威騰電子 (WDC) 2004 Q1 法說會逐字稿

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  • Operator

  • Good afternoon and thank you for standing by.

  • Welcome to Western Digital's first-quarter financial results for fiscal year 2004.

  • Presently, all participants are in a listen-only mode.

  • Later we will conduct a question-and-answer session, and at that time, if you like to ask a question (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

  • Now I'll turn the call over to Mr. Bob Blair.

  • Thank you.

  • You may begin.

  • Bob Blair - VP, IR

  • Thank you.

  • As we begin, I would like to remind you that during the course of this conference call, we will be making forward-looking statements in our comments and in response to your questions regarding our business model, the accretive effect on future earnings of the acquisition of Read-Rite assets, qualification of 80 gig head technology and 80 gig-per-platter (ph) drives and OEMs, 80 gig-per-platter product mix in the December quarter, availability of key components, growth in the hard drive markets that we participate in or plan to enter, expansion of the serial ATA technology in the enterprise market, our expansion into the mobile hard drive market, our current outlook on revenue, unit volume, gross margin, operating income, interest income and tax expense, net income earnings per share and share count for the December quarter, flow of the anticipated financial model or the company's new business model, taking into account the acquisition, including possible gross margins and operating margins, operating expenses cash-conversions cycle and capital spending, and the expansion of gross margins in the second half of fiscal '04.

  • These forward-looking statements are based on current expectations, and actual results could differ materially as a result of several factors.

  • And those factors include the challenges in ramping to high-volume production in a complex head-manufacturing operation, price and availability of heads from merchant suppliers, uncertainties related to the development and introduction of products based on new technologies, difficulties in reducing yield losses from complex manufacturing processes, pricing trends and other competitive factors, changes in product and customer mix, business conditions and growth in the PC and personal entertainment industry, changes in the availability of product components and other factors listed in our recent SEC filings and in our first-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 conference call over to Western Digital Chairman and CEO, Matt Massengill.

  • Matthew Massengill - Chairman & CEO

  • Thank you, Bob.

  • Good afternoon and thank you for joining us.

  • With me today are Arif Shakeel, President and Chief Operating Officer, and Scott Mercer, Chief Financial Officer.

  • The results of our first fiscal quarter reported earlier today, reflect another quarter of continued focus on sustained, predictable financial performance by Western Digital.

  • The Q1 results and the execution that went into, are especially noteworthy given that during the quarter we announced and acquired the assets of Read-Rite Corporation and integrated them into our operations.

  • This was a significant and challenging undertaking by the Western Digital team -- one that now positions us with control of key technology, enhanced-operational flexibility, a vastly improved cost structure and a business model with far greater potential.

  • In the September quarter, we experienced fairly typical demand patterns, marked by growing demand the late in the quarter.

  • We exited the September quarter with channel inventories just over four weeks, and they are somewhat lower now.

  • Demand remains strong across all of our channels and geographies.

  • Revenues in Q1 reached $714 million on unit shipments of 11.3 million, including 1.1 million into the fast-growing personal entertainment space.

  • We continue to improve our position in this market through our alignment with the industry leaders.

  • Our strength in Asia-Pacific was another highlight in the quarter.

  • With revenues in that region reaching an eight-year high -- 32 percent of revenue.

  • One year ago, this region accounted for 19 percent of our revenue.

  • The transition of our desktop mix to 80 gigabytes per platter technology continues on plan.

  • As we exited September, it represented 60 percent of our mix, and it will represent 100 percent of the mix as we exit the month of December.

  • While they have yet to become a material contributor to the business, our serial ATA hard drives for the enterprise market continue to gain traction.

  • As expected, with any disruptive technology such as serial ATA, many of the early adopters are the innovative companies focused on performance in value.

  • We have joined forces with many of these companies in delivering the serial ATA value proposition to the enterprise market, as the infrastructure continues to build out for the high-performance, low-cost interface.

  • Our enterprise class WD Raptor hard drives have been designed into NAV (ph) servers, workstations, rate (ph) servers, medical imaging, gaming and motion picture-editing applications, from companies such as AlienWare, Bally's Gaming, Box technology, M&A technology, Monarch, Rackable (ph), Raid, Roark Data and Virtual Microbe.

  • One of the most important points about this partial list is its diversity of applications.

  • Western Digital is not alone in driving the value of serial ATA into several segments of the enterprise market.

  • We were also very pleased to be able to announce recently the design win of the WD Raptor drive into Dell's precision workstation and dimension PC models.

  • I would now like to address some specific concerns cited recently by analysts, relating to our 80 gigabyte-per-platter technology transition, the yields on our own 80GB hard drives and our near-term supplier component.

  • These concerns are ill-founded.

  • Pertaining to OEM qualifications of our 80 gigabyte-per-platter hard drives, we have completed qualifications in both single platter and multi-platter platforms with all of our targeted OEM customers.

  • In terms of the qualification of our own 80 gigabyte-per-platter heads, this is proceeding right on schedule -- we shared with you in late August.

  • Right now, 23 of 25 OEMs have completed qualification.

  • The two remaining will complete qualification no later than the end of December.

  • Contrary to reports that we are experiencing low yields with our 80 gigabyte-per-platter drives, our yields are, in fact, exceeding or meeting all of our quality and yield objectives and are competitive with those elsewhere in the industry.

  • Finally, on the subject of reported component constraints, we are not facing any supply shortages that will affect our ability to meet the healthy growth reflected in Scott's remarks on December guidance.

  • Turning to our integrated-head operations -- we are extremely pleased with our accomplishments since taking ownership of these assets in early August.

  • Many of you visited our new Thailand facility in mid-September, and had a first-hand opportunity to witness some of the significant operational and efficiency improvements we have already achieved there.

  • For instance, we have been able to double the capacity utilization of our Thailand head facility through a reconfiguration of lines and leveraging a higher volume run rate.

  • We are now more confident than we were in late August that this acquisition will be accretive to our financial performance in the current quarter.

  • By the end of September, we produced more than 3 million heads, exceeding the 2.5 million predicted in August.

  • By as of early this week, we have shipped more than 1.2 million hard drives with WD heads in them.

  • The stability and quality of our 80 gigabyte-per-platter head are the best in class.

  • While we are enjoying success with our head operations, it is also important to note that our relationships with the merchant heads suppliers remain strong since we made our acquisition.

  • They continue as active and responsive partners in our business.

  • Focusing on the outlook for calendar 2004 -- I cannot remember a time when the hard drive industry faced a more promising year.

  • At Western Digital, we are very well-positioned to participate in and benefit from this market growth for several reasons.

  • Our new business model is highly leveraged to growth.

  • Our products and product plans are well-aligned with our customers' requirements.

  • Our technology position has been improved.

  • We have great relationships with leaders in the markets we are addressing.

  • And we have an extremely capable and focused team to get the job done.

  • Looking at some of the recent forecasts from Gardner Dataquest indicates that every one of the markets we participate in or plan to enter in the next year is growing at a healthy rate, continuing to build off the momentum of this year.

  • Unit growth in the worldwide PC market, including desktop and notebook, in 2004 is forecasted at 11 percent.

  • Our core market, desktop personal computers, is forecasted to expand 9 percent on a unit basis in 2004.

  • Revenues in the market for desktop PC hard drives is forecasted to grow 5 percent, coming off an estimated 6 percent growth in 2003.

  • This would be the first time that we have seen back-to-back years of revenue growth in the desktop hard drive industry in more than six years.

  • Looking at the expansion of serial ATA into the enterprise space -- Gardner Dataquest predicts 60 percent year-over-year unit growth in 2004, with serial ATA accounting for 20 percent of all drives shipped into the enterprise market in 2004.

  • Overall, the fastest-growing market for hard drives is in personal entertainment.

  • For gaming consoles, set-top boxes, and digital video recorders, unit volume in this space is predicted to grow nearly 70 percent in 2004.

  • And the notebook PC market is forecasted for 19.3 percent year-over-year unit growth in 2004.

  • We plan to re-enter the mobile drive market in calendar 2004, and are very excited about doing so.

  • It is very clear to us that over the next several years, the world's leading, notebook-PC OEMs will require the attributes of scope, scale and responsiveness that only the large, focused and efficiently-structured hard drive suppliers can deliver.

  • We will be one of those suppliers.

  • In summary, I think our industry and Company are poised for a prosperous year in calendar 2004.

  • Our approach to the business will continue to be sustained, predictable and balanced financial performance, taking care of our customers' needs and growing the business without sacrificing profitability.

  • With our business model, products, technology, growing markets and customer relationships, we are well-positioned to achieve improvements in our already strong financial performance.

  • Scott Mercer will now review the Q1 financial performance and provide our guidance.

  • Scott?

  • Scott Mercer - SVP & CFO

  • As Matt indicated, the September quarter followed fairly normal seasonal patterns.

  • Strong demand toward the end of the quarter, as our customers entered the year-end selling season, coupled with outstanding execution, enabled us to deliverer solid operational results.

  • Also, we have quickly ramped our head manufacturing operations and continue to expect the acquisition to be accretive to our earnings in the second quarter of fiscal 2004.

  • After providing details of our first-quarter performance, I will provide an outlook for the December quarter.

  • Revenue for the quarter was 714 million, up 131 million or 23 percent from the prior year and 34 million or 5 percent from the June quarter.

  • Unit shipments of 11.3 million were up 2.7 million units or 31 percent from the prior year and up 800,000 units or 8 percent from the June quarter.

  • Average selling prices were approximately $63 per unit, down 5 dollars per unit from the prior year and 2 dollars per unit from the June quarter.

  • We shipped approximately 1.1 million units to the consumer electronics sector in September versus 600,000 units in the June quarter.

  • This mix-shift was responsible for about 1 dollar of sequential change in ASP's (ph).

  • Revenue by channel was 53 percent -- OEM, 40 percent -- distribution, and 7 percent -- retail.

  • Versus 52 percent -- OEM, 41 percent -- distribution, and 7 percent -- retail for the June quarter.

  • We had two greater than 10 percent customers during the quarter -- Dell and HP.

  • The Q1 geographic split of our business was 38 percent North America, 30 percent Europe, and 32 percent Asia, as compared to 46 percent, 26 percent, and 28 percent respectively in the June quarter.

  • Our gross margin percentage for the quarter was 13.5 percent, down 80 basis points from the prior year and 20 basis points from the June quarter.

  • Gross margins for the September quarter reflect the effect of one-time charges totaling 18 million, relating to our newly-acquired head manufacturing operations.

  • The one-time charges consist primarily of factory employee severance costs, start-up expenses and under-absorbed overhead related to low head production volumes.

  • Operating expenses for the quarter totaled 91 million and included one-time charges of 27 million, primarily for acquired in-process research and development costs.

  • Ongoing head-design research and development expenses were 5 million in the quarter.

  • Operating income was 5 million for the quarter, including aggregate one time charges of approximately 45 million.

  • Net income and taxes netted to about 0, resulting in a net income of 5 million or 2 cents per share.

  • This compares to a net income of 22 million or 11 cents per share in the year ago quarter.

  • Excluding the impact of the one-time charges and the ongoing research and development expenses associated with the Read-Rite asset acquisition, net income for the first quarter of fiscal 2004 would have been 53 million or 25 cents per share.

  • This additional information is provided for comparison purposes to the guidance we issued in July and August.

  • Fully-diluted shares outstanding were approximately 216 million, up about 2 million from the June quarter because of increased option exercises and the common stock equivalents associated with our higher share price.

  • Turning to the balance sheet, our cash balance at the end of the quarter was 286 million, down 107 million from the June quarter.

  • Cash used by operations was 18 million for the quarter, and was negatively impacted by the previously-mentioned one-time charges, settlement of pre-existing accounts payable relating to the acquired Thailand head manufacturing operation, and a higher accounts receivable balance, given Q1's back-end. loaded demand profile.

  • Capital expenditures were approximately 20 million for the quarter, and our non-cash charges for depreciation and amortization totaled approximately 21 million.

  • Proceeds from option exercises provided an additional 12 million.

  • Other investing and financing activities also included 95 million of cash paid for the acquisition, partially offset by 14 million of net bank financing.

  • Pre-existing bank obligations related to the acquired Thailand head manufacturing operations were fully settled and replaced by a new term loan of $50 million.

  • Our cash-conversion cycle for the quarter, excluding one time charges, was a negative one day, consisting of 42 days of receivables, 18 days of inventory or 20 turns, and 61 days of payables outstanding.

  • And now I would like to spend some time updating you on the status of our acquired head manufacturing operation.

  • The cost of the acquisition was 172 million and consisted of the following.

  • Cash consideration of approximately 95 million, assumed debt obligations of the Thailand operations of approximately 60 million, and direct costs from the acquisition and other miscellaneous, assumed obligations totaling approximately 17 million.

  • Through the end of September, we produced over 3 million heads.

  • We shipped well over one million heads and drives.

  • And we are on track for the acquisition to be accretive to earnings in the December quarter.

  • Also, as we discussed on our December 27th conference call, the financial parameters of our new business model are as follows.

  • Gross margins are between 18 and 22 percent, operating expenses as a percentage of revenue are approximately 11 percent and operating margins are between 7 percent and 11 percent.

  • Additionally, our cash-conversion cycle will range from a negative 4 to negative 7 days on a go-forward basis.

  • Lastly, capital expenditures for our drive assembly and head operations will range from 140 to 160 million for fiscal year 2004.

  • This includes capital expenditures to support our head operations.

  • Consistent with our August conference call, we expect to be operating within this business model during the second half of fiscal year 2004.

  • That was a look back at the first quarter.

  • Now I will move on to our expectations for the December quarter.

  • We expect revenue to be between 760 and 780 million on shipments of approximately 12.5 million units.

  • Our gross margin is expected to be approximately 18 percent.

  • Operating income is expected to be between $65 and $68 million.

  • The net of interest income and tax expense should be an expense of about 2 million.

  • Accordingly, we expect net income of between $63 and $66 million or earnings per share of 28 cents to 30 cents for the December quarter.

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

  • Although it is our practice not to give earnings guidance beyond the current quarter, I would like to make some comments regarding our gross margin expectations going forward.

  • The manufacturing ramp of our head operations is proceeding successfully.

  • And we expect, all else being equal, that we will continue to expand our gross margins in the second half of fiscal year 2004.

  • I will now turn the call back over to Matt for Q&A.

  • Matthew Massengill - Chairman & CEO

  • Thank you, Scott.

  • Operator, if you could now open the call up for questions?

  • Operator

  • Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. (OPERATOR INSTRUCTIONS) One moment please for the first question.

  • And our first question comes from Navine Bhabha.

  • You may state your company name.

  • Navine Bhabha - Analyst

  • A couple of things if I could.

  • First, Matt, your pricing conditions in the September quarter seemed to have bucked the trends compared to your other two colleagues there.

  • Why was your pricing conditions slightly better than those two people?

  • The other thing is, we did hear from Maxtor and Seagate about the pricing conditions in August being fairly weak.

  • Did you see similar trends and a follow-up question on that -- and just given the industry conditions abroad, is the four to six week (indiscernible) level a reasonable rate?

  • Is there any reason to rethink whether or not you need to actually be below the level to maintain optimal pricing conditions?

  • Matthew Massengill - Chairman & CEO

  • Okay, Navine, been on the pricing front, I think one of the things that we try to do was ensure that the business we secured and delivered and serviced last quarter was good business.

  • There's no question that August was -- not only was there slower demand than perhaps people would have liked to have seen, there were a few drives out there.

  • I think we navigated through that pretty well.

  • Our business model has always been very flexible.

  • We try to manage our build (ph) by the daily basis, and perhaps we just saw a little less pricing pressure because we weren't pushing so many drives through the channels at the time.

  • As far as the four to six weeks goes, I think that is the right number of drives to have on the shelves, especially as more and more of our collective business and individual businesses center in areas like Eastern Europe and in Asia were logistics can be difficult sometimes.

  • I think that that's the right level to have.

  • Navine Bhabha - Analyst

  • A couple of follow-ups to that.

  • Scott, DSO's did spike quite a bit -- so did receivables.

  • Can you give us a sense of where they are right now and what you expect by the end of this quarter?

  • Scott Mercer - SVP & CFO

  • Navine, we will be back to a normal kind of four-to-seven-day negative cash-conversion cycle in the December quarter.

  • It was a very, very back-end loaded quarter -- that was primarily linearity that drove that.

  • Navine Bhabha - Analyst

  • Then finally, Matt, and maybe Arif, too, what is your expectation for shipment of that 80 gigabyte capacity or above in Q4?

  • Arif Shakeel - President & COO

  • Well, we talk about the technology, saying that December -- we'll leave December with 80 GB technology at 100 percent of our bill.

  • That's what we talked about.

  • Predominantly, this quarter it was 40 GB.

  • Looking forward, like we have always said, we are fairly flexible about what the customers want but there still will be a fair amount of 40 GB being sold in the market -- not just by us but by everybody else in this particular quarter.

  • Matthew Massengill - Chairman & CEO

  • Now obviously the 40 and 80 together will be the largest capacity sold.

  • And we haven't provided any guidance as to how that will break out.

  • And we will let you know in January.

  • Navine Bhabha - Analyst

  • And finally -- really finally -- in terms of linearity for the December quarter, any expectations on that?

  • Scott Mercer - SVP & CFO

  • Well typically December is a much more linear quarter than its predecessor.

  • Both the December and January quarters -- or I'm sorry, March quarters -- tend to be a little bit more linear then the June or September quarters, and I think that's what we would expect.

  • Bob Blair - VP, IR

  • Next question, operator?

  • Operator

  • Thank you.

  • The next question comes from Harry Blount.

  • You may ask your question and please state your company name.

  • Harry Blount - Analyst

  • Hi, Lehman Brothers.

  • A couple of quick questions.

  • One relates to the Geo-mix.

  • You guys have seen some nice growth in Asia.

  • The counter side of that is you have also seen -- it looks like America's growth declined in the last three quarters.

  • So I was wondering what happened there?

  • And then, secondly, with regard to the significant increase in consumer -- how much of that was gaining versus PVRs on the Delta?

  • And then the final question is, if I add up your desktop units along with those of the two public companies and make some assumptions about Hitachi, Samsung and then finally make one last adjustment for the extra week that one of your competitors have, it looks like desktop shipments were about equal to PC shipments.

  • Is that your assessment, as well as the overall industry?

  • Scott Mercer - SVP & CFO

  • Harry, let me take that question -- the last one first.

  • I think that it's a little early for us to tell about whether or not the drive shipments were the same as the PC shipments because I haven't seen all of the data yet.

  • But I think that that is not an unreasonable expectation in the quarter.

  • Typically, we see it perhaps a little ahead.

  • But in this case, there were quite a few drives that were shipped in August and then a little bit less as we moved through the quarters from the industry standpoint.

  • So I think that's not too far off the mark, although I still would expect to ship more of -- you will see more drives shipments than PC shipped in a given quarter because of replacements, refreshes and also white-box manufacturers that are not counted in the desktop numbers.

  • As far as the PVR versus gaming, we don't break that out.

  • Obviously gaming was a big part of that.

  • I will tell you that are PVRs shipments have been continued to do pretty well.

  • And we have got a fairly aggressive growth rate on those drives moving from last quarter into this one and hopefully in the future year.

  • So while gaming is still a large portion of that, PVRs coming up pretty strong.

  • And then, Arif, I will let you tackle the other question.

  • Arif Shakeel - President & COO

  • Harry, could you just repeat that first question, please?

  • Harry Blount - Analyst

  • Yes, essentially, just looking at your Geo-mix -- a year ago, in the 2Q FY '03, you had about 50 percent of your revenue from the Americas.

  • It has declined to about 38 percent -- sequentially it has declined every quarter.

  • So I'm wondering what exactly is going on within the Geo?

  • Arif Shakeel - President & COO

  • A number of things.

  • First of all, we have been talking about our focus on the Far East -- that we didn't have as good a share as we were entitled to or as we think we could get.

  • Part of it is that.

  • Part of it is movement of shipments as the OEMs manufacture their products outside the US.

  • So a combination of those two is the reason why you see Asia -- I mean, U.S. artificially lower, if you were, and Asia coming up.

  • But the strength in Asia would be see (indiscernible) success we're having, plus some movement of production facilities, equals to the number that you are saying (ph).

  • Harry Blount - Analyst

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • The next question comes from Mark Miller.

  • You may ask your question and please state your company name.

  • Mark Miller - Analyst

  • It's Mark Miller with Hoefer & Arnett.

  • Got a couple of questions.

  • First of all, you didn't seem to show -- I know Seagate had an extra week -- but you didn't seem to show the same level of growth in your desktop shipments.

  • Do you feel you lost any desktop share?

  • Matthew Massengill - Chairman & CEO

  • We may have.

  • And as I said earlier, we were very careful to manage our build relative to demand.

  • And I think that our ASB's (ph) and the desktop being down only a dollar quarter-over-quarter is pretty good evidence of a well-managed build plan versus demand.

  • Mark Miller - Analyst

  • Okay.

  • At the same time, your inventories seem to have gone up more than Seagate and I think Maxtor's actually went down a little.

  • Scott Mercer - SVP & CFO

  • Mark, this is Scott Mercer.

  • The entire build in inventory is because we acquired the Read-Rite head operations.

  • Mark Miller - Analyst

  • Okay.

  • So that includes -- (multiple speakers)

  • Scott Mercer - SVP & CFO

  • That includes work in process for heads and HGA.

  • Mark Miller - Analyst

  • Okay.

  • Can you break that out specifically for Read-Rite?

  • Scott Mercer - SVP & CFO

  • No.

  • Mark Miller - Analyst

  • And I'm also looking at your pricing next quarter.

  • I'm just trying to estimate that.

  • It looks like you're seeing steeper price decline than either Maxtor or Seagate is maintaining for your desktop.

  • I'm just estimating around 700,000 units.

  • Is that because of product mix?

  • Or am I in error here?

  • Matthew Massengill - Chairman & CEO

  • I think the guidance that Scott provided you would have provided for a flat ASP environment quarter-over-quarter.

  • Mark Miller - Analyst

  • Okay.

  • Alright.

  • I will work on that to see where I'm wrong but that's all for now.

  • Bye, bye.

  • Operator

  • Thank you.

  • The next question comes from Rich Kugele.

  • I'm sorry.

  • You may ask your question and please state your company name.

  • Rich Kugele - Analyst

  • Needham & Company, thank you.

  • First, I know it's early with the 73 gig Raptor.

  • But just the rationale for going to there -- that capacity point -- do you find that's really going to be the sweet spot for Raptor?

  • Any color there on what you think that might do to your Raptor shipments?

  • And then, secondly, in terms of the 100 gig-per-platter, do you expect that to be something that you could leverage the Read-Rite head into?

  • Is that something that the rest of the industry should really go to?

  • Or will we just go to 120 and when do you think that might be?

  • Thanks.

  • Arif Shakeel - President & COO

  • Let me deal with the Raptor question.

  • I think the 74 gigabyte broadens our offering into the marketplace.

  • There is still a large market for 36 gig.

  • But I think that 74 allows us to be a broader supplier of products to the people, so I think that's the goodness.

  • We have seen a lot of impressive (ph) 74 GB already.

  • So that is going to do nothing but help.

  • Matthew, you want to take the 100 gigabyte?

  • Matthew Massengill - Chairman & CEO

  • Yes.

  • You know, Rich -- we will let the market decide whether or not 100 gig-per-platter is something that the world wants to buy.

  • I think, realistically, when you look at the capacity points that that generates, they aren't terribly compelling.

  • It doesn't really provide you with a more cost-optimized 80.

  • It doesn't really give you a 120 that's cost-optimized.

  • It doesn't give you a 250 that's cost-optimized to a great degree.

  • And so I think that we will let the market decide.

  • I would be very surprised if we saw a mass-market transition to 100 gig as opposed to 80. 80 is clearly the next large capacity-point of preference.

  • And so we will just have to kind of see.

  • That's obviously 80 gigabyte-per-platter technology that has been pushed and that's not a terribly difficult thing to do, depending on how many of them you're trying to build.

  • We will keep an eye on it.

  • But I don't think it's a major change.

  • I think 120 or so is the next likely transition point, moving to 160 later in this technology road map.

  • Rich Kugele - Analyst

  • And the sense for when 120 might be needed?

  • Matthew Massengill - Chairman & CEO

  • Sometime later than now. (Multiple Speakers) I will say that we believe that the 80 gigabyte drive will be the primary drive of choice for a long, long time.

  • The 40 gigabyte certainly lived longer than most of us would have anticipated as a capacity point, and I think the 80 will live even longer.

  • Rich Kugele - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you, and the next question comes from Kevin Hunt.

  • Please state your company name.

  • Kevin Hunt - Analyst

  • Hi, Thomas Weisel.

  • A couple of questions.

  • I wanted to follow-up on the ASP question.

  • And you know, you had some differing opinions, I guess, on the Seagate and Maxtor calls the other night.

  • I wanted to see what your guys view in terms of potential for allocation of -- in the fourth quarter, given you guys are talking about below four-weeks inventory.

  • And also wanted to know if you could comment at all on where you may be in terms of your own capacity -- utilization at your plants?

  • You know, you're ramping the Read-Rite side of things but what about in your own final assembly side of things?

  • Matthew Massengill - Chairman & CEO

  • What specifically is your ASP question?

  • Kevin Hunt - Analyst

  • I guess what are the odds of allocation in Q4?

  • And have you actually seen ASP increase in Q4?

  • Arif Shakeel - President & COO

  • Let me address the ASP part of it.

  • There are a couple of capacities that we are seeing a lot of tightness, and yes, we have seen some price increases in a couple of capacities.

  • Our overall inventory, as Matt mentioned, is reasonable -- reasonable to low.

  • And that is creating an environment of price increases in a couple of capacities.

  • So overall demand is good.

  • Price increases in a couple of capacities, and I will let you answer the ASP question, Matt.

  • Matthew Massengill - Chairman & CEO

  • Well, I think the other part of that was utilization.

  • Our factories are very well-utilized.

  • But we are very flexible on that, Kevin, adding incremental assembly capacity is not terribly difficult to do.

  • And with the assets we have deployed, we are very well-utilized.

  • Kevin Hunt - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Thank you.

  • The next question comes from Rob Chira.

  • You may ask your question and please state your company name.

  • Rob Chira - Analyst

  • Hi, thanks very much.

  • Two, I guess -- one on December-quarter guidance.

  • Any kind of idea or thinking in terms of modeling -- in terms of consumer electronics and the Xbox as a percentage of mix, do you see that going down, up, flat?

  • And then totally separately, you mentioned that you -- a good progress you are making so far with the back-end the facility in Thailand from Read-Rite -- can you give us a little more -- maybe on the wafer-fab side -- what kind of -- how are the ramps going?

  • What kind of yields you are having?

  • What you're doing in terms of tooling?

  • And what do you think the tooling that's in place is sort of good for now or if it's good well past 80 gig-per-platter?

  • Maybe sort of more on the wafer-fab expectations?

  • Thanks.

  • Scott Mercer - SVP & CFO

  • Rob, this is Scott Mercer.

  • We won't be breaking down our guidance in terms of sector of customer.

  • We will let you know in January.

  • Rob Chira - Analyst

  • Right.

  • Well, it's worth a shot.

  • Arif Shakeel - President & COO

  • Let me address the wafer-fab side of that.

  • When we make the comment of that it is going well in the head operations, it does not just imply the back end.

  • From a capital perspective, as we have discussed, with you on the 27th of August, we've just stated (ph) the numbers that we are spending on process -- the numbers we are spending on development.

  • We are very comfortable.

  • We are making very good progress, and we have said that by the June quarter, we will be capable of producing up to 30 million heads on the way from the wafer -- obviously all the way to the HG (ph) line.

  • So we're very comfortable.

  • We are spending a fair bit of money -- as we described to you on the 27th of August -- and both of the wafer fab, as well as the slider/HGA facility, are on schedule, if not ahead.

  • Rob Chira - Analyst

  • Alright.

  • Great.

  • Thank you.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS) And the next question comes from Christian Schwab.

  • Please state your company name.

  • Christian Schwab - Analyst

  • Craig-Hallum.

  • Great quarter.

  • My question -- just on the market share -- if I do some quick math and assume the others -- you know, bottom two maintained 18 percent of the shipments.

  • You've lost about 3 percent market share -- if you just kind of take consumer electronics and desktop together, is that fair?

  • Scott Mercer - SVP & CFO

  • We think we lost some share.

  • I don't know what the size of it is.

  • I think 3 percent would be a little big.

  • Arif Shakeel - President & COO

  • Excessive, I think.

  • Scott Mercer - SVP & CFO

  • Yes, I don't think it was that -- I don't think we lost that much.

  • Christian Schwab - Analyst

  • Okay.

  • I don't know if you answered it.

  • I maybe missed it.

  • On the consumer electronics, do you anticipate the consumer electronics shipments to increase sequentially?

  • Scott Mercer - SVP & CFO

  • We didn't discuss that Christian.

  • Christian Schwab - Analyst

  • Will you?

  • Scott Mercer - SVP & CFO

  • No. (laughter)

  • Christian Schwab - Analyst

  • That's fair.

  • And then can I assume that at the desktop level, that there was probably, roughly 60/40 split between 60 percent being the 40 gigabit capacity and 40 percent being other capacities the quarter?

  • Do you think that mix is fair?

  • Or would you just say slightly better than 50-50?

  • Scott Mercer - SVP & CFO

  • I don't think we would comment.

  • Other than to say a good deal of the drives that sold into the industry last quarter were 40 gig-per-platter -- I mean 40 GB drives.

  • Christian Schwab - Analyst

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • The next question comes from Mark Miller.

  • You may ask your question and please state your company name.

  • Mark Miller - Analyst

  • It's Hoefer & Arnett again.

  • Do you have -- could you give us an estimate for R&D spending next quarter -- December quarter?

  • Scott Mercer - SVP & CFO

  • We haven't broken that out, Mark.

  • I think that -- (indiscernible) from our business model guidance.

  • Mark Miller - Analyst

  • Okay.

  • The other question is, do you have anything you can give us in terms of what your goal -- I've heard up to 10 million heads chips in the December quarter.

  • Is there anything specific you can give us on how many heads you think you will get in on the fab this quarter?

  • Arif Shakeel - President & COO

  • We've never said 10 million heads in the December quarter.

  • What said was on the 27th of August that produced 1.5 million heads in our Q1.

  • By Q4, our facility will be capable of producing up to 30 million heads, and that is all we said as far as the ramp was concerned.

  • Mark Miller - Analyst

  • Judging that historically Read-Rite used to do 20 - 25 million, that seems especially since the design was -- I believe -- was set in April.

  • That seems rather slow to me.

  • Are you being conservative here?

  • Arif Shakeel - President & COO

  • We are being cautious, conservative -- that's how we run our operations.

  • You can see that in our drive business, and you will see that exact cautious approach in the head business.

  • Mark Miller - Analyst

  • Alright.

  • Thank you.

  • Matthew Massengill - Chairman & CEO

  • Remember, Mark, that this was not firing on all cylinders when we acquired it.

  • Mark Miller - Analyst

  • Are you there now firing all cylinders?

  • Matthew Massengill - Chairman & CEO

  • Doing very well to our plan.

  • Mark Miller - Analyst

  • Okay.

  • Operator

  • Thank you.

  • The next question comes from Kevin Hunt.

  • Please state your company name.

  • Kevin Hunt - Analyst

  • Another follow-up question.

  • Just to follow-up on the mobile drives -- you kind of implied you're going to have one.

  • Any details on timing of that or anything like that?

  • Arif Shakeel - President & COO

  • No.

  • We have not announced product.

  • What we did say was we will -- if you read back over what we said in August -- we said we have now moved into the design phase.

  • And today, I believe, we said that we will have the drives available sometime next year.

  • Kevin Hunt - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Thank you.

  • Bill Lewis, you may ask your question, and please state your company name.

  • Bill Lewis - Analyst

  • Great.

  • J.P. Morgan.

  • My apologies if this has kind of already been asked.

  • But Seagate raised an interesting topic on its call a couple days ago around demand between the two quarters of the second half and seasonality.

  • Do you have any update on how you thought seasonal patterns might or might not be changing?

  • Matthew Massengill - Chairman & CEO

  • I think that from our perspective, we do not see any significant change in seasonal patterns -- that calendar Q3 starts to get interesting as you roll-out of September and calendar Q4 is a very strong quarter.

  • We don't have any reason to believe that it's going to be any different this year than it has been in years past.

  • One of the things that we have noted is that manufacturers are buying components and assembly products much closer to actual end-user demand, which tends to put that -- make that seasonal factor even more pronounced as there is a lot of consumer demand in calendar Q4.

  • And if you're building close to the consumption date then you're probably going to be building more in Q4.

  • So we see the world slightly differently.

  • But, then again, we don't have a large presence in the enterprise business, and so perhaps there are other explanations for it that we're not aware of.

  • Bill Lewis - Analyst

  • And then specific to the consumer business, what's your expectation for sales sequentially in that market?

  • And can you comment on what your share it is on Xbox?

  • Because it appears that Seagate's consumer numbers, excluding PVR, look higher than yours in the September quarter.

  • Matthew Massengill - Chairman & CEO

  • Yes.

  • I think that consumer markets will be quite strong in the quarter.

  • However, I think commercial buying looks pretty good as well.

  • We have a pretty balanced business plan for the quarter.

  • I would say, that between modest corporate refreshes and infrastructure build-out for new manufacturing facilities in Asia and elsewhere, are driving the commercial side of it.

  • Consumers clearly driving at.

  • Whether one is bigger than the other, I think we will have to wait and see how that works out.

  • It's awful difficult, frankly, for us to tell -- especially if your distribution where those drives are ending-up at the end.

  • And your other question was --?

  • Bill Lewis - Analyst

  • Really just around share of Xbox?

  • Matthew Massengill - Chairman & CEO

  • Share of Xbox.

  • Yes, we will -- we certainly believe that Seagate sold more drives to Microsoft last quarter than we did.

  • Bill Lewis - Analyst

  • Okay.

  • And then to clarify -- did you say that you had achieved the 2.5 million head goal from Read-Rite in the September?

  • Scott Mercer - SVP & CFO

  • Yes, Bill, we said we exceeded it.

  • We shipped over -- we built over 3 million heads by the end of September, and we shipped well over one million of those heads in disk drives to customers during the quarter.

  • Bill Lewis - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS) The next question comes from Christian Schwab.

  • Please state your company name.

  • Christian Schwab - Analyst

  • It's a follow-up question.

  • Can I assume on the mobile drives that we're going to take the same -- we're going to lead with kind of performance -- in other words. can I say assume that your thoughts in the mobile drives is that the 40 gigabit space will be the volume space for an expended -- a long period of time there?

  • Can you comment on that?

  • Scott Mercer - SVP & CFO

  • We're not going to preannounce a product, Christian, other than to say that we will have a highly-competitive product that our OEM customers are looking forward to purchasing as we move into the schedule next year.

  • Christian Schwab - Analyst

  • Excellent.

  • Good.

  • Doesn't it seem that there is going to be a whole lot of competition there next year?

  • You know as -- Seagate, you know, is coming in this year, and I understand Samsung is going to come Q1.

  • We now know that you are coming.

  • Believe Maxtor is also well in the development stage.

  • Now we have got seven people competing for a market of 40 million units, which is split amongst all of you is not all the great.

  • Matthew Massengill - Chairman & CEO

  • Well, you know, I think that number one, the mobile PC market is growing quite rapidly.

  • I think it's safe to say that the existing suppliers of hard drives to that market are doing a less than stellar job of servicing it adequately.

  • I think that not all drive suppliers are created equally, and that those of us with large economies of scale -- those of us with great relationships with OEM customers -- many of us with those relationships as long as they have been companies, have done a great job servicing their need, and they are looking forward to our existence.

  • So, yes, it will be competitive, and those of us with very good cost structures are going to do very well in that businesses and those with not so good cost structures are going to struggle.

  • Christian Schwab - Analyst

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • Now I would like to turn the call over to Mr. Matt Massengill.

  • Matthew Massengill - Chairman & CEO

  • Thank you very much for joining us.

  • We look forward to bringing you up to speed on our progress in our January call.