威騰電子 (WDC) 2005 Q4 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good day, everyone and welcome to the Komag Incorporated Fourth Quarter Fiscal 2005 Earnings Conference Call. Today's conference call is being recorded. I will now turn the conference over to the Chief Executive Officer of Komag, Mr. T. H. Tan. Please go ahead, sir.

  • T. H. Tan - CEO

  • Thank you. Good afternoon. I'm T. H. Tan, CEO of Komag. With me on the call today are Mike Russak, our CTO; Tim Harris, our COO; Kathy Bayless, our CFO; and other company officers.

  • Today, I will ask Kathy Bayless to discuss our financial performance for the fourth quarter of 2005 and the whole 2005 fiscal year. Then Mike will discuss customer and market conditions. And I will discuss operations, our outlook for the first quarter of 2006 and make a few closing comments, and we'll open it up for Q&A. Kathy?

  • Kathy Bayless - SVP & CFO

  • Thank you, T. H. Before we begin today, I'd like to remind the audience that we will be making forward-looking statements during this conference call, such as the statements regarding our outlook for the first quarter of 2006, our expected capacity and capital spending for 2006 and our estimated 2006 tax rate. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from our forecast. These forward-looking statements speak as of today, and you should not rely on them as representing Komag's views in the future.

  • We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made. In addition to the factors that may be discussed on this call, important factors that could cause actual results to differ materially are contained in our press release today announcing our fourth quarter results, and in our recent SEC filings, including our Annual Report on Form 10-K for the year ended January 2nd, 2005. Copies of these documents may be obtained from the SEC's website, or by visiting the Investor Relations portion of our website. The press release describing our fiscal year and fourth quarter 2005 final results is currently posted on our website at www.Komag.com.

  • Now I will review our financial performance for the 2005 fiscal year and the fourth quarter 2005. Net sales for the 2005 fiscal year totaled 685.9 million, a 50% increase from 2004 net sales of 458.4 million. Finished disk shipments were 107 million units in 2005, a 51% increase over 2004. Net income for 2005 was 115.6 million, a 125% increase over 2004. Diluted earnings per share for 2005 were $3.55, a 108% increase over the prior year.

  • For the fourth quarter of 2005, net sales totaled 192.9 million, compared to 180 million in the third quarter of 2005 and 131 million in the fourth quarter of 2004. This is a 7% increase from the prior quarter and a 47% increase from the year-ago quarter. Finished disk shipments were 29.7 million in the fourth quarter, compared to 27.5 million in the prior quarter, full factory -- full capacity for both quarters.

  • Unit shipments in the year-ago quarter were 19.8 million. Other disk revenue provided 24.7 million of revenue in the fourth quarter of 2005 compared to 24.3 million in the prior quarter and 18.8 million in the year-ago quarter. Net income and diluted earnings per share in the fourth quarter of 2005 were 35.2 million and $1.07 per share respectively compared to 32 million and $0.97 per share in the prior quarter.

  • Net income and diluted earnings per share in the year-ago quarter were 15.8 million and $0.51 per share respectively. Our income tax provision for the fourth quarter of 2005 was 2.2 million compared to 1.1 million in the prior quarter. The tax rate for 2005 was approximately 4.5%. We currently expect the 2006 tax rate to approximate 4%. The tax provision is primarily non-cash due to tax holidays in Malaysia through 2016.

  • Net margin was approximately 18.3% in the fourth quarter of 2005, compared with 17.8% in the prior quarter. Operating expenses in the fourth quarter were approximately 10% of revenue, similar to the prior quarter.

  • On the balance sheet and cash flow, we ended the fourth quarter of 2005 with 205 million of cash compared to 178.9 million at the end of the prior quarter and 104 million at the end of this prior year. And the accounts receivable balance was 116 million compared to 116 in the third quarter, reflecting higher sales in the fourth quarter and timing of customer payments.

  • Net inventory was 54 million, compared to 49.4 at the end of the prior quarter. Majority of the increase was for raw material inventory to support increased production levels to meet continuing strong customer demand. Depreciation was 12.6 million compared to 11.2 million in the prior quarter and capital expenditures were approximately 92 million in the fourth quarter of 2005 compared to 191 for the year. I will now turn it over to Mike.

  • Mike Russak - CTO

  • Thank you, Kathy. Sales mix by major customer was Maxtor at 31%; Western Digital at 30%; Hitachi at 20; and Seagate at 14%. Shipments of 100 gigabyte per platter and above advanced disks increased to 36% of total finished unit shipments -- 10.7 million units -- compared to 30% of disks shipped in the prior quarter which was 8.3 million units. These advanced disks are primarily targeted for multi platter consumer electronic applications including PVR and DVR applications, as well as near-line storage.

  • Enterprise disk shipments of 70 millimeter and 84 millimeter disks for 15,000 and 10,000 RPM high-end server applications, totaled 1.8 million unites, compared to 2.1 million in the prior quarter. Our blended average selling price was similar to the prior quarter, with an increase in high-capacity disk shipments offsetting a lower percentage of Enterprise disk shipments. We expect a similar trend in product mix in the first quarter of 2006, resulting in a stable blended ASP. About 13% of our fourth quarter revenue was derived from sales of nickel-plated polish substrates and related products.

  • On the technology and product development fronts, Komag continues to be well-positioned to support both longitudinal magnetic recording and perpendicular magnetic recording media for the next generation HDD products. Recently, a lot has been said about the transition from longitudinal recording to perpendicular recording. We would like to make a few comments on that subject as well.

  • Clearly, the transition from LMR to PMR is expected to enable continued aerial density growth rate for magnetic storage at least a 40% per year-over-year rate. And we believe this transition is necessary for the survival of our industry. As we have already seen, the transition is taking place in smaller form factor drives, first, and is expected lastly in the 95 millimeter form factor drive. We expect this transition for 95 millimeter products to begin gradually over the next year to year-and-a-half.

  • Our customers command about 90% share of the 95 millimeter form factor HDD market space. Each customer will most likely transition their products from LMR to PMR at different paces. As a result, we expect that 160 gigabyte per platter LMR disks will peacefully coexist with 200-plus gigabyte per platter PMR disks well into calendar year 2007, if not longer.

  • As we noted in our last quarterly conference call, we expect that the first PMR disks produced by Komag will be for Enterprise HDDs. We still believe this is true. In fact, as we speak, we're bringing up our first PMR capable manufacturing line in Malaysia in preparation for volume shipments later this year.

  • Additionally, we expect to ship 160 gigabyte per platter LMR disks this quarter, and are beginning qualification on several 200-plus gigabyte per platter 95 millimeter PMR programs. Finally, on the subject of 65-millimeter Almag disks for mobile applications, we are in the final stages of qualification on a program, and we expect first volumes to start by the end of Q1. But meaningful volumes are now expected to start in Q2. In addition, we are currently working with other customers on potential additional programs.

  • Now, T.H. will provide some further comments on the fourth quarter and the 2005 fiscal year as well as our business outlook.

  • T. H. Tan - CEO

  • Thank you, Mike. As you can understand, we are extremely pleased with another consecutive quarter of outstanding performance in 2005. In addition, we are very proud of three full consecutive years of continuing annual growth and profitability, with 2005 revenue and earnings per share at all-time highs for Komag.

  • Our 2005 annual revenue and net income increased 50% and 125% respectively over the prior year. Fourth quarter 2005 revenue and net income increased 47% and 124% respectively over the prior year. In our manufacturing operations, we continued our strong execution with excellent yields and productivity leading to a gross margin of 28.4% in the fourth quarter of 2005, while bringing up new manufacturing capacities. We continued to run at full capacity in the fourth quarter and we are able to bring up the first new production capacity ahead of schedule, resulting in finished disk shipments of 29.7 million units compared to 27.5 million units in the prior quarter.

  • With the completion of the installation and qualification of the new equipment for this capacity expansion, completed ahead of schedule, we expect to have approximately 31 million of finished disk capacity in the first quarter of 2006. In addition, we continue to proceed with our plans for capacity of 40 million disks per quarter by the time we exit Q4 '06. This additional capacity will be added in a modular fashion and is geared towards the second half of 2006.

  • Total capital spending in 2006 is currently expected to approximate 200 million to 250 million. It is important to remember that our capacity expansion plans are part of strategic supply agreements we signed with several customers. In these agreements, Komag has made commitments to deliver certain level of media and our customers have made commitments to purchase certain levels of media. In addition, our customers are making certain prepayments for media to help mitigate the cash cost of the expansion. We believe that these agreements with our customers are true win/win situations. It allows us to meet their increasing need for disks by increasing capacity in a very prudent and responsible way. We believe this reflects true [certain] relationships with our customers and we appreciate their support.

  • In December of 2005, Seagate and Maxtor announced that Seagate plans to acquire Maxtor. Both Seagate and Maxtor are customers of Komag and we have strategic supply agreements with both. Also in December of 2005, Seagate and Komag reaffirmed our strategic relationship. Upon the closing of acquisition of Maxtor by Seagate, Seagate would be the successor to the strategic supply agreement between Maxtor and Komag. We anticipate that after the closing of the acquisition we will be supplying Seagate volumes of media that approximate the sum of both the Seagate and Maxtor agreements. I would like to thank all of our employees worldwide for their continuing extraordinary efforts, which make these outstanding results possible.

  • Looking forward, early indications for overall market demand in 2006 remains very strong, and media and substrate capacity remain tight. Based on customer demand, we expect total revenue for the first quarter of 2006 could increase 2% to 4% from the fourth quarter. With this level of revenue in the first quarter and continuing excellent factory productivity, we believe that net margins will be similar to the Q4 '05 at approximately 17% to 18%.

  • We are optimistic about the outlook for growing demand for disk drives and disks in both traditional computer related markets, as well as the expanding market for consumer electronic devices such as PVR, DVR, HDTV, external storage, gaming and other home entertainment devices. We believe that we continue to be well-positioned to benefit from this growing demand for disk drives in multiple markets and applications. In summary, we believe we have the right financial model. We are committed to maintaining low-cost manufacturing, technology leadership and we continue to strengthen our strategic customer relationships, grow our business and provide positive financial performance. Now, I would like to turn the call over to Erica to conduct Q&A.

  • Operator

  • [Operator Instructions] Our first question will come from Kevin Hunt with Thomas Weisel Partners.

  • Kevin Hunt - Analyst

  • Thank you. A couple of questions. First, regarding the Seagate and Maxtor merger, do you think there's any possibility you could actually get an increase in demand from your other customers, Western Digital and Hitachi, where they could kind of gain some market share over the next 6 to 12 months from this merger? That's the first one.

  • The second question is regarding gross margin. You've done a really good job keeping margin -- actually improving it on the gross margin while you're adding capacity. Can you kind of go through the dynamics of what we should expect as you add additional capacity in 2006? Should we expect that to continue to kind of stay in the same range or should we expect some kind of dip in gross margin as you bring on, sort of, capacity?

  • T. H. Tan - CEO

  • Okay. Kevin, the first part is that [inaudible - accent] part, we're not going to answer that kind of question, okay. So sorry about that. But the second part is here about gross margins and what do you expect, I want you to look at how we do our expansion in the last quarter. We brought in the new machines and our new capacity, but we were also shipping products and bring in revenues in the same timeframe. And since we already had been driving at full capacity before we added new capacity, so we're already operating as a very high-end of the gross margin limit.

  • Then when we bring in new capacity, we achieved a successful to -- not have decrease in the gross margin, but we're able to hold it and that's the way we want to continue during this coming year, okay. By bringing in new machines, only for couple or one week, definitely one week we're bringing onstream, we sell them as we try to keep the gross margins at the high 20s. And of course, that also speaks for the net margins. So if there is [enough answers] - for you, Kevin.

  • Kevin Hunt - Analyst

  • Yes. No that's -- thank you.

  • T. H. Tan - CEO

  • Thanks.

  • Operator

  • Our next question will come from Shebly Seyrafi with Kaufman Brothers.

  • Shebly Seyrafi - Analyst

  • Yes. Thank you very much. So first question is your inventory increased by $5 million sequentially with an ASP of around $5 or so that would imply roughly 1 million units were added to inventory, yet you I think produced at or slightly above your prior capacity target of $29 million. So I'm curious if your capacity is already at over 30 million, that's question number one. And going to that inventory -- why the inventory increase that all? Thank you.

  • Kathy Bayless - SVP & CFO

  • Hi, Shebly, this is Kathy. I'll take the inventory question. Basically what I said on the script is that basically the increase in inventory is all raw materials. As we increase our production levels, we need more raw materials to support the production.

  • Shebly Seyrafi - Analyst

  • No finished goods increase at all?

  • Kathy Bayless - SVP & CFO

  • There was not much change.

  • Shebly Seyrafi - Analyst

  • Okay. Second question is your mobile is going to ramp 65 millimeter in the second quarter. First of all, how many customers should we expect you to start with? And secondly, do you have a target for mobile as a percentage of units per revenue exiting this year.

  • Mike Russak - CTO

  • We just - to answer the second part. This is Mike. We don't have a set target. We're looking at this as an incremental opportunity to our main desktop business. And I think, what we said in the -- I mean I know what we said in the script is that we're in the late stages of qualification in at least one program, which would imply at this point one customer. And we're continuing to work with others and it's too early yet to predict the number of programs that will develop over the year.

  • Shebly Seyrafi - Analyst

  • Thank you.

  • Operator

  • We move next to Paul Mansky with Citigroup.

  • Paul Mansky - Analyst

  • Yes. Great quarter. On the last earnings call and not to nitpick here, but you indicated actually that you expected ASPs to be up sequentially in December, and potentially through the first half of '06. It looks like they're actually down $0.01 or so. Can you talk in a little but more detail about what went on there? Is that entirely due to the enterprise, which looks like it was down sequentially or maybe some relative mix between 80s and 100s? And then talk about how we should think about that over the next couple of quarters.

  • Kathy Bayless - SVP & CFO

  • Hi, Paul, this is Kathy. I'll take that question. From an ASP standpoint, I mean, we continued the -- I think, as we mentioned on the call we did continue to transition to a higher percentage of total units at the 100 gig and above, and -- but the enterprise units were a little bit lower than last quarter. So higher mix ASP at 100 and above, but a little bit less on enterprise which we ended up, relatively flat.

  • Paul Mansky - Analyst

  • And do you expect that to gravitate back towards the mean next quarter?

  • Kathy Bayless - SVP & CFO

  • Well, I think we're looking for continuing stability.

  • Paul Mansky - Analyst

  • Okay. And then just as a follow-up. Can you talk a little bit about your relationship with Hitachi? Any concerns there maybe related to their increase in their mix of internally sourced media?

  • T. H. Tan - CEO

  • Well, we have been working with people who have vertical integration model but they always see us as a strategic outsource. In Hitachi, we had the only aluminum based media outsourced to them. They do not leave without a substrate that we provide, so even for the internal disk, they have to buy the substrate from us - that's why we sell substrates, by the way. So we see our growth being in tandem with our internal growth.

  • Paul Mansky - Analyst

  • Great.

  • T. H. Tan - CEO

  • That's all I can tell you. Thanks

  • Paul Mansky - Analyst

  • Okay. And just by way of housekeeping, what was your headcount at the end of the quarter?

  • T. H. Tan - CEO

  • We don't give you numbers, but we are only adding direct labor to keep up with the volume, and our managerial and engineering forces are quite stable. But we just don't give out details.

  • Paul Mansky - Analyst

  • Great. Thank you.

  • T. H. Tan - CEO

  • Thank you.

  • Operator

  • Our next question will come from Andrew Neff with Bear Stearns.

  • Andrew Neff - Analyst

  • Sure. Two things, if I could. One is, when you talk about capacity, are you factoring -- are you including 65 millimeter in that or is that incremental to what you could produce?

  • T. H. Tan - CEO

  • Until the program - this is Tan -- again this program is launched and we would not know the total size. But so far, we look at 2.5 inch aluminum base to be incremental to our licensing business, okay. In a quarter or two we will have better feel for the size and we will see whether it is in substitution of things going on. But the more our customers are saying, it is good as 2.5 inch large base incremental to their business plan, not a substitution alone. We will see.

  • Andrew Neff - Analyst

  • And I guess, well, I'm just trying to understand from -- when you're talking about the -- your production plans, are you including the 65 millimeter in that or would that be on top of that?

  • T. H. Tan - CEO

  • Our capacity is fungible and of the same line and same thing it's going to do any size. Again, we're not treating them as 2.5 inch century or 3.5 inch century.

  • Andrew Neff - Analyst

  • Okay.

  • T. H. Tan - CEO

  • Yes. I don't know the other things. We are very easily converting one to another.

  • Andrew Neff - Analyst

  • And what's the pricing differential between 65 and 95?

  • T. H. Tan - CEO

  • Again, I'm very sorry. I cannot tell you these things.

  • Andrew Neff - Analyst

  • Is it substantially different or what?

  • T. H. Tan - CEO

  • What I can tell you is this aluminum offer a cost advantage besides a performance advantage over glass, okay. If you take that and you go out and if you look at what glass base medias has arranged and see they are essentially going to offer is cost advantage, a significant one. At the same time, we have got a performance advantage.

  • Andrew Neff - Analyst

  • And then two other quick questions. The relationships you've announced with Maxtor and Seagate and others, have you given a timeframe for how long those agreements are?

  • T. H. Tan - CEO

  • Well, I want you to look firstly. First of all, every single agreement we sign with our customers are on file. All right. You can read them. They're all multi-years -- I can tell you one thing -- it's multi-years. Okay. And this is the year of great substrate demand to-date and going through a whole year, as you can hear from other conference calls with other people.

  • Andrew Neff - Analyst

  • And then lastly, just -- I mean, I know you're sold out. So it may be an explanation, but the percentage of Maxtor as a percent of the mix was down sequentially as was Seagate. Can you sort of talk about what was going on in that respect?

  • T. H. Tan - CEO

  • If you look back many quarters, you'll see our aim has always been balancing our top four customers. Our goal is we want to be would be all across the world. We're working on that for the last two years in a row, and we are just getting there and due to merger efforts, we changed some. But it doesn't change the overall drive, which is keep all of the customers equally important to ourselves and us equally important to them. So that sequential drop you see is by design.

  • Andrew Neff - Analyst

  • Okay.

  • T. H. Tan - CEO

  • By growing the base larger and faster -- okay -- and also getting more shipments to other customers that are ion the second and third tiers.

  • Andrew Neff - Analyst

  • And then, I guess, just one last more, if I could. Just in terms of the margin implications of a shift from LMR to PMR, are there more steps involved or there's more any other cost advantage? What's your sense about the implications broadly of that switch?

  • T. H. Tan - CEO

  • Okay. First of all -- as I understand -- okay -- people go to PMR to get to promote the sales just being increased, but there is also a yield impact and there's a cost impact. And we're going to provide PMR to people who need PMR. We're going to sell LMR to people who need LMR.

  • So for us, we are going to be having the same margin. And it doesn't make sense for us to sacrifice one for the other. We just sell to anyone who wants anything. We have the technologies for both kinds, but we're going to make a lot of equal or similar margin.

  • And the customers make their own decision. If they may have a lot of advantage by using PMR, then they go ahead and do it. If they have an advantage by using LMR, because they have a more mature business -- more mature technology enhance and channel, then really we are very happy to do business with both kind of customers. And we'd like to have the same amount of business.

  • Andrew Neff - Analyst

  • Thank you.

  • T. H. Tan - CEO

  • Thank you.

  • Operator

  • We'll move next to Mark Miller with Hoefer and Arnett.

  • Mark Miller - Analyst

  • Congratulations on another record quarter -- it's becoming kind of routine to say. Just a couple of questions, I'm a little confused. And can you give us a little more information about 160 longitudinal and perpendicular? How they roll out this year? I mean where will you be by the end of the year, in terms of 160 longitudinal and perpendicular as a percent of shifts -- just roughly?

  • Mike Russak - CTO

  • Yes. This is Mike. Hi, Mark.

  • Mark Miller - Analyst

  • Hi.

  • Mike Russak - CTO

  • It's difficult to be very specific. We would expect to be in late stages of qualification and possibly early shipments of some PMR product. And againas I mentioned in the comments, as we go across the customer base, people are rolling out the products at different rates, but I would expect to see some small volume of PMR this year. But, at this point, I don't think we could predict what percentage of product would be there.

  • Mark Miller - Analyst

  • What about longitudinal 160?

  • Mike Russak - CTO

  • Longitudinal 160 is the -- longitudinal is the magnetics of choice for 160. I believe all of our 160 programs will be LMR.

  • Mark Miller - Analyst

  • Okay. Just wondering in terms of the aluminum magnesium, are there other possibilities that this substrate might find its way into say server or [games]? I mean should we just assume it's for mobile or you feel it could expand in terms of its usage?

  • Mike Russak - CTO

  • Yes. We believe there are several opportunities. Now as you well know, we're already shipping in the enterprise space 70 millimeter and 84 millimeter, and then other customers or other companies have 65 millimeter. That's all aluminum in -- Almag-based disks in the server space. In addition to that, we believe we'll start to see some unique applications of aluminum into some gaming applications, into what we kind of kiddingly say stationary mobile application where youhave a device such as a play station or something and you will sit down on the table and use it, and yet it is portable if you want to pick it up and move it around. So yes, we're seeing more applications open for Almag as we go along.

  • Mark Miller - Analyst

  • For 65?

  • Mike Russak - CTO

  • Yes 65.

  • Mark Miller - Analyst

  • Just finally, any feeling about there's a lot of equipment being ordered, and you've -- have you seen any delays especially from your sputtering equipment vendor or vendors or are things rolling out smoothly with these people because you're buying --putting a lot of equipment in.

  • T. H. Tan - CEO

  • We have planned on these expansions months ahead and we have great relationships with equipment makers. So everything that we're putting in our plan this year will be covered and lead time, yes we have been doing as whole as the lead time is nine months and beyond. And this is good thing that big time is long so that delivery can just set on to volume tomorrow. We have to make sure that these volumes are brought into the market in an orderly, prudent and responsible manner and we are an example of that. First, and all the lead time is a function of the [formation] in the past five years which is powerful result of revenue and growth. And before that, so now the world is waking up to this. You better grow in an orderly manner and we're doing that. And our equipment is all placed. The orders are well in the queue. And we are very happy with what we are seeing.

  • Mark Miller - Analyst

  • Well, God forbid this happen, but you are ramping the 40 gig, is what you're talking about at the end of the year. If for some unforeseen reason the market doesn't develop that way, are you committed to take equipment to further that capacity even if the market doesn't play out that way?

  • T. H. Tan - CEO

  • The way we operate and you can see whether how we operate so far you've been watching us for so long. We are doing it in a very modular manner, and we are mainly pulled by how. We are able to accommodate any powerful market shift. I think market shows something that due to any reason, okay, geopolitical or whatever, we can now delay the installation and delay the cash outflow. So we are very happy with what we have been able to do. It's just not talk. We have been able to do it, the world can see, and we are very confident about this year.

  • Mark Miller - Analyst

  • All right. Congratulations again on another record quarter.

  • T. H. Tan - CEO

  • Thanks.

  • Operator

  • And next we'll hear from Mark Moskowitz with JP Morgan.

  • Mark Moskowitz - Analyst

  • Hi. Thank you. A couple of question, if I may. The first one to Kathy. I want to get back to the gross margin for a second. If you can give us some sort of sense in terms of where we should think about margins going forward, if you're already peaking or on the verge of peaking?

  • And the reason I ask this is I think that a lot of the useful life of your assets already in place - or your equipment in place have been fully utilize or written off and so the depreciation hasn't been as say poignant as it may be going forward given all the CapEx you put forth in 2005 and also [force] coming into 2006. So can you give us a sense in terms of how big of a dynamic this [D&A] impact is going to be going forward?

  • Kathy Bayless - SVP & CFO

  • Well, I think as we said, basically I mean, we're - our plan is as we bring on capacity, just as long as we bring capacity on and we give an effective job, keeping our utilization reasonably high -- I mean our target gross margin is basically similar to what it currently is, so high 20s.

  • Mark Moskowitz - Analyst

  • Even though you got lot more equipment coming on that's going to be depreciated for the first time?

  • Kathy Bayless - SVP & CFO

  • Yes. We have new equipment, we felt that will be coming on depreciation will get higher, I mean that's basically a fact of life, right now. Anybody who's bringing up capacity is going to be done with new equipment. But also, with additional unit volumes, basically there is more revenue as far as products that we're making. I mean, we're basically -- the objective is to price products basically for -- in relationship to cost.

  • Mark Moskowitz - Analyst

  • Okay. And then as far as the enterprise, the way it fell off in the December quarter, I just want to get a sense if you can kind of -walk us through the dynamics that are given that the market was a little stronger than anticipated. Is that more a function of more capacity coming online from other suppliers out there or a customer had - an unexpected weaknesses?

  • Mike Russak - CTO

  • Yes, hi, this is Mike. That segment of business has remained quite stable in terms of unit numbers. I think we've reported 2.1, 1.8, 1.9 million. So we don't see any -- we think that's within normal fluctuation. We don't see any trend there. We have the one main customer and that customer has been pretty solid in the way they've been taking product. And then there's always 100,000 here, 100,000 there -- really depends on delivery schedule in some cases -- when we actually shift the product, so we consider that normal variation. We don't see is as a downward trend in enterprise business.

  • Mark Moskowitz - Analyst

  • Okay. And then Mike, while we have you. I want to ask you just to kind of set the record straight. When you're talking about mobile, in terms of Almag and were you're going [without] this qualification process, is that for a notebook drive or is that for different type of flavor in terms of the Xbox 360, which some people see as a mobile drive, or even the Mac Mini?

  • Mike Russak - CTO

  • I think perhaps the way to clarify that is, as the product is qualified in the drive, there are certain specifications which have to be met and we anticipate that all of the specs that are necessary to qualify that drive for mobile applications will be met. So our opinion at this point is that they could be shipped in laptop drives. What the customers actually do with them, of course, is there are as I mentioned earlier many other applications.

  • Mark Moskowitz - Analyst

  • So at this point it's opinion, it's not fact that it's going into a notebook drive.

  • Mike Russak - CTO

  • Right, because it's -- the product hasn't really started to ship yet.

  • Mark Moskowitz - Analyst

  • Okay. And then lastly, before I cede the floor, I just want to get a sense in terms of Seagate and they're talking about their [Tonka] drives in terms of going to 160 gigabyte here, per platter, exiting the June quarter almost with our programs using LMR. I want to get a sense, as you ramp towards that type of technology, what is going to be offset there? Because I would gather as we move through the second half of the year that there will be at least a nominal reduction in component count at least from a media standpoint, if Seagate is really able to really move forward with this 160 ramp. What is the offset for you in terms of how much of an ASP improvement do you get when you move to 160 LMR disk versus the current technology?

  • T. H. Tan - CEO

  • Okay this is T.H Tan. I will attempt to answer most of your questions, here. When you talk about 160, -- okay, let's take LMR 160 this year as the main event. And the biggest question is is there going to be a reduction in platter count - multi-platter count. I want you to - first before you even ask about the multi-platter and on high capacity, you know that majority of our business are in one platter or two platters. Okay, PCs are heavily into the one platter. 160-gigabyte are not, okay, they have no impact on that one.

  • Now going through the high-capacity drive, the application within the [video], people want to have more capacity rather than less. So we believe three platters to four or five they are going to hold its own because the growth of this segment, okay, three platter and above, is a lot faster than one and two platter. So even for a second, which we don't believe, but for a second we think that there may be some reduction from five to four, then but the growth is so much faster that -- watch it up. So at least you don't have 160 may be the last program of the desktop of LMR, but we don't anticipate it [ASP] a detriment or [part of a detriment] at all. Okay. I hope I covered all your questions. If I missed anything, remind me.

  • Mark Moskowitz - Analyst

  • No, I think, let me just try to throw it back to you. So you're saying that where your biggest growth is in terms of higher capacity drive, even though you do expect some sort of impact from 160, you think that the growth, the overall growth in those markets will offset the reduction in platter count?

  • T. H. Tan - CEO

  • Yes, absolutely. And I also want to go out on a limb to say that some time in the next few months you'll see an announcement of greater than 500-gig. Okay. Today, 500 gig is a highwater amount, but we already know that we are looking on higher than that and that will be four or five platters with 160. Just watch for that and then you'll know that we are on the right track.

  • Mark Moskowitz - Analyst

  • Okay. Thank you.

  • T. H. Tan - CEO

  • Thanks.

  • Operator

  • Our next question will come from Christian Schwab Craig Hallum.

  • Christian Schwab - Analyst

  • Thank you. Western Digital, as a customer, are you guys gaining share in a meaningful fashion there again versus show a trace? I mean revenues were up 29%, either the units are -- well anyway are they gaining share?

  • T. H. Tan - CEO

  • This is T.H. Tan hefre. The way we grow is faster than the industry growth and we don't comment on individual customers whether they're going with our competition or not. But just take this important factor into consideration. Okay. It would drive our growth in 2005, is phenomenal growth. The number of disks per drive is going up because of the modern process. And we are growing faster than all these growth and we can do configuration. And so you draw your own conclusion. Are we gaining market share or not. We just cannot comment on individual customers but we think the answer is out there.

  • Christian Schwab - Analyst

  • Fantastic. And then when do you anticipate that you would begin to be manufacturing and - well, when do you see the ASP began to drop 1% to 2% sequentially in line with your historical trends? [inaudible - cross talk]

  • T. H. Tan - CEO

  • [inaudible - accent] I hope never. The more I just believe come to realized that analogy cost money. The days of buying synergies of the lowest cost is over [inaudible - accent] capable of buy it. And always we found very rational is indeed. And we're going to deliver more value than what we are charging. Our gigabytes will be cheaper and cheaper, but it takes more energy and more analogy to bring the new stock on stream, and that means we have to be compensated with appropriate gross margin and we have to manage the gross margins to have appropriate net margin so that we can afford R&D.

  • I think this is the way we operate our customers -- by signing up strategic supply agreement with us, and while then you'll come online, we affirm that relationship in a very proper manner, okay, as they come from the biggest of them all, a lot of supplement. That tells you something that, the days of people trying to get more for less and squeezing the supply chain was just an aberration of history, okay? The long history of hard disk size, there was a five-year period for that aberration.

  • Christian Schwab - Analyst

  • Great. Well, I hope that -- you're correct in that. On the 2.5 inch drive program in aluminum, have you guys disclosed the capacity point of that drive -- the capacity per platter?

  • Mike Russak - CTO

  • No, we have not disclosed that.

  • Christian Schwab - Analyst

  • Should we assume that this is going to be a high-volume, low capacity or should we assume that it's going to be very high capacity? Can you help me there, low or high?

  • Mike Russak - CTO

  • We expect it to be in the mainstream of those product offerings.

  • Christian Schwab - Analyst

  • Perfect. That helps. And then, on the modular kind of ramp, we have 31 million and we're going to 40 million. Can you just give a little bit of color on how we would-- you anticipate this capacity being added? Should we have our models very back-end loaded for that capacity or are you talking about adding a couple million capacity every quarter, and then the fourth quarter is when we get the bigger jump? Can you give us any type of color on how that rolls out?

  • T. H. Tan - CEO

  • Unfortunately, we cannot do. But come to this conference every quarter we will tell you, not one quarter out - how much we're going to bring in. We're always under promising and we're trying to over deliver.

  • Christian Schwab - Analyst

  • Great. Thank you.

  • Operator

  • Our next question comes from Karen Payne with Pacific Edge Investment Management.

  • Karen Payne - Analyst

  • Hi. Thank you. You've chosen to use the Intevac or -- excuse me -- the Anelva manufacture coming for perpendicular, and I wondered how that's going to work with the Seagate choice of the Intevac equipment. The media will be different and the head will be still coming from Seagate. So I wondered how you thought you would deal with the challenges of the different types of media?

  • Mike Russak - CTO

  • Yes. This is Mike. Well, first of all, we have stated before that we are - we believe our entire toolset is capable of doing perpendicular recording media. So we will get product from the Intevac systems, the Anelva systems, as well as our [Passby] systems. Generally what happens is you make adjustments in the process in order to accommodate the requirements of the specific application.

  • Now there's enough process latitude to make those adjustments on all toolsets. So while a disk from each toolset might not look exactly alike, they can be made to perform in a very [comparable] manner in any application. So we can ship a product made on an Anelva into an application where the competitor has a product that's made on an Intevac. So we don't expect that to be a major technology issue.

  • Karen Payne - Analyst

  • Okay. Thanks.

  • Mike Russak - CTO

  • Sure.

  • Operator

  • Next we'll move to Joel Inmann with Robert Baird.

  • Joel Inmann - Analyst

  • Hi, thanks. First question I have is can you kind of give us a timeframe of when you expect media to be balanced in the supply/ demand environment?

  • T. H. Tan - CEO

  • If you look at other announced capacity increase by our customers, capacity suppliers and our merchant competition, take that all together again in 2006, and then take the number of disk demand, okay, take 2005 total ship and you bring 15% growth into it. And you draw a line, and you also -- assuming we have to take some numbers, there some numbers have system coming out but not published back and telling the back that the number of disks gained compared to the number of drives today is [inaudible - accent] 1.7 disk per drive pushing that number, shifting the number assuming there is no growth, okay, in that of high ratio.

  • You will find, again, the total deal coverage and [Nathan] did a good job in doing this and we have put it on our website. You can take a look at that 1.7 disk per drive, there's greatrshortage incoming into the year and there's great shortage going out. We entered this year and later this year with almost as much gap between supply and demand okay more -- more demand than supply. That is the fact we are looking at.

  • Joel Inmann - Analyst

  • Okay.

  • T. H. Tan - CEO

  • And the reason for that is because the barrier to entry is very high, the lead time very long. The aluminum-based substrate capacity is the shortest of them all. Our competitors they have been under investing and we have been just investing in tandem in our media growth. So, that is the reason why the gap is going to be constantly high -- the gap between demand and supply.

  • Joel Inmann - Analyst

  • Okay, thanks. And secondly, can you talk about why your CapEx estimate is going up? I think before you said it was supposed to be similar to 2005, $200 million and now its $200 to $250 million?

  • Kathy Bayless - SVP & CFO

  • Yes, this Kathy. The first -- this is really the first time that we've said in the press release what our CapEx plan is, and the reason that we have a range in there is based upon what we've said relative to our second expansion and that is basically can be done in a modular fashion. So it's a matter of timing and depending upon how fast or -- that we need to put in the capacity.

  • Joel Inmann - Analyst

  • Okay, thank you. And then lastly, just the other liabilities lying in the balance sheet. Why did that increase so much?

  • Kathy Bayless - SVP & CFO

  • Other liability, that's where some of our customer -- that's where our customer prepayments sit.

  • Joel Inmann - Analyst

  • Okay. Thank you.

  • Operator

  • Our next question comes from Dan Renouard with Robert W. Baird.

  • Dan Renouard - Analyst

  • One quick follow-up, thank you. Just -- did you give or can you provide CapEx in Q4 and also depreciation? Thanks.

  • Kathy Bayless - SVP & CFO

  • CapEx in Q4 basically we said the CapEx I think for all of 2005 -- we ended up at about $191 million. And that if you go back and subtract out everything, I think that ends up at about $91 million for Q4. And from a depreciation standpoint, I think I gave out that number -- Q4 depreciation was I think 12.6.

  • Dan Renouard - Analyst

  • Thank you. And then just quickly on CapEx for the year, should we expect that to sort of grow in ratably through the year, 50 to 60 million a quarter. Or how should we see that?

  • T. H. Tan - CEO

  • This is T. H. Tan here. Again, I stated before and I'll state it again that that our business plan is based on using all the new capacity that [they have been commissioned] so that we can keep our high gross margin and manage the net margin to be in the higher range. So it means that it depends on how our customer demands further delay we can do it sooner, we can do it later. There's no way I can tell you sitting here generally how this is going to be panning out, because we had a week-to-week and month-to-month yield. Okay, but we will give you guys guidelines at the appropriate time. So capital expenditure follows by this year of capacity increase.

  • Dan Renouard - Analyst

  • Okay, thanks.

  • T. H. Tan - CEO

  • Thanks.

  • Operator

  • Les Santiago with Piper Jaffray has our next question.

  • Les Santiago - Analyst

  • Yes, a couple of questions. I mean as you grow your media capacity, could you talk about how you see your investments in substrate capacity? And then given the fact that -- would we just see your other revenue line kind of go down and your finished disk shipment line go up or do you actually plan to invest in new substrate capacity to account for this increase in media capacity?

  • T. H. Tan - CEO

  • Okay. That's good question. Because substrate capacity shortage is really a constraint on the market and we are happy to say that we saw that coming, we invested wisely, and to sure that our media growth, okay, because of one more media we are not going to deny that just because didn't invest in substrate.

  • But the other thing that I want to remind you that, we are a media company. We're not going to be making our living on selling substrates. So the substrate cost and the capital expenditures and the return on substrate alone is not a very good business. That's the reason why our emerging competition are not doing a lot of that. And if you are not a media company and just sell substrates, [it would be worse].

  • So for us, we are happy to have a very solid media business, and we use our substrate sales for strategic relationships. We want to be make money in process to be sure our customers will need substrate. We'll get them substrate but we always tie it to media sales. So as we grow, we want to make sure that we have enough substrates to grow, all right and media. Now we are not going to aim for increasing the substrate business because by itself it's not a very good business to be in.

  • Les Santiago - Analyst

  • Does that mean your other revenues should kind of trend down going forward as you increase your finished disk shipments?

  • T. H. Tan - CEO

  • The best we can tell you, is that it will be just be very flat.

  • Les Santiago - Analyst

  • Very flat. Okay. And then, secondly, just a question on absolute unit shipments to your various customers. I mean, it looks like Seagate and Maxtor put together -- the absolute shipments of both of those customers appears to be down quarter-over-quarter. Could you tell us why that is? I mean nearly 400,000 units or so.

  • And then obviously corresponding to that, Western Digital shipments are up significantly quarter over quarter, so I'm just trying to see is there a shift already taking place, or can you explain that?

  • T. H. Tan - CEO

  • No, definitely not. Do not think that. That is a wrong conclusion. What you're saying, I stated in the previous call is we're working hard to keep all four equal. So we had the bigger guy will not be growing as fast as our base is growth. In fact, our base, increasing base most of that go to provide the third and fourth, and then second. We try to work that towards equality and then the merger also came at the end of the year -- most everything has been said and done.

  • So you should not read anything in there as a shift. Now what we are aiming for is with a new Seagate Maxtor combination getting under way in the next two quarters or so, we are going to be growing our base and we are going to try to achieve some kind of parity with our goal [inaudible - accent] several companies, we have to establish our goals.

  • Les Santiago - Analyst

  • Okay. Thank you.

  • Operator

  • And our next question is a follow-up from Andrew Neff.

  • Bill Hand - Analyst

  • Yes, it's Bill Hand for Andy. Just a follow-up question on the ASP. Given that you're in a sold out capacity situation, why wouldn't you be in the position to dictate the mix to your customers and therefore foster an increasing ASP as you indicated coming out of last quarter?

  • T. H. Tan - CEO

  • If we do that, we would be accused of having short-term memory loss. Okay. Because what happened in the past is, they call for a behavior that will just create and the modestly and those who are driving your customer to want to do more internally. We have come very far from there from the last few years. We have not come to a very optimal relationship with our customers [with] in terms of capacity, and they all want to do some excellent buying and we do internally and we grow in tandem. And the best we want to hope for is continuing this relationship so that everyone can make a lot money and we will be trying to save money by improving yield and productivity and passing on savings to the customer.

  • But in the meantime, when you bring new and more complex products into the market because of higher costs, you asked for a reasonable growth for that and therefore a higher ASP. So the model has been this, better ASP the stable because it consists of new products, as to more pricing and there are some - [so reduction] in pricing for the mature product. So we expect our blended ASP to be stable. Okay. And if the mix is going to be going up faster than we planned, then blended ASP can go up and that is the good model. We don't want to be accused of taking advantage of the shortage that we have today. Okay?

  • Bill Hand - Analyst

  • Okay. Thanks.

  • T. H. Tan - CEO

  • Thanks.

  • Operator

  • Next we have a follow-up from Paul Mansky with Citigroup.

  • Paul Mansky - Analyst

  • Great, thank you. Would it be fair to say that -- as I look back at just kind of chronologically at the order of the volume purchase agreement announcements, would you agree with the statement that with respect to your incremental capacity that you brought online earlier than you expected this quarter, Western Digital received the bulk of it?

  • T. H. Tan - CEO

  • I think it's a fair assumption. In fact, the conclusion, according to the facts out there is correct.

  • Paul Mansky - Analyst

  • Okay. Great. Thank you. And then one more housekeeping, if I may. Share count dropped very modestly sequentially. Is that entirely a function of the stock price pressure -- the stock pressure in October and part of November?

  • Kathy Bayless - SVP & CFO

  • That's correct.

  • Paul Mansky - Analyst

  • Okay. Great. Thank you.

  • Operator

  • Next we have a follow-up from Mark Miller.

  • Mark Miller - Analyst

  • Your cash position has increased rather dramatically. I know you've got fairly substantial CapEx spending at least for part of this year, but longer term, where do we go from here as you start building more and more cash? Any ideas in terms of debt payments, share repurchases, because the cash is getting very appreciable, that how it's [going to mount] for the rest of the year.

  • Kathy Bayless - SVP & CFO

  • Mark, this is Kathy. Basically, what we said was we expected to fund our CapEx with cash from operations as well as some customer advances. As we bring up the new capacity in '06, we have continuing CapEx requirements as well as starting to -- if the capacity comes up, starting to basically return those customer advances. So just funding the growth of the business is really the primary goal.

  • Mark Miller - Analyst

  • Okay. Thank you.

  • Operator

  • Next, we have a follow-up from Christian Schwab.

  • Christian Schwab - Analyst

  • Yes. I'm sorry. Kathy, did you give what the stock option expense is going to be?

  • Kathy Bayless - SVP & CFO

  • Stock option expense -- we have basically in 2005 -- I mean we converted most of our program over to restricted stocks, so really the only thing we have to pick up in addition through the P&L in 2006 is for our stock options, the remaining amortization of those. So right now what that looks like is just for the stock option piece is pretty small, maybe $0.02 a quarter.

  • Christian Schwab - Analyst

  • And that's in the guidance of 17% to 18% net margins that you gave?

  • Kathy Bayless - SVP & CFO

  • Right.

  • Christian Schwab - Analyst

  • Great. Thank you.

  • Operator

  • And our next follow-up is from Les Santiago.

  • Les Santiago - Analyst

  • Yes. Delving deeper into the supply chain, are you seeing any dynamics in the raw cost of aluminum itself? Anything that you can tell us there -- anything -- dynamics that matter?

  • T. H. Tan - CEO

  • We have - this is T.H. Tan. We have a very good arrangement with our suppliers. There are some forward buying and some guaranteeing of volume and pricing. So we do what all responsible manufacturers will be doing. When we get the word we are going to have some shortages in some key components, we took care of that business.

  • Les Santiago - Analyst

  • So you don't see any major moves there affecting your business over the course of '06?

  • T. H. Tan - CEO

  • No. We mitigated against all these risks. That's what we are paid to do.

  • Les Santiago - Analyst

  • Okay. Thank you.

  • Operator

  • You have no further questions from the queue at this time. I'll turn the conference back over to our speakers for additional or closing remarks.

  • T. H. Tan - CEO

  • Thank you very much. Okay, thank you for joining with us on this call. We look forward to speaking with you next quarter. Thank you.

  • Operator

  • That does conclude today's conference. We thank you for your participation. Have a great day.