Q4 results and our near-term outlook. Scott.

Thanks Matt. Good afternoon everyone.

Our fourth quarter net income of 13.1

represents our third consecutive quarter following this profitability and our second in the row for the Hard Drive business. In addition to generating cash flow from operations for the fourth consecutive quarter and ended the quarter with cash balance of over 220 million. Our gross margins were once again over 13.5 percent and core operating expenses continued to stay comfortably under an 11 percent of revenue.

As Matt indicated, the fourth quarter also represents our last quarter of new venture lots. Late in the quarter, we made a decision to discontinue our Keen operation.

of the Intellectual Property portfolio created by group during the last two and half years.

the last of our conventional operations. If

that accounted for discontinued operations, and current and prior results have been reclassified, the quarter.

Now let me take you through the rest of the fourth quarter and full year results and then I will tell you our outlook on our first quarter of fiscal 2003.

The follow discussion reflects the reclassification of Keen's current and prior period of losses, two of the discontinued operations loss.

Revenues for the quarter were 541 million, a sequential increase of 54 million or 9 percent in the March quarter, and an increase of 85 million or a 19 percent in the prior year.

Unit shipments of 8 million were down 1% on sequential basis and up 51% year-over-year.

results were about 68 dollars versus 74 dollars in the March quarter. The decrease in AFP as a result of higher Xbox unit shipments was about the same as in the March quarter and a little over 10 percent of our volumes.

Decrease in the FTS results of fire demands for our value-line product combined with a more competitive pricing environment.

Revenues

were 58% of OEM and 42% reseller.

This will get us a 64 percent OEM and 36% percent reseller for the March quarter.

We left two greater than 10 percent customers during the quarter, Dell and HP. The geographic

business for 54 percent North America, 29 percent Europe and 17 percent Asia. Our revenue level from Asia was at the highest level of the fiscal year reflecting our increased focus in that market. Our gross margin was 13.7 percent, up one-tenth from the margin in the March quarter and up 2.5 points from the prior year. Excluding X-Box our desktop gross margin was an excess of 14 percent roughly the same as the March quarter. This gross margin performance in a competitive pricing environment is a reflection of our continuous improvement in cost design and factory execution. Total operating expenses remained under excellent control and were 57 million down 3 million from the March quarter. But now it is as a result of the elimination of miscellaneous new venture activities and improved SG&A cost management. Operating income is just over 17 million for the quarter down about 3.5 million from the March quarter but up about 15 million from the prior year.

from another item totaled up 1million. Investment in continuing operations was 16.2 million or 8 cents per share. Profits from discontinued operations totaled about 3 million and net income was 13.1 million or 7 cents per share. Fully diluted shares outstanding were about 198 million, which is about the same as the March quarter. Talking about balance sheet, our cash balance at quarter end was 224 million down by 3 million from last quarter. Cash generation from operation

down from March, which was

Q4 and the eluded impact on DSO. Capital expenditures were about 8 million for the quarter and our non-cash charges for depreciation, amortization and interest totaled about 13 million dollar. Proceeds from option exercises generated about 1 million and repurchases of convertible debt expense was about 4.5 million. At the quarter end we have about 86 million in

. Cash used by continued operations 15 million. Our cash investment cycle for the quarter was a negative 88 down from 11 days from the March quarter. The current period conversion cycle 37 days outstanding receivables, 14 days of inventory (25.5 turns) and 59 days payables outstanding.

with the focus on some additional comparisons.

will be accomplished in 2002. We ended the year with gross revenue of 2.15b an increase of about 200 million from fiscal 2001. Total units shipment was 29 million compared to 22.3 million in 2001. Gross margin had a consistent year with 13.1%. An increase of 2.5 points from 2001. Total operating expenses were 231 million for the year, flat from the prior year's 229 million. Operating income was 51 million for the year versus an operating loss of 22 million for 2001. Net income for electronic items was 33.5 million or 17 cents a share for 2002 versus a net loss of 57.4 million or 40 cents a share for 2001.

over a 100 million dollars.

And the balance

was

for the fiscal year and

was down from $12-24m is up over $50m from last year. When you look at the fourth quarter and our fiscal year now I move on to our statements for the September quarter. In order fiscal 2001

we have left to

consistent trends to improve.

. The

expected September results expected to be influenced by flat demand and slightly lower EFTs [phonetic]. Expected revenue $525million on shipments of between 7.8m and 8m units. Gross margin was expected to be about 13.5 percent than we reflect in the previous quarter.

about $57m. Operating income is expected between 12 and 14 million dollars. Net interest expense and tax rates are expected to total about 2 million. Net income expected between 10 and 12 million dollars and earnings per share between $0.05 and $0.06. Share count expected to remain at roughly 200 million for the September quarter with modest increase in

. Now the conference call to

.

*************

Thank you Scott. At this point, Operator, let's open up the call for questions

Yes.

We are ready for questions please.

We will now begin the question answer session for today's call. If you have any question please press star one. The questions will be answered in the order they are received. If you would like to withdraw your question please press star two. Our first question comes from a

. Please state your company name.

Well, Thanks. Congratulations on a good quarter. I wanted to ask a couple of questions. If you could talk about IBM in terms of Hitachi and

in terms of pricing competition in the beginning of the quarter and you are suggesting it is looking better now. Can you give us an update on some sort of dynamics as this merger goes through and the impact that you are seeing? And may be along

on the outlook fit, as a lot of investors put pretty poorly and how do you look at that and how that price does incur that you suggest the currency what looks relatively good in July.

Sure. IBM in the April kind of timeframe was seen as a lot more competitive. We were down a little bit in June. However we don't know how that is going to help. You all know that our distributor Robin

. It is sometimes very difficult to get a gate down but it seems that July was better than April was for IBM.

As far as

goes, I think our visibility into what they are up to and what they are seeing is a bit limited and we have got a one rate version of their comment from their call. We can only presume that the big portion of the issues must rise in the enterprise and as we are not seeing any strip of imagination on the desktop side,definately from our perspective, but it is the day when they report the

in the April timeframe.

And last question if I could. On new products as we look forward, where would be the situation for the new six decade family of product as a percent of sales in this quarter and next, when we should be volumes of 80 and lastly when you said it would be volumes of

?

On the 60gb, we have announced 200gb when we go in out to

. Like always, you know, when we go from one technology to the other, we will supply what the customer requires. Even if you don't just talk about the area density, we will not are not so hung up on exactly how many 60s how many 40s. Whatever the customer demand we have going to supply to them. We don't see any technical difficulty in ramping the product and we will ramp it according to what the customer plans. The full

as we talk to you, in the last call I guess, we have start seeing shipments from Western Digital towards this end of next year, early part of next year for the server as well as the desktop markets. It that answer all your questions.

The next question comes from Crain

. Please state your company name.

Salomon Smith Barney. Thank you. Could you talk a little bit about your CAPEX spending? I am not sure if I caught that number at 8 million.

That is correct. Crain.

Could you talk a little bit about where you are cutting cost and how you cut so much cost, I mean looking back, historically, looks like it is a pretty low number and then also can you talk about the cost cutting you did on the R&D side as well as the SG&A side and should I give us some color on that, where is that potentially build going forward and then rest of one of the quick one.

I'll address LOA in general the stock production for you, in general the cost reduction as we all know it comes from both the building material as well as the

side. The bond side is the combination of both. Engineering design as well as commercial workout. On the CAPEX side, we have been a believer at least

manufacturing processes spending a whole lot of money or all of automation, create a process make it very efficient and it is just a process that we can do it for a lot less money then

.

On the spending side,

to take on?

The sequential reduction was in part

I said in some of my remarks due to elimination of some the miscellaneous metrics in R&D.

is again flat, relatively flat at 67 million for the upside of September quarter.

Is that where you expect to be running the business going forward?

That is our expectations for the September quarter and we will talk about

periods.

execution on the gross margin side, there are values going forward as were essentially flat, you know, that about 13.5 points and we are going to expect that the

and margins would be about the same also for the second quarter.

Then clearly we can do the impossible to expand our margins but you know, we have to operate the market we are operating.

The next question comes from Sarah

please state your company name.

Operator.

And I guess we have to

point what they were concerned about what they saw. Our presumption is, it must have been more than enterprises given the size of the shortfall of their earnings, very difficult for that to attributed to the desktop side.

Okay great. And then the other two small ones I have were just related to the impact from the merger of HP Compaq in the quarter and I know some people have talked about how the June to July quarter end shift had affected some of the linearity? Is that something that you saw or seeing or any other kind of impact around the merger positive or negative and then if you could secondly address some of the July pick-up we are hearing relates to commercial versus consumer. Is there anything that your are saying that will lead to the same thing one way or the other?

As far as the HP merger effect is concerned, we haven't seen any significant affect of that other than the usual kind of things that you would expect with two large companies joining together. In fact I would comment that from a process standpoint they have been very smooth through the transition and we don't see any significant linearity or other issues at this moment relative to their combined businesses. And as far as commercial versus consumer all may come by reforms to jump in. I think it is very tough for us to see on the PC front. Whether one is driving more than the other I can't say that on the retail side we certainly have seen a pick up in the last four or five weeks in our retail sales but that may not have anything to do with what is happening on the PC sales side.

We can't see the difference at this point between consumer and non-consumer. They both look the same right now.

Okay, thank you.

Next question.

Your next question comes from Bill Lewis. State your company name.

Bill Lewis, JP Morgan. Good job. A couple of questions if I could. Could you talk about what Xbox sales were in the quarter

and then in your guidance you know, flat-to-down slightly on units contracts a little bit with Maestro seeing up units and I am trying to understand how much of that is related to PCs

down on units versus a change in Xbox, Could you give us any inside into that?

The mix of Xbox for the quarter was about the same as in the March quarter, a little lower than 10 percent in the quarter.

And as far as relative to you know our competitors outlook, I think we go to consider our

is the starting point. So from our perspective, we see a flattish kind of market. We are coming out of a pretty tough pricing environment. We are hoping things get better. But we have got a deal what we have in front of us, so what's driving their expected upside in unit revenues and revenues only they can explain, we just have to comment on what we see.

Is there anything we can read in between PCs and Xbox or are you seeing them trending quarter-to-quarter about the same?

Okay and same thing, same question on gross margins.

Right and given the fact that serially TA and the 60 Gigabyte platter seem to be 80 Gigabyte are ramping now. You feel comfortable with the current R&D levels that in

for those products.

Absolutely.

Great, Thanks a lot.

I would say no, I will keep

but help lead them.

Right.

Thank you.

The next question comes from Rit Seizal please take state your company name.

company. First I guess just a little bit of more clarification on the channel inventory, both what

you have and what the rest of the industry looks like and then secondly on capacity utilization and plans where you kind of, stand right now.

From a talent growth prospective as I said we are very comfortable before we have it. It's roughly 5 weeks, its a little bit lasted left than it was this time last quarter. The industry seems to be doing a pretty good job working it down to

that's difficult data for us exactly and the other question was.....

regarding capacity utilization and your plans?

There are, you know we had a

efficiently utilized all the assets we have with a lot of flexibility and had to use them for, I would that we are not at all concerned about utilization rates in our facility nor we are concerned about the ability to expand if needed.

Great thank you.

The next question comes from

. Please take your company name.

What is the revenue

for the next quarter?

About 5 million, 0.5

.

How do you select value of those

by that?

That was about around number

.

Okay. Can you

.

Yeah.

Okay.

Are you getting the

to do that?

We have not given any guidance on that.

Okay thank you.

Your next question comes from Mark Miller. Please take your company name.

This is Mark Miller

. There is a question of uncertain, what are the concerns of the previous question about shipping. If you say that

able to ship at the end of three or full year three?

We said it clearly that shipments will begin towards the end of or early in the next

beyond the same line for the industry.

Okay. You mentioned those were also the

because of forward pricing pressure. Do you see any move by them, to try to put pressure on the low end of the market as they pull their

on the track of the market?

I think, you know, again I don't know what they really say, then why do make the comments relatively with. We can all

on our markets. And, you know, it would appear to us that

is willing all things that a company will want to do and try to maximize their revenue margins optimizing opportunities and you know, I am guessing a, pretty lovely quarter on the enterprise, and there would certainly be a difficult pricing environment on the

side but you know had already seen building and operating units, you know, they did not seem to be over

, they have seen to be

all the way they were managing the

program. So it comes to

the evidence for that.

Last month's

and Hewlett Packard, Compaq made some announcements saying that they are going to

a fully substantial price

back replacement from their suppliers and it will have news on the business. Do you see any additional pressures from Dell and Digital

?

You know, these are big companies with proper

, and may pressure up everyday and another factor,

didn't make the big difference, but it was a highly competitive market of all the commodity that they purchased that may be one of the most competitors so, you know, I don't think, it depends upon things a whole lot, because of it.

Okay. Thanks a lot and I

this was a very impressive quarter considering the

industry.

Thank you.

Sarah, we cannot

you very well.

Is that better?

Yeah.

Okay. Sorry. Two questions, did you have any revenue in any

from set-top-box market and also do you expect that there is possibility of 10% revenue next quarter?

The shipments

. Shipments seem to be

into the PDR market were not really material

call and we will, you know comment, in terms of the ex documents going forward. The break up

cannot expect but certainly it has been on basis of

unit's outlook.

Okay. Thank you.

Again if you want to ask a question press star 1 on your touch-tone phone. The next question comes from Bill Lewis please state your company name.

JP Morgan. This is a follow-up question. I could, you didn't seem to talk on the pricing environment today and what do you think might be the opportunities to get pricing back up given the brief dramatic drop this quarter and this is evidence we have seen in the last couple of weeks, the prices have actually increased as individual capacities and I want to get your reaction to that Indiscernible) on the outlook.

Sure. The, as we said, as I said in my remarks, we have seen occurrence

the evidence that our competitors have raised some prices of distribution

to their capacity. We have raised our prices in the distribution channel in certain capacities and just in general I would say that the environment today is better than the environment in last time April. Now the question is how long will that last and what impact can that have throughout the quarter is to be determined and will largely be determined by demand and available supplies. So assuming that both continued to manage the way as being managed today through the bulk of the quarter, I think that provides you know, some real opportunities but we have got long ways to go and you know lot of business get

in September in this quarter.

Okay. Thanks Bob.

Goodbye, thank you Bill.

The next question comes from Barbaine

please state your company name.

Bear Stearns. Max, I thought that call is late

so apologize this. Somebody asked the question, sure they must have. Just on

IBM venture, can you tell us what's going on there right now, just what you are seeing and you will be hearing some comments that combined joint venture might not play the best

? Can you comment on that? And second Scott, what is the EPS guidance for next quarter?

EPS guidance was 5 to 6 cents. For as the IBM or Hitachi situation I think we've commented earlier that they were pretty aggressive in main time frame; they've been less aggressive lately. We don't really know whether that means its going to stay that way for the balance of the quarter or not and as far as whether or not the combined entity will continue with the best part of the business or not. Clearly a decision to be made by Hitachi and the Company and we don't really have a, we don't have any evidence one-way or the other to make a comment on that. We know we'd like them to do but that just may not be there.

Thanks a lot.

Again to ask a question press star one. We have no more questions; I'd like to turn the call over to Matt Masengill.

Thank you. We really appreciate your attendance on our conference call and again I would like to personally thank them from the board of directors and the senior management team for doing all the hard work in Western Digital employees around the world that they've done a fantastic job in fiscal 2002. Congratulations. B'Bye.