威騰電子 (WDC) 2004 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 2004.

Presently, all participants are on a listen-only mode.

Later we will conduct a question and answer session.

At that time if you would like to ask a question, you may press star one on your touchtone phone.

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'd like to remind you that during the course of this call, we will be making forward-looking statements and our comments and in response to your questions concerning our business and operational model, our reentrance into the mobile hard drive markets by the end of this calendar year, growth of the personal entertainment market, our growth of revenue, gross margin, our targeted gross margin model, operating income, the net impact of interest income and tax expense and net income earnings per share and share count for the fourth fiscal quarter.

These forward-looking statements are based on Western Digital's current expectations and are subject to a number of risks and uncertainties and actual results could differ materially as a result of several factors.

We encourage you to read the risk factors in our report on form 10-Q with period ended December 22nd, 2003 and our other SEC filings for an understanding of the factors that could cause our actual results to differ and may affect our business and results.

We undertake no obligation to update our forward-looking statements to reflect any other information or events or for any other reason, and you should not assume later in the quarter of the comments we make today are still valid.

I'd now like to turn the call over to Chairman and Chief Executive Officer, Matt Massengill.

Thank you Bob.

Good afternoon and thank you for joining us.

With me today are Arif Shakeel, President and Chief Operating Officer and Steve Milligan, Chief Financial Officer.

Steve will review our third quarter financials and the outlook for the June quarter after my remarks.

Before commenting on our Q3 performance, I want to say a few words about the industry.

We are all well aware that the industry is working through some tough issues right now.

I think some perspective is important however.

This is still a good business to be in with a right structure and that's a big part of what the industry is dealing with right now.

It is important to note the recent progress made in the distribution channel.

The industry requires that an impressive job quickly and independently reducing the inventory levels of desktop drives in the distribution channel in the March quarter through discipline and careful sell-through management.

At Western Digital, we continue to

distribution practices.

But good progress has been made.

As you have heard from others in the industry, we are currently facing very aggressive pricing at PC OEM customers.

In the March quarter, we witness some of the most severe OEM price declines in recent history.

This is unfortunate since those of us in the business understand that sustainable OEM share is never achieved on the basis of price alone.

Market forces will ultimately determine where we all go from here in managing the higher-than-ever cost to meet OEM customer demands for quality, reliability, technology, service and support.

And at the same time deliver value to our shareholders.

We will remain focused on balancing this total equation with good choices and consistently generating profits and cash.

Turning to our Q3 report, I am very pleased with our financial and operational performance in the March quarter that reflects continued operational excellence and results that are better than the overall hard drive market.

These results demonstrate the underlying strength of a business and operational model, we have spent the last four years developing.

As we have said consistently, it is a model that can succeed even in the toughest of times.

With continued execution in the hard drive business and additional benefits from the head operation, we recorded revenue of $749m on unit shipments of a $11.8m and we earned $47.9m or $0.22 per share.

Our gross margin was 16.4%.

All of these results were within the guidance provided on our December quarter call in late January.

The head operation continues to perform very well.

Our Q3 gross margin performance and our guidance for the fourth quarter reflects the efficiencies of our overall operations including heads and the business model.

We continue to make important progress in our efforts to grow the business in adjacent storage markets, including personal entertainment and enterprise and notebook computing.

In building the operating structure in business model described earlier, we have worked very hard to infuse WD with a relentless focus on efficiency and our cost structure and with our operating expenses.

A primary advantage of this approach is that we are able to address new growth opportunities without large incremental expenditures and to enter those markets profitably.

As all of these markets emerge, they will increasingly take on the more competitive attributes of the desktop hard drive markets with end-users continuing to demand faster, more powerful products at lower prices.

We understand that the way to earn and keep this business is through delivering consistent quality, reliability, and service.

So, it is critical to be structured efficiently to be able to meet these requirements.

We believe that we have put together a structure and a model to do so.

Our development effort to bring a mobile drive to market by the end of this calendar year continues to progress on plan.

We remain as committed and as excited as ever about our re-entry into this high-volume market.

We will be delivered and pragmatic as we enter this market without specific shared goals.

We have consistently described our strategy to penetrate the enterprise market with lower cost and high performance serial ATA technology as a marathon versus a sprint.

We are seeing some solid traction there.

Our Western Digital rafter, the industry's first and only 10,000 RPM serial ATA hard drive, that seemed steadily growing acceptance in an expanding breadth of applications including Linux and Wintel workstations, servers, and industrial application.

Of the serial ATA drive we shipped in the March quarter, both 7200 and 10,000 RPM, we estimate that approximately 400,000 of them were sold into the traditional

drive market.

In the personal entertainment, we continued to engage with the market leaders and the gaming and PVR/DVR segments, as this market continues to grow rapidly from its current relatively small base.

Our quarter over quarter shipments were up slightly in the March quarter to over 500,000 units.

Our major personal entertainment customers include Microsoft,

, Sony, and Pioneer and other industry leaders, and we were in qualification at a number of new accounts.

I am very pleased with the progress we are making in this market and towards the volume increase, we expect the market to be served by a small number of highly qualified drive suppliers with relatively even share awards.

In previous calls, we have also described to you our objective to grow our business in underpenetrated emergent geographic markets such as Russia, Eastern Europe, Middle East, India, and China.

Accordingly, we have made a series of investments to properly serve this new regions with expanded sales or representative offices and service centers.

We have seen our business in Asia grow significantly in the last year based on this focus and deployment of resources.

We look forward to similar success in these emerging markets.

In summary, we will remain focused on managing the business as we have been with an emphasis on generating consistent, predictable levels of profitability and cash for our shareholders.

We have a model to weather rocky times like the present and we will not be distracted from addressing the major growth opportunities immediately in front of us.

I would now like to turn the call over to our CFO, Steve Milligan.

Steve?

Thanks Matt.

Western Digital demonstrated sound market discipline and strong execution.

Additionally, our head manufacturing operations continued to ramp and we were again accretive to our third quarter earnings.

These factors enabled us to deliver another quarter of solid operational results.

Revenue for the quarter was $749m, an increase of 6% from the prior year and a decrease of 10% from the seasonally stronger December quarter.

Unit shipments of 11.8m represented an increase of 15% from the prior year and a decrease of 7% from the December quarter.

Average selling prices were approximately $64 per unit, a decrease of $2per unit from the December quartet.

We shipped more than 500,000 units to the consumer electronic sector, representing a slight increase from the seasonally stronger December quarter.

Revenue by channel was 49% OEM, 43% distribution, and 8% retail versus 51% OEM, and 43% distribution, and 6% retail for the December quarter.

We had one greater than 10% customer during the quarter and that was Dell.

The Q3 geographic

of our business was 42% North America, 30% Europe, and 28% Asia.

As compared to 41%, 31% and 28% respectively in the December quarter.

Our gross percentage for the quarter was 16.4%, down 60 basis points from the December quarter and 90 basis points from the prior year.

Our gross margins for both the March and December quarters included the accretive benefit of our head manufacturing operations.

Operating expenses for the quarter totaled $74m or 9.8% of revenue.

Operating income was $49m.

Interest and taxes totaled approximately $1m, resulting in net income of $48m or $0.22 per share.

This compares to net income for the prior year quarter of $55m or $0.26 per share.

Fully diluted shares outstanding were approximately 218m shares, essentially unchanged from the December quarter.

Now, turning to the balance sheet, our cash balance at the end of the quarter was $360m, up $42m from the December quarter.

Cash generated from operations totaled $62m.

Capital expenditures were $26m for the quarter and our non-cash charges for depreciation and amortization totaled approximately $27m.

Capital expenditures for fiscal 2004 are expected to approximate $160m.

Proceeds from auction exercises and employee stock purchases provided an additional $6m.

Our cash conversion cycle for the quarter was a negative two days, consisting of 37 days of receivables, 22 days of inventory or 17 turns, and 61 days of payables outstanding.

That was a look back at our third quarter.

Now, I will move on to our expectations for the June quarter.

The June quarter is a 14-week quarter for WD and our guidance reflects the anticipated impact to the extra week.

We expect revenue to be between $700m and $725m.

Our gross margin is expected to be approximately 16%.

Our gross margin guidance continues to reflect the favorable contribution of our integrated head operations.

We remain confident in our ability to improve our pre-acquisition gross margin model by 400 basis points given the operational efficiencies provided by our head operations.

Accordingly, assuming desktop gross margin levels return to the 14% to 18% level realize prior to our acquisition, we continued to believe a targeted gross margin model between 18% to 22% is attainable.

Operating income is expected to be between $34m and $36m.

The net of interest income and tax expense should be an expense of $1m.

Accordingly, we expect net income between $33m and $35m or earnings per share of $0.15 to $0.16 for the June quarter.

Our share count is expected to remain relatively flat quarter-on-quarter.

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

Thank you Steve.

Operator, please open the call for questions at this time.

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're received.

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

One moment please for the first question.

Rich Kugule you may ask your question and please state your company name.

Yes, Needham & Company.

Thanks.

I guess first, just on the mobile side, as we look at your entrance here, you still feel that it's important to enter the space, how do we keep Mobile from becoming the enterprise situation we have to deal with today?

Everyone just kind of marching 80 miles an hour into an intersection.

Certainly, well there is a couple of important attributes, I think the Mobile that are significantly different than the enterprise.

First of all, our expectation of the Mobile markets, gross margin characteristics is from day one that it would look more like the desktop.

That is not necessarily been the case for the past several years, and so I think its been quite an adjustment for those who have been enjoying significantly higher gross margins than that.

As the market evolves the volumes get bigger.

It's an increasingly important market for those of us that are very large-scale disk drive suppliers to satisfy.

Our customers need us to be there, they've certainly requested that we help them with those products, and we intent to enter the market.

So, both technologically from a market standpoint, it's important to be there.

As far as how do we avoid the issues in the enterprise, I think you have to look at the factors in the enterprise.

This has been a very high margin business for quite some time dominated by very small number of players, our share seems to be getting reallocated a little bit differently, pricing is coming down dramatically, it would appear margins are arriving quickly.

The incremental dollars required to be in the enterprise business are substantially higher than the incremental dollars required for us to be in the mobile business.

So, I think there is a number of factors that are different.

That being said, I do believe that the mobile market will in fact to be intensely competitive as we move through next year.

And I think our objective would be to produce a very solid product of superior quality and reliability, use the same attributes that we've done to secure and maintain a very significant OEM presence in our desktop business all these years and apply that to mobile market, and do every thing that know how to do to ensure that from very early on that's an accretive business for us.

Thanks, and I guess secondly, can you give us a little bit of color on understanding how you map out your business and you come up with your guidance?

Are we doing ourselves those of us that are looking at

are we doing ourselves a disservice almost the backhanded way of looking at market share?

Is there a different way of looking at it or do you use TAM as well internally?

Well you know I think there is a number of factors we considering when putting together a forecast.

One is what our customers are telling us based on their requirements.

We look at seasonal trends, we look at current pricing and anticipated future pricing environment to the best of our ability, we examine in the supply base, in the trends there, there is a number of factors that influence us and what we try to provide you is our best estimate based on the facts that we have and the estimates that we have sitting here today.

Obviously, almost every one of those can change in the quarter and many of those can significantly alter our forecast and our ability to perform to those levels, but we are giving you the best that we can today.

I would say that you know while we use that as forecast the TAM conversation we try our very level best to produce the drives based on how the market is consuming not so much what we think the TAM is.

I guess just lastly, since we have been discussing this in fairly good detail about the OEM being priced, the OEM situation and that's not being price aggressive, who is that really who is spurring that?

Is that the OEMs taking advantage of pitting one player of another or is it the players doing it themselves?

Is this a problem that can be resolved by better discipline on the vendor's or is there something that it is more indicative of a change in thinking on the OEM side?

Well I don't think the OEM is ever going to stop try to get the best price they can possible get in the market place.

And so, I don't think that it would be appropriate or possible for me be able to tell you know that there was a smoking gun here in the market.

It was obvious to us last quarter that somebody was far more interested in growing their OEM business than others and so that probably put more pressure than we have normally seen.

Thanks a lot Mat.

Thank you Kevin Hunt.

You may ask you question and please state you company name.

Thanks.

Thomas Weisel Partners.

A couple of things.

Can you maybe discuss what you saw as in the relative placing environment between the OEM and maybe we could be more specific, OEM versus Channel and also just a detail question, in your net income, net interest income are you going to be having it this quarter?

Is there some offset to the actual interest here in this quarter that?

Kevin, let me answer the question on interest.

We got -- that is really a net -- we have got some interest expense in there related to the $50m term loan that we have got offset by some interest income that we get with our cash balances.

But obviously given rates were not earning you know huge sums of money on our cash balances.

Did you say a $1m is what you expect for the next quarter?

That's the net of taxes and interest.

Okay.

That's also got the tax provision in there Kevin.

Okay.

All right.

The pricing question, you know as we stated and Matt talked about it already a couple of times, yes the pricing for the OEMs ware a lot steeper last quarter than even we anticipated, and the pricing even though it was aggressive in the distribution channel was perhaps not , was certainly not as tough as it was for the OEM.

And then one final question.

Can you comment on any -- on the mix of say 40 80 and 160 and above in the quarter?

Any changes from last quarter?

I don't -- we don't see any dramatic changes up for 40, 80 to 120.

However, as time goes by on a daily, weekly, monthly basis 80 will start to very slowly become a little bit bigger part of the business.

However, having said that now it has been a little more than two years that 40 still is the main capacity for both the distribution as well as the OEM business.

And over all Kevin our mix was relatively flat with fiscal Q2 overall.

Okay thanks.

Thank you.

Mark Moskowitz you may ask your question and please state your company name.

Yes.

Hi.

Thanks.

JP Morgan.

Question again on the OEM mix.

The last couple of quarters your percentage of sales to OEMs has fallen slightly.

Is that a more strategic decision on your part to preserve margins or is it more of a competitive encroachment?

Then secondly, as far the head business -- I was wondering if you could comment on the absolute level of attrition in the March quarter in terms of how it compares to December, should we see some more movement up in June and lastly as far as the tax rate, how did you get the lower tax rate in the March quarter?

Okay.

On the OEM question, I don't think there is any significant shift in our strategic thinking about how we deal with OEMs.

OEM customers are very important part of our business.

I think we got a good job balancing our OEM business where we probably have the best portfolio of OEM company doing business with us then we have had in a very long time as a corporation.

So, it's a more balanced business.

Last quarter I think what you saw is our retail numbers were up fairly nicely as a percentage of our revenues; distribution was almost exactly the same.

I would also comment that as we improve our business in some of the emerging areas, that's almost exclusively white-box business to some degree, and so that added some business there, but I wouldn't read anything into those numbers.

I would say that, over the past several quarters there is only been significant shift in our strategy, as it pertains to the OEMs.

We are selective about the business that we pursue.

Obviously, business -- it's in good businesses and interesting to us, and so we will continue to manage this thing on a daily basis, and run it to satisfy customer requirements, at the same time maximizing our opportunities for our shareholders.

With that Steve can give next two.

And Mark on the accretive impact of our head operations, consistent with what we have talked about in the past, we're not going to provide a specific number regarding that, but consistent with last quarter, it was solidly accretive for earnings.

On the tax rate, what we did is we took a look at our geographical mix of income, for our three quarters today and

that up to a year-to-date effected tax rate of 3% versus 3.5% that we had in there before, and that provided us with a slight benefit in the current quarter about of $600,000.

Okay.

Thanks.

Christian Schwab, you may ask your question and please state your company name.

It's from Craig-Hallum.

Great quarter.

Regarding the statement on SATA 400,000, how did that compare to the December quarter?

I don't think we brought that in December quarter.

Our comment was that, until it was big enough to talk about, we didn't really think we needed to comment.

We've seen tremendous uplift in the number of Serial ATA drive shipping in the market generally.

In addition to that, the number that's being supplied into what we assume to be our enterprise price applications has grown fairly nicely in the past couple of quarters.

Fantastic.

Just in line with the

and ASP, what is your expectation for that on a sequential basis?

Do you expect it to be, I mean, in line with Seagate or in line with seasonality?

Well, I think that we would expect it from the calendar Q1 to calendar Q2 time frame that we will see seasonal softness.

And so we are anticipating the market will be down and we're taking longer lines of 3% to 5%.

We also expect that ASPs could drift downward in the quarter.

That's traditionally the case in a software demand environment.

We aren't providing specific unit guidance, but those are the two factors that we consider when establishing guidance that we just gave you.

Great, fantastic.

Thank you.

Thank you.

Gabriel Tsuboyama, your line is open.

Please state your company name.

Hi, Deutsche Bank.

Thanks for taking my question.

Could you first comment on the Opex being higher sequentially?

I wonder if a portion of that, if you could even break it out, maybe what was attributable to the head operation versus maybe what was attributable to the mobile drive development?

Hi Gab, this is Steve.

Most of the increase was due to our mobile operations or the development effort related to our mobile.

Okay.

Thanks.

And secondly you stated that you did 500,000 units of consumer electronics, did that -- the mix within that CE segment, was it more towards PVR?

And could you also elaborate now as to -- have you always thought that you could take even share in the PVR segment of roughly I guess a third, a third, a third, if you just cut out the three large American players or has that thinking shifted recently?

Well, I don't know the market will be split evenly, but I think our commentary is that we're not going to see a disproportionate amount of share at anybody's hands, given the nature of the business.

This is consumer electronics, a very cost sensitive market.

It's becoming a very high volume market.

In our experience, in the past that whenever markets exhibit those sorts of characteristics, customers tend to want the spread the risk.

And so our expectation would be that they will spread the risk in a similar way that they do in other high volume markets, which would suggest that nobody is going to have a larger percentage.

As far as our qualitative comment with regards to our PVR/DVR versus gaming business, PVR/DVR over the last several quarters has become a better and better part of our business for us, and we anticipate as we move through this year, it will continue to grow faster than it

And we are not going to provide any specific numbers at this time, but certainly as the year goes on, we will continue to update you on our progress there.

Again, this is Steve, I misinterpreted your earlier question.

I thought you were referring to Q3 versus Q2, our increase over Q4 OPEX have to do with the extra week of the 14th week in Q4.

Okay, now my original question was Q3 versus Q2.

Oh, I am sorry.

And then my final question is, I think if you go back to the September quarter of last year, you may comment about how -- I think your overall share in the desktop dropped because you walked away from some business that you didn't want to go after.

Could you remind us, what that was in the distribution channel or maybe even OEM business?

We did not break it out, where it was and we are not going to do at this moment, but I would like to say that it was, you know, we are back to the 25 inch standard market share, I believe for last quarter and September we were down about a point and a half, if I remember correctly.

Again, I think the way I will think about it is when people were trying to push more volume than the market needs, it puts pressure just about everywhere and so, we just carefully evaluate, where it makes sense for us to be and where it doesn't in a given quarter.

Okay, thanks very much guys.

Thank you.

Rob Cihra, your line is open, please state your company name.

Hi, thanks very much.

Fulcrum Partners.

Two different things if that is right.

One is, I know you guys are not talking about the number of heads being build, but at the same time, one point you guys had given the goal of the code and core capability of producing 30m heads internally, but existing June, I think it was.

And just a second, I get that back, still your goal -- and is there just any way of giving us an idea of maybe how much of, percentage wise your pricing of your own head now versus what your plan is maybe in the next quarter and the quarter after.

Or to put in other way, how far you are up that ramp of integrating the head operations, I mean are you sort of half way there, or you at the quarter of the layer, or are you all the way there in terms of, just to give an idea of, where that ramp goes and where the end point is?

Thanks.

All right.

Let me answer the first part, which was we had said that we would the capability of producing 30m heads in the June quarter.

We are at that point, as we schedule in the June quarter, we will have the capability to produce 30m heads.

Matt, if you want to take item two, three and four?

Sure.

Rob, I will give you credit for trying to find seven different ways to ask us the same question, we are not going to answer, but.

But now it's very important that for us, for a number of reasons that we don't break that out, and we are not trying to be over a cryptic for you.

As you know, we are a pretty open company when it comes to that kind of things, but I think to reach a point as we exit the June quarter, we are very confident, we are in a position to built 30m heads.

You know, we are obviously closer to that timeframe to date, and we are well we startled and I said in my commentary, the business is meeting or exceeding all of this objectives.

Okay, I guess, this should -- I know you don't want give any more than that, but when you talk about the contribution to gross margin, or it being accretive, is that something that you will be accretive?

Sequentially still to have several more quarters going forward, or we already sort of most of the way through that.

I would -- only answer that question, to say as, we where not done yet.

Okay.

Thanks very much.

Thank you.

Keith

, your line is open, please state your company name.

All right.

Thank you, can you hear me.

Yes.

Great good.

In terms of the gross margin just one detail question, I miss what you said, you anticipated the gross margin to be in the June quarter place?

Equally expected to be approximately 16%.

16% even.

And then just trying to follow up on Rob, question for a second -- in the second half of the year, you said 30m head capability in the June quarter.

But in the second half of the year, are the benefits of that are fully reflected, do you think in your income statement, and what would it for September and December quarters?

Let me just try.

Let me tell you, what I am going to be able to tell you.

We are working on a time line that would allow us to be able to produce 30m heads, is -- actually at the June quarter.

We feel very confident in our ability to do that.

We have not yet achieved all of the efficiencies that we can achieve out of that operation.

And so as we move foreword in time, we can anticipate improvements as a result of that.

I am not in a position to quantify that for you.

Okay, thanks.

And then on, just on AFPs, you mentioned that AFPs might be a little more difficult than, I think it is centrally at 3% sequential decline in the March quarter

What would any kind of color, do you anticipate seeing some release ASPs as you get into the seasonal back half of the year, one reason that you wouldn't think that that would continue?

Typically what we have observed in the past in the marketplace, is that you know, you have improving ASP environments as you get into calendar Q3 and Q4, and softer ASP environments in Q1 and Q2, calendar.

And I don't know that there is anything that we would see that would suggest that that's going to be any different.

I am not sure we characterized our fiscal Q4 as being more aggressive than fiscal Q3.

I think what we said was that we are anticipating ASP pressure in the quarter, and we haven't quantified that.

Thanks very much.

Thank you, Mark Miller your line is open.

Please state your company name.

It's Hoefer & Arnett.

Just wanted to go back to this PVR or consumer electronic shipped, are you breaking out any more XBox in terms of unit shipped and is that included in this 500,000 unit figure or any other gaming application?

Mark we are not providing specifically what the XBox volumes were and the 500,000 units that quarter included the XBox volumes.

Okay, the second question, inventory has almost doubled, kind of curious in terms of

December quarter, what's the reason for that?

Inventory doubled, inventory was down Mark.

I got $149m in March '04, was it at $70m something in December?

No, it was at about $155m and change as well, so it was down.

Okay, well it was $97m in June I guess that's what I was looking at.

Clearly it's up from the beginning of this fiscal year because of the head manufacturing operations.

Okay.

There is the reports that in the second last year that there is enough people under the market

substrates could be in shortage.

I am just wondering do, if you have an adequate supply to launch or ramp or is that going affect you?

We, I believe we talked about that last time but let me just restate, we have been working both with substrate suppliers and media suppliers, and we are very confident that we have supply for the back half or when we introduce a product for the rest of this calendar year.

The final question is that you are spending capital both

facilities.

Is this going to be mainly through cash flow or do you expect to do some series secondary financing?

At this point we are looking at financing our capital expenditures via our cash flow generation.

Thank you.

Thank you.

Harry Blount, your line is open and please state your company name.

Lehman Brothers.

Just a question on product transition, how would you expect that to impact the June quarter given that a number of companies are having product transactions in the September timeframe?

I don't think that desktop market is going to see any major product transition in the September quarter.

I believe you were referring it to the enterprise marketplace, and as you well know, we are not in that particular marketplace except we play through our serial ATA market.

I am talking to a couple of the fronts actually, because it sounds like we've got some new product introductions obviously coming on the mobile side as well but also we are going to start seeing more high capacity competition within the more traditional desktop arena.

I believe from an aerial density prospective, we are not going to see a new offering, however there maybe product offerings, and we don't consider that as a product transition, that is just a product offering from one or more players.

Yes, and I think here Harry, that high end of the market is beginning to grow.

A big chunk of that market is servicing the enterprise serial ATA space, so it just continues to add credence to our belief that serial ATA will continue to pick larger and larger presence in the enterprise market space.

And some on TVR as well, next question as it relates to coming back to the OEM distribution pricing discrepancy, have you seen any kind of OEM behavior to this point channeling some of those drives back into the gray market as a result of that discrepancy?

You know, customers that would be considered OEMs wouldn't exhibit that behavior; a company that would distribute disk drive would be a distributor not an OEM.

So, you know we try to put some fairly stringent rules in place into our base as to who we call an OEM and who we call a distributor, and I can tell you that it would be a very short lived operation for an OEM that would be distributing our product they are not authorized to do so.

And I am concerned obviously from an industry standpoint as and there are second-tier OEMs out there.

Again if there are OEM's that are distributing products then they are distributors not OEM's.

Okay.

Thank you.

Once again if any one would like to ask a question please press star one on your touch-tone phone.

Once again, if any one does have a question, please press star one.

Naveen Bobba your line is open.

Please state your company name.

Bear Stearns.

Thank you.

A nice quarter guys.

Thanks.

First, Matt can you talk about demands so far in the quarter, April is a typically a jobby month.

Is that how it's playing out or there is any different this time around?

Well, we always expect April to be pretty and we're hardly ever surprised.

And on the same topic, Steve first when does your June quarter end.

Is it July 2?

July

Okay.

Now will the month of June still constitute about 50% of the business, that's your typical pattern?

We expect that right now it should, you know, follow the seasonal patterns in terms of the calendar period.

So, June is usually the heaviest month for our fiscal Q4.

Okay.

And Steve you have a CAPEX estimate of fiscal '05?

We're actually working through that Naveen, right now.

But right now, we're anticipating that our CAPEX levels will increase in fiscal '05 due to a few factors.

One has to do with the mobile launch, and also as we continue to improve and expand our head operations.

So we should see an increase, but right now we're not prepared to provide a number and we'll talk more about that in the July call.

Finally, Matt structurally nothing has changed with the desktop segment in the recent past.

The top-three vendors still hold about 80% to 85% of the market.

And yet saving has been aggressive.

I won't ask you why that is but what do you think will get the industry out of this condition.

Well I think it really gets back to insuring that we're all doing a good job managing our bill plans and expectations, and this problem started back in September.

It started in September when a couple of suppliers decided to produce more disk drives than the market needed and we've been pushing that way for several quarters now.

And sooner or later that has to be dealt with and we certainly felt the effect of that.

So, it really gets down to just good business operating decisions and insuring that we're doing a good job matching our customer demand to our bill plans and satisfying that as close to the point of consumption as possible.

Thank you.

Thank you.

Thank you.

Laura Guimond, your line is open.

Please state your company name.

Robert Baird.

First of all going back to the tax rate, isn't it going forward it will be closer to this 3% level or back up to the

3.5%, 4%?

That's hard to say.

I wouldn't model something in the 3% to 5% range.

It really depends upon a lot of different factors that frankly

are hard to predict.

Okay.

And then second, HP was not a 10% customer this quarter.

Looking forward, do you expect that to continue to be the case or was this quarter a little unusual?

I don't think there is anything unusual about the quarter, I mean, as you know HP tends to be a very strong consumer player for the PC market , you have to remember where we play with

.

And so as we move forward, we'll continue to work closely with HP.

They are a valued customer and I wouldn't read too much into that.

Okay.

And then finally just wondering about your accounts receivable, they were down pretty significantly this quarter, was that because of a change on how the sales fell during the quarter or some other reason?

No it really wasn't, there was really no difference between our fiscal Q2.

We did a good job from a collections activity standpoint and that really drove our decrease in receivables.

But linearity was fairly consistent this quarter compared to the prior quarter.

So, It was really receivables performance, just collection.

Great.

Thanks.

Thank you all for joining us for our call today.

We look forward to updating you in July and just a note of thanks to all of Western Digital employees and partners that work so hard to deliver some pretty good results for us in this quarter.