威騰電子 (WDC) 2003 Q3 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to Western Digital's third quarter financial results for fiscal year 2003.

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, and now I would like to turn the call over to Mr. Bob Blair.

Thank you, sir.

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 questions concerning our ability to produce 80 gigabyte Per-Platter product, additional customer qualifications of 80 gigabyte Per-Platter product, pricing trends for the June quarter, ramps and mix of 80 gigabyte Per-Platter technology, adoption of Serial APA technology, our expectations with revenue, profitability and inventory levels, the Western Digital business model, and our business and financial outlook for the June 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 ramps, the uncertainties related to the development and introduction of products based on new technologies, overall supply and customer demand in the hard drive industry, pricing trends and other competitive factors, changes in product and customer mix, business conditions and growth in the PC industry, the availability of product components, and other factors listed in our recent SEC filings, and in our third quarter press release issued 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 Matt Massengill, Chairman and Chief Executive Officer.

Good afternoon everyone.

Thanks for joining us on our call today.

After my opening remarks, our CFO, Scott Mercer will provide detailed commentary on our March quarter financial performance and our guidance.

Then Scott, myself, and our President, Arif Shakeel will respond to your questions.

We are very pleased to deliver outstanding financial results for our fiscal third quarter.

Revenues totaled $706m, up 19% from last year.

Unit shipments reached $10.3m, equal to the unusually strong December quarter and up 27% year-over-year.

Average selling price was $68, down from the December quarter, but flat with both the September and July 2002 ASPs, sustaining the trend of moderate quarterly pricing changes.

Net income was $54.5m or $0.26 per share, up 184% from one year ago.

Our financial condition strengthened through generation of $99m in cash flow from operations and retirement of our convertible debt.

The year-over-year comparisons are especially noteworthy and tracking our progress, because the March quarter in 2002 was absent any industry consolidation share opportunities, which somewhat influenced earlier fiscal 2003 versus 2002 comparisons.

We saw healthy demand in the March quarter, and the Western Digital team executed very well again in maximizing customer satisfaction and profitability, which has been and remains our primary focus.

We continue to attain the highest quality ratings at leading PC OEMs.

Our major strength, as these customers increasingly focus on the importance of total cost of ownership.

In a quarter where total revenue declined sequentially, we saw our revenue with our top-5 PC OEM customers increase from the December quarter.

The strength of our PC OEM customer business combined with our relationships and skill in managing the distribution channel and our continued leadership in the retail business are the key factors behind our sustained profitable performance.

Turning to the desktop industries latest aerial density transition, I would like to provide you with an update on our management of the shift to 80 gigabyte per platter technology.

We are in a position today to produce as much of our mix as we want to based on 80-gigabyte aerial density as we exit the June quarter, taking into account all key aspects of such a transition.

Implementation of the technology and supply and manufacturing capability.

Six of our OEM customers have qualified our 80-gigabyte per platter program including our multidisk 80-gigabyte per platter drives.

Four additional OEMs will be qualified within the next three weeks.

The major considerations in our decision making on this transition are cost, quality, and customer preference.

In the March quarter, the vast majority of our mix was based on 40 gigabyte per platter technology, much of this by direct customer request, in fact our entire unit volume upside in the quarter came as a result of specific requests from PC OEM customers for additional 40 gigabyte per platter hard drives.

Looking at the fourth fiscal quarter, the key considerations in our production mix decisions will be the extend to which customers request continued shipments based on platforms other than 80 gigabyte per platter and the market demand for drive capacity smaller than 80 gigabytes.

We are in a position to ship a large percentage of our desktop PC production off the 80-gigabyte platform this quarter, but the final mix will be customer driven.

A most important metric is that our customers are very happy about what we are shipping now, as measured by our quality rating and level of business with them.

The benefits of our careful approach on this front have been and we believe we will continue to be reflected in superior financial performance for Western Digital.

In addition to managing the desktop technology transition, we successfully launched our new 10,000 RPM 36 gigabyte enterprise serial ATA, WD Raptor hard drive in the March quarter.

We shipped WD Raptor into the worldwide distribution channels.

The initial customer interest in WD Raptor has been tremendous and we have seated these drives the key industry players involved in the creation of the serial ATA infrastructure.

As a result of these infrastructure building efforts we certified WD Raptor compatibility with both Intel Serial ATA rate controller and Threeware Escalade 8500-rate controller card.

As we have said all along, the adoption of serial ATA in the enterprise will be gradual but significant and we are off to a strong start.

Turning to the June quarter, this is traditionally the industries softest period.

Accordingly our planning takes us into account, but as our guidance will convey we foresee a solid quarter for Western Digital.

At revenue and profitability level above the current consensus Wall Street forecast and that will again demonstrate solid year-over-year comparisons.

We believe industry inventory levels currently stand between five to six weeks and we would expect to see them remain in the four to six week comfort zone throughout the quarter.

In summary, we are very pleased with the results reported today and we remain more excited than ever about the significant role that Western Digital will continue to play in this great industry.

I would now like to ask Scott to review the financials.

Good afternoon everyone.

As Matt indicated, the March quarter showed good follow through in demand from the December quarter.

Healthy industry demand coupled with superb execution by the Western Digital team enabled us to again deliver outstanding financial results.

Unit shipments were essentially flat on the sequential basis versus the seasonally strong calendar Q4 as Western Digital shipped over 10m units.

Revenue for the quarter was $706m and was up 19% versus the prior year and our average selling price of $68 was roughly flat with our fiscal of Q4 2002 ASPs.

This marks one year of flat to higher ASPs.

Profit levels remain strong with operating income increasing by almost a 175% versus the prior year.

Additionally, we ended the quarter debt free having paid off $74m in convertible debt.

Most impressively we ended the quarter with more cash when we started despite the debt payoff.

Outstanding cash flow management allowed the company to generate $99m in cash flow from operations.

These results continue to provide proof for the earnings leverage and financial discipline inherent in Western Digital business model.

I will now move on to the details of the third quarter after which I will provide an outlook for our fourth fiscal quarter.

Revenue for the quarter was $706m up $111m or 19% from the prior year, down $44m or 6% form the seasonally strong December quarter.

Unit shipments of 10.3m were up 2.3m units from the prior year or 27% and flat for the December quarter.

Average selling prices were approximately $68 down $5 from the unusually strong December quarter but flat with fiscal Q4 2002 and fiscal Q1 2003 ASPs.

Shipments to consumer electronics customers were approximately 3% of our unit volume for the quarter reflecting the usual drop in fee demand from calendar Q4.

Revenue by channels 53% OEM, 39% distribution, and 8% retail, the same as the December quarter.

Once again we had two greater than 10% customers during the quarter Del and HP.

Notably, our revenues with our top five computer OEMs increased sequentially, despite the overall decrease in revenues reflecting the desire of these OEMs to continue to buy cost effective and high quality 40 gigabyte per platter technology.

In Q3 geographic split of the business was 48% North America, 31% Europe and 21% Asia as compared to 50%, 31%, and 19% respectively in the December quarter.

Our gross margin percentage was 17.3%, up 370 basis points from the prior year and down 190 basis points from the unusually strong December quarter.

Operating expenses was $65m or 9.2% of revenue as compared to $68m for the December quarter.

The $3m decreases was due to lower pay for performance and the pension plan expenses.

Operating income of $57m from the quarter, up $36m from the prior year and down $19m from the December quarter.

As the percentage of revenue, operating income was 8.1% in the current quarter versus 3.5% in the prior year.

Net income and taxes totaled $2.6m.

Net income was $54.5m or $0.26 per share as compared to net income for the year-ago quarter of $19.2m or $0.10 per share.

The prior year net income figure includes $4m of income tax benefits and investment gains.

Fully diluted shares outstanding were approximately 208m, up 4m from the December quarter due to the increase in stock option equivalents and employee stock purchases.

Turning into the balance sheet, out cash balance at the end of the quarter were $347m, up $20m from the December quarter.

Cash generated from operations was $99m for the quarter, up $7m from December.

Capital expenditures were approximately $16m for the quarter and our non-cash charges for depreciation, amortization and interest totaled approximately $14m.

Proceeds from option exercises and employee stock purchases provided an additional $11m and during the quarter, we repurchased $74m of convertible debt using existing cash reserves.

Our cash conversion cycle for the quarter was a negative 12 days.

The current quarter conversion cycle consists of 25 days of receivables, 17 days of inventory or 21 turns, and 54 days of payables outstanding.

Now, let's look back at our third quarter.

Now, I will make a few comments about our current view of the WC business model and then move on to our expectations for the June quarter.

Our view of our business model indicates that we should be able to generate gross margins of between 14% and 18%, depending upon industry conditions prevailing during a quarter.

Coupled with maintaining operating expense levels at 10% or less as a percentage of revenues, our operating margins should be between 4% and 8% of revenue.

Our expectations for the seasonally challenging June quarter fit into the mid-range of our operating model.

The March quarter continued to show good strength in demand.

However, while we expect June to show solid gains on a year-over-year basis, the sequential trend from March to June will be impacted by the typical seasonal softness.

Accordingly, we expect revenue to be between $650m and $670m on shipments of between 9.8 and 10m units.

Our gross margin is expected to be just over 16% Operating income is expected to be between $39m and $43m.

Net interest and other income should approximately offset income tax expense.

Accordingly, we expect net income of between $39 and $43m or earnings per share of $0.18 to $0.20.

Our share count is expected to increase slightly as more options are exercised or make their way into diluted calculation.

Now, I will turn the call back over the Matt to open it up for questions.

Thank you.

Operator, if you could open it up now, we will now entertain questions.

Thank you ladies and gentlemen.

We will now begin the question and answer portion of today's call.

If you have a question, please press star one on your touch-tone phone and questions will be answered in the order they are received.

If you would like to withdraw your question, please press star two.

One moment please for our first question.

Our first question is from Richard Kugele, please state your company name.

Needham & Company.

First, I guess, in regards to pricing declines the quarter, can you talk where you saw that pricing pressure that led to that $5 decline?

And then secondly, the initial customer reaction to the Raptor, have you got in any sense that this is fitting really well into a particular vertical or a type of a customer base, any comments there?

Okay.

As far as pricing is concerned, there was no one area or one section of the business that was any more difficult than the other.

Pricing was reasonable all across the board throughout all the geographies.

It was a kind of homogenous quarter from a pricing perspective as it relates to the geography.

Matt, do you want to address that Raptor issue?

I think we've seen very, very solid response pretty much across the Board for our Raptor product.

And again, this is the first 10,000 RPM Serial ATA product available for anybody to really take a look at.

So, we've seen very good responses from our large OEM customers all the way through to the fairly small channel players that will be utilizing the product in a wide variety of applications from JBOD RAID Controlled server storage all the way back into appliances and in some cases, a very high end workstation product.

So, I'd say just good feedback so far, pretty strong response from the channel, albeit, at fairly small levels, but the product so far looks to be very attractive.

Has any more server OEMs given you any indication that they are going to be qualifying that any time soon or do you have that on your roadmap in the near term or is that going to be more latter in the year?

Well, I think as we've said we would anticipate qualifications of those kinds of customers at the back half of this year.

But, certainly great response from those kinds of customers.

And lastly, I guess you commented on where you thought inventory levels were for the industry, your particular inventory levels, do you have a sense for that and the channel?

We are right there in a five to six week range.

Thank you.

Thank you.

Our next question is from Bill Lewis.

And, please state your company name.

Yeah.

JP Morgan.

A couple of questions.

First, could you talk about ASPs in the quarter?

They were down $5 as you noted and talked, I guess addressed.

You did address pricing, but addressed what happened with mix to affect ASPs?

But yeah.

Like I said in the product question, we answer those kind of the same way.

We saw it there as a price decline.

The mix, we didn't see it to be rising as much, but it was still a reasonably good mix up.

It's the pricing decline from quarter to quarter.

Okay.

And then, as we look ahead, your forward guidance implies ASPs down say about $1 sequentially.

So, it seems as if the rate of ASP decline is expected to slow in the June quarter.

Could you talk about some of that factors that you are expecting behind that?

I think that's really a mixture driven, Bill.

We would anticipate a higher amount of mix going into calendar Q2 than we did coming out of calendar Q1.

Okay.

And lastly, just on the 80-Gig proprietor, you talked about where you are.

Can you address that I guess more concretely in terms of what percentage your shipments were at 80-Gig proprietor this quarter and kind of - any benchmark on what you think they might be in next quarter and the June quarter?

I don't think they will provide any more color than what I said in my opening remarks other than, not much of it last quarter, certainly, we are off to a good start.

Our yields are above our plan and we are going to continue to provide customers what they are looking for and we are going to ship products at the best possible economics or the ones with lowest possible cost.

So, we are in a good position, we can throttle the mix as we need to and certainly our customer response is such that they want to see a bigger percentage of our output as we move through the quarter, move that we will do it.

But, I will tell you that our OEM customers, especially those qualified products and that have good metrics for measure in quality of their products in the field, are insisting on continued production of 40-Gigabyte per platter programs.

Alright, great, thank you.

Thank you.

Our next question is from Harry Blount and please state your company name.

Hi, it's Lehman Brothers.

Couple of other quick questions.

Just on the OEM quals Matt, that I think you indicated.

You would mention that you had six OEM quals, four more that you expect in the next three weeks and then you would also mention something in there that some or all of those had also qualified in the multi-platter capacities?

Yes.

Can you just clarify; is it just some of qualified multi-platter or all six of qualified multi-platter?

The one that require and/or buy both capacities are drive (ph) have qualified both multi-disc as well as the single-disc machine.

Okay.

And then if we take a look at your mix of single platter versus multi-platter, can you give us a sense of that in the quarter?

I don't think we've broken that out, but, you know, suffice to say for the industry something on the order of 80% of what shipped single platter.

So, we can look two different from that relative to our output.

Okay.

And then the other clarification question I had is, you had talked in your prepared remarks about, you are basically going to ship the 80-Gig mix based on the customer preference demanding quality, but then you would also made some kind of commentary, I believe, that you would have some modest impact on your financial guidance for the June quarter.

Could you clarify that please?

No, I don't think I did indicate that, but what I said was we would be in a position to ship as much 80-Gigabyte as we needed to and that, we would like the customer preference dictate what our overall annum, any mix would be.

But no reference whatsoever to the impact on our financials for the 80.

Does the mix matter for your guidance for the quarter, like, if the mix shifts one way or the other?

I think, you know, clearly if the market demands more gigabytes that has a beneficial effect to our financials and if the market demands less gigabytes that generally would reflect less.

But as far as mix between 80 and 40, no.

Okay, great, thanks.

Thank you, our next question is from Mark Miller and please state your company name.

It's Hoefer & Arnett.

Congratulations.

Again great quarter.

Just a question Matt, I think one question some of the investors have is concern about price erosion.

Will it be constant, will there be more erosion at the lower end of the market before to get to the higher end and especially with Ceat and Maestro making noises that most of what they are going to ship is going to be at the higher end just give that feeling that you did see a little bit price erosion and say Maestro, of course they are going to server mix but their mix goes down?

I am just wondering what do you think about price erosion?

Is it going to be even, it's going to be more before to go to the higher end, next quarter?

Well, I mean, we almost always more percentage price decline on higher end product when you do the lower end products and I think we'll definitely see that as we move through this quarter in this year.

I think it's important to note that well our competitors are shipping perhaps more 80-Gigabyte per platter technologies and they are utilizing that to ship 40-Gigabyte disc drives.

And not that they are not perhaps shipping others.

But the 40-Gigabyte drive is a very large percentage of the marketplace and we believe we'll remain a large percentage of the marketplace certainly throughout this quarter and probably in the next.

It's a very popular capacity and many of our OEM customers, for example, won't buy that as well as our channel players.

So, I don't think we can read much into the technology transitions implying anything specific about the pricing on the 40 or 80 or anything else.

I think it will come down to the usual supply demand.

As long as we do a good job, having the right amount of product available at the right time, that will help solve any particular pricing issues and if the industry builds too much then we're going to have pricing pressures.

But I don't think there is going to be any specific influence on technology on those price points this quarter.

One of the things that's surprising, I went back and looked at it historically, and revenue decreases tend to be quite substantial over the last four years, and in seems like everyone is predicting much more benign revenue and ASP erosion then what we have seen, in fact, December quarter probably not March quarter were the two strongest quarters for the industry since 1997, it looks like June will be the same.

I am just wondering, what's the reason for the optimism?

I know inventories are seasonally usually high this time of the year, but are you seeing any pick up in April from what you saw in March?

What's just the reason and it seems this a better than what we have typically seen going into June?

Well, I think you are absolutely right.

I think there's a number of factors that are feeding it.

I think we have a more mature industry, there are certainly a fewer players making better decisions.

I think that the technology curve or the aerial density curve has had an impact here as that thing slows, it definitely slows pricing down.

I mean, we live longer with the same capacities which means the pricing isn't going to fall as fast, and finally we are running out of things to cost reduce at rapid rates as we were as we were pulling out of disk drive.

So, we're kind of getting into this average of two heads and disc per drive, kind of, you know, yet to have a platter and at least one head.

So, I think when you add at that all up, it implies that we are going to see far less price erosion on a yearly basis then we ever have in the past.

And I think that's bearing itself out now, and it has been for the last certainly 4 to 5 quarters, and we will see what'll happen in the future.

Finally, there was some rumors or some industry sources citing that one of the head manufactures, which had been supplying 88 gigabyte had some ups and downs and I'm just wondering, has that supply been, you know, kind of, in some respects not as constant as it should be.?

Well, you know, there are three head suppliers at any given moment, any given day, any given week.

Some of these always up and some of these always down.

As you well know, we qualify all three suppliers on our 80 gigabyte product.

So for us, there is no issue as far as the head supply for the 80 gigabyte system.

Thank you.

You are welcome.

Thank you, our next question is from Rob Cihra, and please state your company name.

Hi.

Thank you, Fulcrum Partners, a couple of questions if I could, one easy one just if you could give us your mix of 7200 as a percent?

I don't think you gave it.

No, 64% of the units.

Great, thank you.

And the bigger one, I guess is just, on the 88 per-platter transition, I guess, you know, you guys had, said actually last quarter that you probably hope to exit June at a 100% of the mix, and I understand why you are saying OEMs are liking the fact that you are sticking with 40s more.

But is there, certain, I guess the worry would be that you are kind of putting off, the inevitable at one point with Maxtor and specifically I think even more so with Seagate heating up now at 80.

Not, I mean, I know you guys are in a lot better shape now then you were, but if you go back several years, there was a huge issue you had when you delayed your change from symptom to amorheads.

And it took you, you know, years to recover from that, obviously, I would hope to think, that sort of thing wasn't going to happen but you know, what did you learn from that, you make sure you don't be hearing, that you don't put it off, even if maybe OEMs are asking for the more mature product.

Well, I mean, first and foremost, I think, a major difference between that and now is that those products that we were shipping did not improve other quality of the products that we were shipping.

In fact, quite frankly, up, a good word was, it was determent to our overall quality.

In this case, we are shipping a higher quality In this case, we are shipping a higher quality product in the alternative, number one.

Number two, we are building and shipping 80-gig per platter technology today, and we are doing it at very attractive yields.

You know, I just don't think we ought to be in a position to be mandating to our OEM customers what they will or will not be taking from us.

We have had a very specific request.

We are outperforming our competitors from a quality metric standpoint, and we are going to continue to do that.

Okay, and just finally actually on the consumer electronics drives, can you give us any kind of idea what you are thinking for the June quarter?

I mean, is that up, down, flat, you know, what do you think the dynamic is going on there?

It will be up.

Counter Q1 is traditionally the lowest point in a consumer mix and so we think we will see some improvement in our consumer drive shipments in counter Q2 and a fairly reasonably up quarter.

Okay, great.

Thank you very much.

Thank you, our next question is from Christian Schwab and please state your company name.

Hi, Craig Allen, got a great quarter guys.

What do you estimate your current desktop market share to be?

It should be somewhere in the 24ish kind of range.

And your guidance for shipments for the June quarter, does that assume 24% market share or do you believe that you will continuously gain market share again?

No, it assumes about the same market share.

Last quarter we talked about all channels and all geographies being strong.

Can you speak to the level, looking at geographies, any weakness or strength or was it relatively in line with what you were expecting in the March quarter?

Actually, the strength was not geography, it was the channel.

We saw more strength from our top few OEMs.

Higher demand, as Matt talked about, came from the top few OEMs that we do business with rather than from geography.

Having said that, geographically we were not disappointed anywhere, but as we have been saying before, we are not performing to our satisfaction in Asia as an example, but our strength really came from our major OEM.

The strength that you received, in particular, from your top two OEMs.

Was it a quality issue with another manufacturer or what was it?

First of all, I didn't say top two OEMs.

I said our top few OEMs.

Second point is I can't speculate exactly why they bought it, they just seem to like our performance of our products and our service level and all those things in that side.

I suppose that probably brought more drive from us.

I think if there's a mentioning too that as we move through a very busy time in the year for them last year when perhaps they were having trouble getting allocation from some other places in the market, we made a concerted effort to ensure that all of our OEM customers got the products what they needed for that quarter, and I think that's certainly helping on top of the fact that as I said before our quality metrics are very, very good at all OEM customers who can measure them.

Great, thanks.

Thank you, our next question is from Collin Campbell and please state your company name.

Hi, Brookside Capital.

Thanks for taking my questions.

First, just wanted to understand what impact moving to 80-gig per platter has on ASPs and gross margin percents both in the current 80-gig head environment where yields aren't that great and that maturity for that platform?

I don't think the 80-gig transition has much impact or whatsoever on ASPs and if it's done properly, it shouldn't have an impact on gross margins either.

Certainly, having the 80-gig per platter program available to ship very high capacity disk drives that haven't existed before provides some margin expansion opportunities, which we have seen last quarter, and that we will continue to see this quarter, but at the end the market is going to buy the capacity that it wants to buy.

Those capacities are already in existence to a large degree and, you know, the transition to 80 we should be done in most cases when it's cost effective to do that.

And so I think that's where you are seeing the balance right now.

For many capacities, from our perspective the 40 Gig does a great job for 80 and above the 80 Gig proprietor, programs are beginning to look more attractive.

So, I don't think you are going to see an inflexion but again give you a very seamless transition.

I think the margin impact to our business going from fiscal Q3 into Q4, a little bit on volume, a little bit because we are going to have some more Xbox product in there and a little bit because of pricing in a traditionally slow quarter but I don't think you are going to see an impact on the prices or the margins because of the 80 gig transition.

Okay, and my second question is did - of the top five OEMs, did each of them increase sequentially or just the top five as a group and if so how many of the accounts actually grew sequentially as opposed to declined?

I think we said as a group that they grew sequentially.

But some went up, some went down?

Now we just - we are not going to break it out the group went up.

Okay thanks.

Thank you.

Our next question is from Patrick Kenney and please state your company name.

Eastbourne Capital.

Couple of questions to go back to the 80 Gig for better transition.

Can you talk about the margin differential on a DPOP 80 Gig per platter, so shipping that single-sided, single-hit product versus a 40 Gig per platter?

You mean as 40 Gig of our drive?

Yeah.

From our perspective all cost structures and we can only speak to ourselves.

We believe we are doing ourselves a margin favor in continuing to ship very mature, very high yield and good quality successful 40 Gig proprietor technology instead of DPOP 80.

Others may have a different approach.

You know and I think all gross margins are demonstrating that we are at least competitive.

And when do you think we hit that transition, when do you think the yield's come up high enough on the 80 Gig proprietor to have you make that transition regardless of what the customer demands?

I think it's a pretty complex.

It was - let me just throw a few variable value.

It will also have to - not only does it have to do with the yield but it also has to do with the pricing of the 40 gigabyte [Inaudible] of the 80 gigabyte.

So not only do we have to yield better but our supplier has to have tremendously high yield to match the tremendously high yield from the 40 gigabyte.

So, it's a pretty complex equation.

You know there's a [Inaudible] and there is the [Inaudible] in our factory and the same thing applies at our customers.

So, I would say that you know, it is progressing very well like Matt said, we are ahead of our own targets from a technical capability perspective, which is yield.

And it is just progressing very well.

Any idea on the time frame of when you hit that transition?

I wouldn't want to get to that particular.

It's going to happen so.

Again you know, I to be on top most, to be on this quarter for the 40 and you know, as you get to that point then perhaps the 40 gigabyte drive becomes less important for the industry.

Fair enough.

In terms of since you haven't had any head issues, from a supply perspective on the 80 Gig proprietor, are there any other manufacturing issues that would come in this way?

Or any other pieces of that yield equations that are important or potentially more important than the head?

Well, if you remember we have been producing 80 gigabyte drive now for a while.

We've been learning everyday, fine-tuning a process something for that nature, so we are now to the point that the risks as far as the ramps are concerned are much lower than a traditional ramp would be.

We have looked at all areas.

We are really confident that all the risks have been mitigated.

We don't see any big gotchas at this particular moment.

Sounds good.

Serial ATA units in the quarter, I don't know if your going to disclose that, but if you can give us specifics in terms of units I don't know has a percent of revenue or something like that and then maybe talk about the financial opportunity on those products as far as ASPs and gross margin?

Well you know the Serial ATA unit was very small.

So we didn't break it out and we won't until it is, you know, something we are talking about.

I think the opportunity is significant in that, especially on the 10,000 RPM front, where these will be very attractively priced products all be it at a significant discount as today's skuzzy drives still significantly higher than the average- parallel IDE drive sales for today and we believe that they are at fairly attractive margins.

So as time goes on that will get better.

We've said all along that this initial foray into the business would not generate a lot of volume.

We are establishing the technology.

We are attracting the infra structure players and getting the designs put together and than as we move through the year, this calendar year, this will become a more and more important part of our revenue and margin strength.

Fair enough and you added Dell Micro in the quarter.

Any comments Arif on units or revenue there?

No not really.

They've brought strength to our distribution business and we are very happy that we are doing business with them.

And where would they fall in terms of, like say size of a distribution partner?

We don't talk about those things, they are just a very good partner we are riding and we are very happy to do business with them.

Yeah, are you surprised that they are a very large distributor of magnetic stores or devices we've expected and they are very successful for us.

Yeah thanks.

Thank you, our next question is from Harry Blount and please state your company name.

Hi.

Lehman Brothers.

Couple of quick follow-ups, do you have the split between - on the inventory side between finished goods WIP and raw materials?

Sure Harry, the raw material number was $13m, work-in-progress $17m, finished goods $81m.

Okay and could you comment on April, we saw a lot of price pressure kind of last three weeks of March.

Is that updated in April or are we still seeing continuation of that trend?

You know, we got some pressure and you know - back to what we did at tracking to what our expectation is for this quarter.

Highly safe to say though that, as you pointed out as we acted in March and the pricing was certainly more aggressive than it has been through most of the quarter, we expected that and seasonally you can almost always expect it to sort of slow down as you move out of April into May.

Okay and than on the component cost side of the equation just back of the envelope looks like component cost ticked down a little bit.

Any particular portion of it or is it related to the 40/80 mix or you are just having to use fewer components?

It's a little bit of both, all what you said.

And was it in any particular areas, because my understanding is some components are still relatively tight.

So ASPs have been holding up.

No, actually we, as you said earlier, we do not see for whatever the reasons any tightness in any of the major components and therefore the cost reductions, as you mentioned came across the board through a head in media, mechanical, electrical, all areas we did a pretty good job.

Okay and then just last two question, you had indicated in you prepared remarks that you expected to finish the June quarter with inventory at 4 to 6 weeks.

What do you see in terms of visibility that gives you the confidence that inventory is going to be kind of flat-to-down slightly?

I think some of that is having to do with stock of patterns and other based on comments that we are hearing from the industry.

Clearly, the June sell through is significantly better than April sell through.

That has been true for us as many years as I can remember and I think we could expect the same thing this year.

I think the industry continues to do an outstanding job managing inventories and build plans and so, our expectation would be that we continue to do, we've been doing individually over the last couple of years.

Harry, this is Scotty.

Keep in mind also that depending on the conditions, whatever conditions there may be, we will manage to that number.

We will not build inventory for the sake of building inventory.

Okay and then given Matt's comments on the quality metrics being so strong and a lot of the OEM's, have you been able to further reduce your warranty reserve on a kind of per-unit basis from the levels you had last year?

Yes, certainly from year-over- year Harry, we had enough major focus area internally for us to look at how we continue to improve product quality and lower the total cost of ownership for their customers.

Is that then a significant contributor to profitability?

It certainly helped, but I wouldn't call it the most significant at all.

Great thanks.

Thank you, our next question is from David Wu and please state your company name?

Wedbush Morgan securities.

Two quick questions.

When do you expect the 80-Gigabyt platter to be the majority of your shipments for desktops and the second question I have is, this SARS thing, has it, what is the risk in your supply chain if this thing really spreads beyond what we know today?

Let me address the 80-Gigabyte question first.

This is Arif.

As we have mentioned before, we are technically capable of doing majority of it this quarter.

It is the customer request that we offer the 40-Gigabyte.

So, again it would depend on the customer request, the financial viability for 40-Gigabyte, the quality level and all those things.

But if had to predict out there, it is not very far away when most of the drives that we produce will be 80-Gigabyte because our customers don't want to take that particular capacity as well as we'll start achieving the quality metrics that we are used to and we want continue giving to our clients and I will ask Matt answer as for the other question, the SARS question.

Relative to SARS, we will just say this.

We can't find an effect today in our business relative to SARS.

There has been some talk about sort of freight issues out of Asia, which really resolve more and logistics, delays, not cost for us.

It is almost impossible for us to predict what might happen depending on how bad this becomes.

All we can say today is that it isn't affecting our business and over the short order we don't expect it to, but it is impossible for us to try to speculate what the long-term effect might be if this turns out to be a significantly different health concern than we currently see.

Thank you.

Thank you and once again as a reminder, to ask a question please press star one.

Our next question is from Richard Kaiser and please say your company name.

Hi, Sanford C. Bernstein.

Could you just repeat the numbers you gave for the geographic mix in the quarter?

Sure, the North American split was 48%, 31% in Europe and 21% in Asia.

Okay so pre-FX you are looking at, was FX about 6% then added to your top line.

In terms of foreign exchange?

Right.

Those vast majority what we saw was in US dollars globally.

Okay, got it all right.

So, then you don't employ any kind of hedging strategies that would -- you know or need to that's going to obscure what the bottom line number is?

Not at all.

Okay terrific, thank you.

By the way just for everyone’s information we have in -- we posted an investor information sheet each quarter on the day that we announce with breakout of revenues on a geographic basis on the breakdown of inventories among other types of information you all might be interested in.

Thank you.

Our next question is from Mark Miller and please state your company name.

Hoefer & Arnett.

Just wanted to -- could you give us a total for consumer electronics or xbox ships?

3% of our unit shipments in the quarter were consumer electronic.

Okay.

Thank you.

You’re welcome.

Thank you.

Our next question is from Christian Schwab, please state your company name.

Just a quick follow-up.

Earlier you stated that you had called all three manufacturers on the 80 Gigabyte there.

Are you securing shipments from all three?

That's correct.

Thank you.

Thank you.

I would now like to turn the call over to Mr. Mat Massengill.

Thank you for joining us.

We look forward to updating you on our progress in our July call.