威騰電子 (WDC) 2008 Q2 法說會逐字稿

Good afternoon and thank you for standing by.

Welcome to Western Digital's second-quarter financial results for fiscal-year 2008.

(Operator Instructions).

As a reminder, this call is being recorded.

Now I will turn the call over to Mr.

Bob Blair.

You may begin.

Thank you.

As we begin, I would like to remind you that we will be making forward-looking statements in our comments and in response to your questions, concerning supply and demand conditions in the hard drive industry, growth opportunities and WD's strategies to address these opportunities, the plant volume ramp of our 250 gigabit per square inch technology, beliefs regarding our future capital expenditure as a vertically integrated hard drive manufacturer, our growth and pricing expectations, expectations regarding our bridge financing facility and future longer-term financing, and our current financial outlook for the March quarter.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-Q filed with the SEC on November 6, 2007, as well as the additional risk factors reported in the press release, included as exhibit 99.1 to the Form 8-K we furnished to the SEC today.

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

I will now to the call over to Western Digital's President and CEO, John Coyne.

Thanks, Bob.

Good afternoon everyone.

After my remarks, Tim Leyden will review our December quarter performance in detail and address our outlook for the March quarter.

A year ago, I spoke you for the first time as CEO and outlined my commitment to continue the pursuit of profitable growth.

I am happy to report that our December quarter results complete a calendar year of tremendous achievement by the WD team, a year in which we delivered industry-leading growth and financial performance and during which we significantly strengthened our technology position and the fundamental WD business model.

In calendar 2007, we increased revenues by 38% and earnings per share by 56% compared with calendar 2006.

More importantly, we have built momentum throughout the year and we exit the December quarter with revenue up 54% and earnings per share up 137% compared to the same quarter last year.

Additionally, we maintained the financial asset management discipline which is a hallmark of WD applying our expertise to the newly acquired WD media operation, cycle times and inventories while also continuing to improve in head and drive operations, resulting in a sequential increase in inventory turns from 12.6 to 14.8.

Hard drive finished goods inventory at the end of December was down 2% year over year while we still achieved 54% revenue growth with consistent and responsive customer support.

Capital spending at $332 million year-to-date is also disciplined and tracking in line with the previously announced reduction to our annual capital plan.

I want to take this opportunity to acknowledge the outstanding contribution of the entire WD team, the tremendous support of our supply partners, and the increasing preference of our customers for WD's value proposition.

Our high quality, high reliability products, our flexible and responsive service, our efficient large-scale operations, our investments in technology capacity and capability, and our commitment to continuous improvement all contributed to these superb 2007 and December quarter results.

WD's performance reflects that of a highly motivated team operating with passion, taking appropriate and rapid action, focused on productivity, demonstrating relentless perseverance and innovation in technology, products and process; and balancing the needed our customers, suppliers, shareholders, employees and the communities in which we operate with integrity.

Opportunity is being created by a continuing surge in demand for traditional computing related storage, further enhanced by emerging storage demand driven by rich content distributed over the Internet and personal content arising from the conversion of photography, audio and video from analog and digital technologies.

For calendar 2007, demand for hard drives grew over 15% on a unit basis and 67% in total HDD storage capacity, for a total of approximately 88 billion gigabytes of HDD storage.

In the December quarter alone, units grew 20% and total HDD storage capacity expanded 70% versus the year-ago period.

This strong growth in units and total HDD storage capacity is expected to continue for the next several years.

WD is capitalizing on growth opportunities through thoughtful strategies which we have executed very effectively in recent years.

I would like to briefly highlight a few of these key strategies.

Five years ago, we identified that the market for 2.5 inch hard drives would become an increasingly important segment of the overall market.

We invested consistently and patiently in people, technology staging, product and process development, and entered the market in September of 2004.

Step-by-step, we began to build applications knowledge, business understanding and customer acceptance.

We maintained focus on our technology and reached a point in May of 2007 where we began volume shipments of the 250 gigabyte capacity, the industry's highest capacity two-disk, 2.5 inch drive at that time.

In late October, we followed up with our 320 gigabyte capacity, again leading the industry to volume with advanced technology and capacity.

This technology and product leadership is underpinned by high-yielding, high-quality, low cost design and manufacturing.

In the last year, we have tripled our output of mobile drives, shipping 8.7 million 2.5 inch hard drives in the December quarter.

Our technology and product momentum in this space allied to our acknowledged reputation for quality, reliability, availability and responsiveness, bodes well for continued growth in this, the fastest-growing segment of the storage industry.

For many years, branded products was a successful but small element of our total product mix consisting mostly of internal drive upgrade kits for desktop computers.

About three years ago, demand in this category began to expand dramatically driven by Internet content and the conversion of audio, video and photography from analog to digital, allowing consumers to process and store this content on computers and similar devices.

Again, we made timely and appropriate investments in people, to understand the emerging market, to design appropriate products, to establish the right channels and partners, and to lead and inspire our teams.

Two years ago, branded accounted for just 5% of sales.

Today, branded represents 18% of our hard drive revenues and WD is the leading storage appliance brand.

Adding to our presence in the enterprise SATA market, we launched our GreenPower line of drives mid-year.

And this product concept is finding significant acceptance in the enterprise customer base, addressing the need to reduce the power demands of large commercial storage farms.

During 2007, we made three very important long-term strategic investments.

The first with the acquisition of Komag provides the ability to design and manufacture our own media.

Just like our head acquisition in 2003, WD media is playing a key role in driving our future technologies as well as further improving our cost model and our supply security and flexibility.

The second was an asset purchase of Senvid, a software company, to enable the further broadening and enhancement of our branded product offerings.

The third involved the opening of a design center in Longmont, Colorado; adding a significant new talent pool to the WD engineering team to fuel future growth.

We enter 2008 with strong positions and momentum in all our served business segments.

We are ramping production of our industry-leading 250 gigabit per square inch technology, first deployed on our 2.5 inch products last October and now on our 3.5 inch product platforms, creating a common, highly leveraged, efficient, high-volume technology platform for our component and drive operations for the year ahead.

We will also see the full impact of our internal media operations as we move through the year.

We continue to explore opportunities to broaden our product portfolio in existing markets and to enter new and adjacent market segments as it makes business sense.

We're making appropriate investments to stage for these opportunities.

Consistent with WD tradition, we will make specific product announcements only when these products are available and shipping in volume.

The future for our industry looks bright.

Demand for storage capacity is forecast to continue growing at some 60% annually, which, when addressed with areal density growth of 40% plus, translates into HDD unit growth in the high teens.

This demand is strong and broad-based, with many new applications for our technology.

With an appropriate business model, good execution, aggressive cost management, great products and a rational approach to pricing, tremendous value can be created by addressing this surging demand for high-capacity storage.

While there may be concern about the impact of macroeconomic additions on demand for storage, we have yet to see any effect on actual usage or order rates or on forecasts from our customers.

The availability of weekly industry information on inventories sell in and sell through to all channels enables us and the other industry participants to act swiftly whenever we see an imbalance between demand and supply.

With WD's high-velocity, low-inventory supply chain and manufacturing model, we have historically demonstrated an ability to react to both upside opportunities and downside challenges.

With our lean, efficient OpEx model and our low-cost operations we have the lowest relative breakeven point among major players in the industry.

As an efficient, vertically integrated Company, WD has been able to consistently attain high levels of profitability and return on capital, which has allowed substantial investment in future technologies, products and capacity.

We expect to continue to grow profitably and we will continue to price our products with all customers and in all market segments so as to enable continued investment and a long-term sustainability of our business.

We have the passion, the people, technology, product breadth, manufacturing scale, quality, reliability and customer relationships in place, and 2008 offers an unprecedented opportunity for profitable growth in all of the business segments which we address.

WD's positioning has never been better.

However, as in the past, our success depends largely on our own execution against the opportunities and challenges that emerge in an ever-changing market.

Tim will now provide details of our December quarter performance and our outlook for the March quarter.

Tim?

Thanks, John.

We're very pleased with the results for our December quarter.

They reflect crisp and timely execution by the WD team, strong demand for hard drives and a rational competitive pricing environment.

Our operational flexibility enabled us to quickly react to a number of attractive [market] and product mix opportunities throughout the quarter.

These opportunities continued to arise after our revised guidance in early December, resulting in additional upside.

Coupled with continued progress on the integration of our media operations and our ongoing focus on asset efficiency and cash management, these factors led to exceptionally strong revenue, earnings and cash flows in the December quarter.

Revenue for our second fiscal quarter was $2.2 billion.

This includes $120 million from external sales of media and substrates.

Hard drive revenue was up 46% from the prior year and hard drive shipments totaled 34.2 million units, up 40% from the prior year.

Average hard drive selling prices were approximately $61 per unit, up $2 from the September quarter and up $3 from the year-ago quarter as a result of firmer pricing due to the strong demand for hard drives, coupled with an improved segment and product mix.

The percentage of our hard drive revenue coming from non-desktop PC applications increased to 54% in the December quarter as compared to 53% in the September quarter and 42% for the year-ago quarter.

We shipped 8.7 million 2.5 inch mobile drives in the December quarter as compared to 5.9 million in the September quarter and 2.7 million in the year-ago quarter.

Demand for mobile storage continue to increase and our quality, technology leadership, product offerings, operational flexibility and responsiveness have solidified our position as a valued partner to PC manufacturers, major distributors and retailers.

In consumer electronics, we shipped 4.1 million 3.5 inch drives for use in digital video recorders in the December quarter versus 3.7 million in the September quarter and 2.7 million in the year-ago quarter.

This market continues to offer long-term growth opportunities and demonstrates the potential of non-PC-based consumer electronic systems incorporating hard drives.

However, pricing in the DVR market does not currently provide adequate returns to justify incremental capacity expansion to fully support these growth opportunities.

Desktop product shipments were better than expected.

Unit shipments were up 10% from the September quarter as compared to 5% for the market as a whole.

During the quarter, while we honored our pre-existing OEM commitments, we focused on satisfying upside demand from the distribution channel first as desktop OEM margins, like DVR, are less attractive than other market areas.

Sales into the enterprise market, our highest margin segment, were in line with our expectations.

Continued growth in shipments of hard drives for non-desktop PC applications has led to a substantial improvement in the diversification of our revenue and customer base.

Hard drive channel revenue was 48% OEM, 34% distribution and 18% branded products versus 50% OEM, 31% distribution and 19% branded in the September quarter.

And it was 46% OEM, 37% distribution and 17% branded in the year-ago quarter.

These percentages exclude external sales of media and substrates, which totaled $120 million in the December quarter, or 5% of revenue, and $40 million in the September quarter, or 2% of revenue.

Revenue for each of our top five customers increased from the September quarter.

However, because of the increased diversification of our revenue base, again no single customer comprised more than 10% of the total.

The Q2 geographic split of our hard drive revenue was 32% Americas, 32% Europe, and 36% Asia as compared to 34% Americas, 33% Europe, and 33% Asia in the September quarter.

And it was 38% Americas, 32% Europe, and 30% Asia in the year-ago quarter.

These percentages also exclude external sales of media and substrates.

Our gross margin percentage for the quarter was 23.3% versus 18.3% in the September quarter and 17.9% in the year ago quarter.

This increase was a function of the favorable industry conditions I referred to earlier and our ability to quickly react to the opportunities for volume increase, pricing and mix optimization presented by this stronger demand.

Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher mix of products based on newer, more cost-effective technologies and the contribution of media operations.

I am pleased to report that the media acquisition was accretive to the December quarter, our first full quarter of operations.

This is two quarters earlier than we originally forecast and is due to higher internal usage, higher external sales and more rapid progress in yield and utilization than originally contemplated.

Operating expenses totaled $181 million or 8.2% of revenue.

This includes a full quarter of media operating expenses, continued investments in product and technology improvements, and higher incentive compensation associated with the more favorable financial results for the quarter.

Operating income was $332 million or 15% of revenue.

Net interest and other nonoperating costs netted to an expense of approximately $16 million.

This includes about $8 million of losses on our investments in auction rate securities which I will discuss later.

Income tax expense was $11 million for the December quarter, or approximately 3.5% of income before taxes.

This includes the benefit of adjusting our year-to-date rate down to approximately 4.5% excluding the Q1 nonrecurring items.

We now expect our rate for the full year will be in the 4% to 6% range.

Net income totaled $305 million or $1.35 per share.

Turning to the balance sheet, our cash, cash equivalents and short-term investments at the end of the quarter totaled $967 million as compared to $851 million at the end of September.

Cash generated from operations during the quarter totaled $519 million.

Capital expenditures for the quarter were $169 million and non-cash charges for depreciation and amortization expense totaled $111 million.

For the first six months of 2008, our capital expenditures totaled $332 million, approximately $100 million of which relates to our 8 inch wafer fab conversion.

We still expect capital expenditures for fiscal 2008 to be around $700 million, which is consistent with the reduced capital plan that we communicated to you during our first quarter earnings call on November 1 despite significant increases in our volume.

As previously indicated, this includes about $200 million for conversion of our head wafer fabrication facility and $100 million to upgrade our media technology.

Depreciation and amortization expense for fiscal 2008 is expected to be about $400 million, including about $100 million for media operation.

During the quarter, we retired $250 million convertible debt assumed in the Komag acquisition through cash payments of $240 million and a further draw on our bridge financing facility of $10 million.

As of the end of December, we had $760 million outstanding under our bridge financing facility.

We are in the process of obtaining longer-term unsecured financing that we expect will consist of a five-year term loan and a revolving line of credit totaling $500 million to $750 million.

As a today, we have received non-binding commitments totaling in excess of $700 million.

We expect to pay off the $760 million outstanding under the bridge financing facility through a combination of these loan proceeds and existing cash balances.

This refinancing transaction is being led by JPMorgan and Citibank.

Our cash and cash equivalents of $917 million are invested primarily in readily accessible AAA-rated institutional money market funds, the majority of which are backed by the US government.

As of the end of December, our short-term investments of $50 million included $43 million of AAA-rated option rate securities.

During the December quarter, the market values of some of the option rate securities we owned as of the beginning of the quarter were impacted by the macroeconomic credit market conditions.

We reduced our investments in option rate securities from $197 million in the beginning at the quarter to $43 million as of the end of the quarter.

As a result of these market value changes, we realized $3 million in losses on sales and $5 million of unrealized losses to mark the remaining investments to market.

Since quarter end, we have sold an additional $10 million at par, bringing our current net balance of option rate securities down to $33 million.

These securities will likely be held for some period of time until secondary markets become available.

These investments are currently accounted for as available-for-sale securities.

The market values of these investments are subject to fluctuation.

At the end of each quarter, we will evaluate any changes in value to determine if they are temporary or permanent.

Temporary changes are recorded in equity, while changes believed to be permanent are booked to the income statement.

We did not repurchase any common stock during the December quarter.

Since May 2004, we repurchased 15.1 million shares at a total cost of $204 million, for an average price of $13.53 per share.

$46 million remains under our existing stock purchase authorization -- stock repurchase authorization.

Our cash conversion cycle was a positive four days, consisting of 45 days of receivables, 25 days of inventory or 15 turns, and 66 days of payables outstanding.

Now I will move onto our expectations for the third quarter of 2008.

We expect total revenues of between $1.925 billion and $2 billion.

This represents an increase of between 37% and 42% over the prior year period.

This revenue range includes $50 million from sales of media and substrates to external customers, down from $120 million in the December quarter as we complete our obligations to supply external customers.

Historically, drive demand goes down sequentially from December to March by from 3% to 5%.

However, demand for the December quarter was unusually strong for the industry.

We grew volume, mix and pricing as a result of our ability to quickly react to this demand strength, our leadership position in certain markets and significant productivity improvements achieved in the quarter.

We view this combination of circumstances as extraordinary and unlikely to fully repeat in the March quarter.

Accordingly, we are currently modeling a sequential decrease in the range of 6% to 10% in our hard disk drive revenue for the March quarter.

As a consequence of the strength of demand and rational behavior in the second half of calendar 2007, the hard drive industry appears to have achieved an overall uplift in margins by all major participants.

Our results demonstrate the profit potential for those companies with an effective cost structure who execute well, where all industry participants focus on profitability, cash generation and demand/supply management.

Also, we continue to believe that our blended internal and external media supply model will deliver cost improvements at the gross margin line of up to 300 basis points by the end of calendar 2008.

The accelerated progress of our media integration, our changing segment mix and an expectation of continued rational market behavior now enables us to reset our gross margin model from our historical 15% to 20% range up to the 18% to 23% range.

Gross margins for the March quarter is anticipated to be in the middle of our revised model at approximately 20%.

While this is down from the December quarter, it is up significantly from the 15.8% gross margin we reported for the March quarter of 2007.

Operating expenses are projected to be approximately $175 million as we continue to invest in expanding our product and technology portfolio.

Net interest expense is projected to be about $8 million, assuming no further investment losses.

We anticipate our tax rate to be in the range of 4% to 6% of pretax income, and our share count will be about 227 million.

Accordingly, we estimate earnings per share of between $0.85 and $0.91 for the March quarter.

Operator, we are now ready to open the call for questions.

(Operator Instructions) Mark Miller.

It's Mark Miller with Brean Murray.

Congratulations on a wonderful job.

It is very impressive to me.

Just wanted to talk a little more about Komag, and you say there is still more room for margin improvement as we go through the end of the year.

What do you estimate Komag being accretive this quarter added to your margins?

Was it around 75, 100 basis points?

80 basis points, Mark.

Second question -- was there any change in -- did you do more heads internally this quarter, or was that flat roughly quarter to quarter in terms of percentage of total heads that you did internally versus externally?

I think roughly, on a percentage basis, roughly flat to the prior quarter.

Can you just break down the inventory for me?

I know it is up somewhat.

It's not unusual but could you bring it down and maybe you did that and I missed it in terms of finished goods and raw materials and work in progress?

Actually, our inventory turns improved from 13 to 15 in the quarter, and finished goods were up from 151 up to 157 million.

But as we indicated, that is actually down from --

A year ago.

-- same period last year.

Wonderful job.

Thank you.

Rich Kugele.

Needham & Co.

I guess first, since it will affect your gross margin and my model, is Komag actually able to help you on some of these newer areal density's you are announcing, at least on the desktop side, or are you buying those parts on the outside and using Komag for more of the main stream?

We are both in the June or May and October 2.5 inch programs, and in the 3.5 inch 320 gigabyte per platter that we've just announced, we have capability on both our internal heads and media, as well as capability from our external suppliers.

So we use a blend of both.

And then from a capacity standpoint, how long -- I guess a lot of the $100 million you have spent to date has really been just on bringing the media business up to a greater percentage perpendicular.

But how long do you think it will be before you actually have to add capacity on that side?

Some time, given that we expect to -- and the 300 basis point full year contribution on the cost side is driven from an expectation of yield utilization and throughput increase capability from focus on a much narrower set of products.

And we experienced, if you recall, in the 2003, 2004 experience of ramping the internal head capability, that a very significant contribution on yield and throughput capability came from rationalizing the product mix.

Thank you very much, and well done.

Richard Keiser.

Sanford Bernstein.

I just wanted to inquire about a couple comments you made pertaining to high velocity and high visibility.

Historically in the storage disk drive market, there has been a lot of volatility around pricing associated in part because of the distributor channel, and I wanted to get your sense for if that has changed or not.

You seemed in your comments to talk about more stability, a more rational behavior all major players, and I just wondered if you can provide some color on that.

I think over the years, the reporting from the distribution channel has been significantly improved in terms of its timeliness and overall encompassing of the entire distribution set worldwide.

Recognize also at the same time the number of drive companies has reduced significantly and the concentration of product through large distributors has increased.

So total visibility in the entire distribution channel has improved dramatically over the past several years.

We now have visibility to sell-in and point-of-sale data as well as, of course, visibility to manufacturing inventory servicing the large OEMs on a weekly basis for the entire industry.

And all industry participants have access to that data.

I think our ability to manage demand and match with supply has been dramatically improved over the last several years.

And then just one follow-up.

There was something I did not quite understand.

It was a comment with respect to pricing.

I think it was of DVR and that it did not warrant additional investment.

Could you just clarify what you meant there?

I am sorry I missed that.

That market is a bit below the set of returns that we would like to see, and what we are doing about it is we are -- it is a two-sided proposition.

We are obviously going to work on our costs in order to make it more attractive to the customers.

We are also going to work with the customers in order to make sure that they are aware and value our value proposition that we bring to the table.

So really what we are saying is that we are directing our capacity to the more profitable segments and parts of the business, and that one is below what we would like to see.

Just one final question, if I might, and that is now you have made a point about how the business model is much more diversified and this gives you more flexibility.

And I'm just wondering if in the context of consumer spending we should also see that as a greater risk.

I don't believe so.

If you look at the overall market data, typically most weight is given to behavior of the IT and computing segments as it relates to potential hard drive sales.

If you look at 2007 data, roughly 300 million PC systems shipped in 2007, while 500 under million hard drives were shipped in 2007.

So we are getting an increased, significant increase, in the level of demand for large capacity storage devices that are not linked directly to the sales rate of PCs or industrial computing applications.

I think that augers very well for balance and opportunity as we look forward.

David Bailey.

Goldman Sachs.

A couple of questions, if I may.

The first, could you comment on how much capacity you are adding these year, and do you have any idea what the expectations are for the industry versus that sort of mid to high-teens unit growth that you are expecting?

I think our observations relative to industry capital, Seagate announced last week their intention to be very disciplined and frugal in relation to capacity investment.

I think we've just reconfirmed that our capital plan, which we reduced by $50 million, from $750 million to $700 million in our last call, that we're sitting on the lower end, the $700 million guide for our capital for the full year.

So we are taking a very measured approach to capacity.

The good thing is that the improved visibility we have into the demand and inventories in all channels gives us a much better informed base from which to make our capital decisions.

We have also worked very hard in the past few years with our capital equipment suppliers, particularly as it relates to drive assembly capability and drive test capability, to shorten lead times so that we can react much closer to the visibility to true demand.

I think you have seen in the 2007 performance reflects all of those improvements in both visibility and execution of matching supply capacity to true demand.

And just to follow up on that on the visibility side, is your visibility longer range or is it more just a better idea of what is going on in the short-term?

I think it is a combination of the two.

On a long-range basis we're looking at the fundamental underlying drivers that are generating the 67% demand profile that we have seen over the last couple of years for billions of gigabytes of storage.

As we come closer in to customer forecasts, customer orders, inventory levels, we have the ability to look at how we should match against that emerging short to medium-term demand profile.

The other element that has helped in this regard is that as the late 2006, early 2007 returns in the industry were inadequate to fund aggressive investment looking at capacity going forward, our OEM customers are beginning to realize the need to be more longer-term in their views and so we have seen a number of our OEM customers entering into multi-quarter agreements with us now to secure that most critical of all items, which is availability to support their business plans.

Steven Fox.

Merrill Lynch.

I was wondering, just looking at your outlook, if you can talk about what you think happens to your branded sales as you go into the March quarter, since there is not a lot of history there, what are your retail customers telling you?

And then secondly, just getting back to that DVR comment, can you sort of quantify what that means in terms of your unit outlook going forward?

Does it mean you hold steady at current levels, or actually grow at a lower rate?

I am just trying to get a better feel for that.

Let me deal with branded first.

The first calendar quarter is typically a strong quarter for branded products, particularly January-February period, where we get a gift certificate redemption kind of boost to the market after the Christmas shopping period.

What we are hearing from our retailers right now is that although they have some challenges, storage and particularly WD branded storage is a very bright spot for them in terms of their retail sales in the stores.

So we're very encouraged by what we see so far in the quarter.

Thanks and then on the --

The second part of the question was the (inaudible) base, the DVR.

Again, the typical seasonality there is that it falls off significantly into the first calendar quarter.

So typically, volumes are down quarter to quarter.

Our comment relative to margin contribution is more a question of what kind of capacity we put in place to support the July through December period next year in 2008.

Sherri Scribner.

It's Deutsche Bank.

I just wanted to explore a little bit more into your outperformance in the notebook side of the business.

Do you feel like that is OEMs coming to you because you have a superior areal density product or because you have a superior quality product?

Can you maybe give a little detail there?

All of the above.

I think the really interesting observation is that the vast majority of the notebook marketplace is still seeking increased storage capacity.

Case in point, the latest IDC preliminary data for the December quarter indicates that SSDs shipped in notebook computers reached some quantity short of 5000 units for the entire quarter.

Hard drive of capacities of 250 gigabytes and 320 gigabytes shipped over 3.25 million units of which WD supplied the majority.

Great.

And then --

Technology is important in this marketplace.

Good high capacities are important in this marketplace.

And of course, you must deliver that leading-edge technology with high reliability and high quality as a given.

And then in terms of if I look at your share now, you have gained significant share quarter over quarter, probably somewhere approaching 20% share of the notebook market.

There's a lot of players in that market.

Do you think that you are tapped out in terms of future share gains?

How much share do you really think you can get beyond where you are right now?

Well that will be an outcome for our customers to decide.

All things being equal, you would think that the six players, there would be one sixth of the market for each.

However, all things are never equal, and our opportunity in that market is down to our ability to execute and to continue to delight customers with the right products that suit their product plans.

And I believe we are very well-positioned to keep delighting our customers in that space.

Okay, but maybe just quickly, do you have any -- what you think about these three platter notebook drives are coming out at 500 gigabytes capacity?

Do you think there is demand there?

Do you think there is any issues with those drives?

Well, I think as we do, I think it is a strong endorsement of the view that there is a strong appetite for high-capacity solutions in both in the notebook and in the portable branded products space for 2.5 inch drives.

So that is the really good news.

As I mentioned when I was talking about WD's future plans relative to markets, we announce products when we are shipping them in volume, and we will continue to follow that practice.

We will support our customers in meeting that currently insatiable appetite for large capacity drives for the notebook space.

Mark Moskowitz.

This is Anthony Luscri for Mark Moskowitz, JPMorgan.

Going back to the branded business, can you contrast relative strength in the European versus the US markets and what have you seen through January thus far?

I think we are doing well in both geographies and consistent with our expectations relative to the seasonal patterns, we have observed over the last couple of years.

And going forward, how much of the channel in OEM replenishment is supporting guidance for the March quarter, given the low base exiting December?

We do not really look at a replenishment in terms of -- we're happy with where the inventories are today.

If I look at the total industry inventories, and that would be manufacturers' inventory that we have in our own facilities and in the customer OEM (inaudible) and in transit, and I look at the channel inventories that our distributors hold on an industrywide statement, on a combination of 2.5 and 3.5 SATA and PATA drives, which is the served market for WD, the days of inventory for the entire industry supply chain were down 11% year over year as of end of December.

And as of the beginning of week three of the current quarter, we are down 13% on a year-over-year basis.

So I think the industry is manufacturing at a rate that is in very good synchronization with the actual demand.

I think the inventories are in a very good plays, and so WD's pretty happy with the environment right now from an inventory supply management perspective.

And one last question -- what was your capacity utilization exiting the quarter and expectation for March?

Pretty full last quarter.

We basically ran hot all quarter long, and next to the best opportunities we could find in the demand space, we did not satisfy all available demand.

Consequently, we expect to run pretty good utilizations through the March quarter.

And understand on the WD's model, we feel no compulsion to run our factories flat out.

We run them efficiently.

We take appropriate action to match hours worked and manning to demand levels.

But we do not need to run at 100% utilization to make money.

In fact, we can run very significantly lower levels (inaudible).

So we match our supply to the demand that we see and we get visibility of that demand on a weekly basis, and we will take appropriate actions.

Aaron Rakers.

Wachovia.

Congratulations on the clean quarter.

I would like to dive a little bit deeper into the gross margin line.

You had said that 80 basis points from the Komag acquisition.

It would be very helpful to understand where the remaining sequential 420 basis points came from, be it mix shift in terms of capacities, and where I'm trying to get to is that if I look at the mix of business towards mobile, are we starting to see mobile carry a better than average gross margin for the Company?

Yes, you are.

If you look at what we have already indicated, enterprise is our highest margin product.

Branded products is our next highest margin product and notebook comes pretty closely after that.

And then there's a bit of a gap between desktop and consumer electronics.

And so with that being said, as we roll into this next quarter, that 20% guidance roughly, that is factoring in -- correct me if I'm wrong -- you're saying 300 basis points by the end of the year from Komag split across these next two quarters.

With that being said, why -- are you being a little cautious in seeing that comeback due to pricing or why are you seeing that come back a little bit?

Actually, the difference between the 80 basis points and the 300 basis points is actually spread over four quarters because it is the end of calendar 2007.

Thanks for the clarification.

I guess the other thing is on the channel inventory trends, where are you at in terms of weeks of channel inventory for yourself and relative to that to the industry?

We are sitting about the midpoint of our four to six-week range.

Actually, on the four to six-week range there, as we look at that we are currently combining in that number both distribution and the branded products pipeline.

So as branded products becomes a larger amount of business for the industry and for ourselves, it is likely that we will have to split that out going forward because the pipeline for branded products is in the seven to nine-week range.

And the distribution bulk is in the four to six-week range.

A final question, if I can jump in real quick, given your comments earlier, are you implying that for your notebook business, what is your average capacity for your notebook drives right now relative -- I believe Seagate told us that it was somewhere around 135.

I am trying to understand how much you are benefiting from just the technology leadership in that space.

We do not publish what the average mix is, but I will tell you that we did have a rich mix for the quarter.

And as we go into the next quarter, we don't anticipate that mix will be as a rich because it will probably gravitate more towards the industry mix as there will be more participants providing the higher capacity drives.

Jeff Brickman.

UBS.

I just wanted to ask a little more on the branded business.

What do you see out there from the competition?

And I guess more specifically, what advantages do you think you have that clearly have led to this solid growth?

And do you think going forward that you can maintain a share position similar to what you see out there today?

I think the advantages we have -- we are an early start, very good industrial design, and very good ease-of-use software and product configuration, and very healthy relationships with our our partners in the channels that take us to market.

So we've got a very strong position, very well-recognized by the consumer, and we're going to continue to try to capitalize on those strengths as we move forward here.

And do you see anything from the competition or anything out there that makes you think that it might be more challenging to maintain what appears to be a very high level of market share going forward?

Competition is always tough in this business, but we are frankly more focused on the opportunities and the kinds of products and the markets and geographies and partners that we need to be choosing in order to sustain growth in that market and accelerate growth in that market than we are looking in the rearview mirror to see who's behind us.

Understood.

And then over on the competitive side in general, did you see anything in the way of increased price aggression at all towards the end of the year or so far in this quarter in January?

What we're seeing really in January so far is normal, typical pricing behavior.

It is always a tougher quarter than the Q2 quarter, and we are seeing exactly what we expect at this particular point.

Keith Bachman.

Bank of Montreal.

To follow the last question, what are your like-for-like pricing assumptions for the March quarter?

We don't actually give out like-for-like pricing, but as I indicated we are expecting typical seasonal type of price declines, and that is what we're seeing so far.

Seagate on the notebook side, Seagate has the 250 gigabyte notebook that they are shipping now.

As you guys -- you would not answer the previous question on your capacity points on the 2.5 inch, but can you indicate whether off of such a high base that you anticipate maintaining share this quarter, losing a little share, gaining share on the 2.5 inch side on a sequential basis?

No, as I indicated, we've been shipping the 250 gigabyte capacity since May of last year, and have a substantial share in the 250.

And we do expect to have, as more people join with the capability to address that capacity point, we do expect to see some pressure there.

However, we now have since October the 320 gigabyte capacity, which gives us the opportunity to satisfy our customers' needs to continue to increase the product offering in terms of the storage capacity that they can offer in their high-end product mix.

And so we are baking into our numbers the expectation that there'll be other competitors at the 250 gigabyte capacity point.

But we are expecting that we will see a significant move up to 320.

We have already begun to see that happen.

Okay, so that 320 is still a competitive advantage in your eyes for Western Digital.

Okay.

Tim, just one last one for me.

Rich cash flow this quarter -- your debt level is at 760 or 770 something and change.

I know you are refinancing everything, but as you look out over or think about the next three quarters how will you think about applying the cash to pay down the debt versus growing the cash balance?

How should we be thinking about the debt balances as we roll forward?

As you see, it is a term loan A, which gives us -- we'll have a mix of revolver and term loan.

And we are obviously -- we have not figured out yet how much of the refinancing is going to be revolver.

We are still in negotiations with banks about that.

But what we will do as always is we will figure out what the most appropriate structure is and continue to take advantage of opportunities.

Maybe (inaudible) the share price -- we still have $46 million left in the share repurchase authorization.

And if the opportunity presents itself and the market continues to give these sort of opportunities, the macroeconomic market I'm talking about, (multiple speakers) give the opportunities there, we would be opportunistic relative to buying back shares.

Interesting.

Okay.

Thank you.

Joel Inman.

Robert Baird.

Can you talk a little bit about opportunities for further expansion in the enterprise market with maybe new protocols or new product offerings?

We have indicated that we have strong growth opportunities in all the currently served markets.

And those opportunities arise through the growth of those markets as well as the opportunity to out-execute on quality, reliability and customer service and products.

And we have also indicated that there are other parts of market -- gaming, high-performance enterprise -- where we do not currently compete and that it is our intention over time to be a full line supplier to the industry.

Outside of that, we will announce products as we ship them.

Thanks, and just one follow-up.

Can you give us some idea of the Komag revenue wind-down over the course of this year?

As we indicated, we're forecasting it to be $50 million this quarter, and after that it would be so insignificant that we will not be breaking it out.

Jay Hingorani.

Standard & Poor's.

Just a couple of housekeeping I think I missed.

On the channel breakout for the December quarter, could you just tell me what the [disti] and the OEM was, please?

OEM was 48%, distributor was 34%, and retail was 18%.

And just wanted to get your impression -- you did mention that (inaudible) and the unit shipped, the IDC number.

We also heard from EMC about incorporating an SSD drive, an enterprise SSD drive.

What is your view on that, and give me some color on what you think about that?

I think both of the areas where SSDs have shown up so far are valid niche markets.

But they are niche markets, and it is a significant endorsement to see EMC bring out a product at the very high end of the performance spectrum.

But recognize of the 8 million or so drives shipped into that enterprise space, less than 2 million are addressing high-performance in that category of performance.

And this SSD announcement is a small slice of that small slice.

So it is a niche application which offers some opportunity for system designers to tune performance.

Okay, but longer-term, what would you have to see to even consider that technology to be something that you would address?

As those niche applications grow and I am confident they will grow, we look at -- if you look at the characteristics, flash is media.

You have to then match that up with a controller and applications knowledge, and knowledge of how to put that whole thing together in a reliable way and to make it look and behave like a hard drive which is the application.

And so who better to take media and integrate it and ship it into a market where there is deep experience and knowledge of the application and the hard drive companies?

So as we see that market becoming large enough to justify the engineering investments, it is highly likely to that you will see WD and other drive manufacturers address that market segment.

I guess what I was trying to determine and maybe you did give me some hint about that is how much of an engineering effort, if you will, does it take for you to get there versus the IP that you already have in house?

Or is it something you can go out and buy?

Be aware that in 1989, Western Digital was shipping SSDs in partnership with SunDisk which was the precursor to the current SanDisk.

So there is a significant body of knowledge relative to how to take solid-state media and incorporate it in a drive product.

Rich Kugele.

Needham & Co.

Thank you for the quick follow-up here.

Two quick ones.

The seasonality -- what are your expectations for the industry in the first-quarter?

I know you're talking about the December was an outsized quarter for you, that perhaps your sequential will be a little bit greater.

We will see if that plays out, but in terms of the industry expectations, what are your thoughts there for the first quarter?

We're anticipating a 3% to 5% reduction in the TAM quarter on quarter.

And then lastly, since you brought it up about breakeven being lowest in the industry, I knew Seagate has made public comments that theirs is now down to 12% to 13% gross margin, that they would be able to breakeven.

Do you have any comments on where we should be thinking yours is post Komag?

Not really, no.

I would now like to the call over to Mr.

John Coyne.

Thank you, operator.

In closing, I want to thank you all for joining us today.

I'd also like to thank again our employees, our suppliers and our customers for an outstanding December quarter.

And we look forward to updating you on progress as we execute our strategies and address the last opportunities we see ahead of us in the storage market.

Thank you.

Thank you.

This does conclude today's conference call.

You may disconnect at this time.