威騰電子 (WDC) 2009 Q2 法說會逐字稿

Welcome to Western Digital's second quarter financial result for fiscal year 2009.

Later, we will conduct a question and answer session.

(Operator Instructions) Now I'll turn the call over to Mr.

Bob Blair, you may begin.

I want to mention that as we begin we'll be making forward-looking statements in our comments and responses to your questions concerning:

Demand in the hard drive industry, reductions in our expense and operations structure.

Our business restructure plan and the associated impact on our ability to maintain operating expense align capacity with demand and improve structural costs and gross margin range.

The expected size, type and timing of charges and future savings associated with our business restructuring plan.

Our ability to deliver industry leading performance, market opportunities for high capacity storage, our future investments, repurchases of our stock and management of our cash, good will impairment charges.

Our gross margin model, cost structure and ability to remain profitable and cash flow positive.

Demand and pricing on the hard drive industry for the March quarter and our financial results expectations for the March quarter including revenue, gross margin, expenses, share count, restructuring costs and earnings per share.

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 this our 10-Q filed with the SEC on October 31st, 2008 as well as the additional risk factors reported in the Press Release included as exhibit 99.1to the form 10-K we furnished to the SEC today.

Undertake no obligation to update our forward-looking statements to reinspect new information or events and you should not assume later in the quarter that the comment we've make today are still valid.

In addition, references will be made during this call to non-GAAP financial measures.

Investors are encouraged to review the reconciliation of the differences between the non-GAAP measures to the comparable GAAP financial measures in our Press Release included as exhibit 99.1 to the form 10-K.

Excuse me, the form 8-K that we furnished to the SEC today.

A copy which can be found under the SEC filings link in the Investor Relations of our website at www.westerndigital.com.

I would also like to note that churches of remarks from today's call by John Coyne and Tim Leyden will be available on the investors section of Western Digital's website immediately following the conclusion of this call and now I'll turn the call over to President and CEO of Western Digital, John Coyne.

Thanks, Bob.

Good afternoon and thank you for joining us today.

In our last conference call in October 2008, we were coming off a weak September quarter and accordingly, in contrast to historical norms of 7% to 10% quarter on quarter growth, we provided what we believe was muted guidance for the December quarter of approximately 5% unit growth in our served markets for 3.5" and 2.5" ATA drives, however, as the quarter developed, we saw unprecedented macroeconomic conditions, depress these already muted expectations with demand actually declining 14% sequentially, transforming the December quarter into one of the most challenging ever for WD and the entire hard drive industry.

Instead of the 138 million units in served market demand which we expected, we saw a decline in industry shipments to 113 million, a negative swing of 25 million hard drives.

The timing of this sudden demand shift gave us and others in the hard drive industry just two months to react and adjust.

This rapid falloff in demand amplified by customer inventory adjustments further intensified the highly pricing environments that we experienced throughout calendar 2008.

As we saw demand fall off dramatically in early November, we acted swiftly to align our production volumes and operating expenses, demonstrating the benefits of a well-coordinated, capable and committed team, executing to a proven, fast, flexible and responsive business playbook.

Our response yielded positive results in comparative profitability, cash generation, asset management and increased customer preference.

While pleased with the performance of the team and the business model in addressing short-term conditions, our assessment was that this was not just a one quarter anomaly, but rather a demand level reset, which would become the new baseline for demand throughout calendar 2009.

Consequently, we developed and put in motion a plan which resizes our expense and operations structure to a revenue expectation for calendar 2009, some 25% below that we achieved in calendar 2008.

The details of this plan, which involved headcount, compensation, and work hour reductions across all areas of the Company as well as closure of facilities in both our component and hard drive manufacturing operations, were outlined in the form 8-K we filed with the SEC on December 17, 2008.

These actions, which we expect to complete within the March quarter, are designed to maintain our operating expense in the range of 9% to 11% of revenues at the $1.5 billion level.

The resizing of production capacity through work hour and headcount reductions, facility closures, and equipment retirement is designed to align capacity more closely with our perception of ongoing demand, improve our structural costs and move us back towards our business model gross margin range of 18 to 23%.

The hard drive is a high technology commodity, critical factors for success in this market are consistent, high quality and reliability, large scale and low cost, focused asset management, effective technology deployment, product breadth and product availability.

WD's consistent and profitable growth over the last seven years demonstrates our understanding of these key factors, and our ability to deliver industry-leading performance across all of them while executing within with the financial model I outlined earlier.

We are focused on continuing to deliver outstanding customer value through consistent execution against this simple, yet effective model.

Operating expense averaging 10% of revenue over the last five years has enabled expansion of our worldwide sales and support operations which has extended our absent to bring outstanding products to customers in all parts of the globe.

It has funded the development of industry-leading component technologies in heads and media to underpin our customer value proposition, and it has allowed us to develop a broad and diversified product portfolio serving the ATA hard drive and external storage markets while also funding significant engineering activity in preparation for our entry into the traditional enterprise market.

We continue to demonstrate the effectiveness of these controled and focused investments through the technology deployments and product shipments we have announced since the last conference call.

In the December quarter, we believe that we shipped more 500 gigabyte 2.5" hard drives than all five of our competitors combined and shipped twice as many as our nearest competitor.

We brought the fundamental technology and system design to market at roughly the same time as key competitors.

However it's the entire recipe of our approach to new product introduction and ramp that is evident in this level of market acceptance and our financial results.

The ingredients include our process technology and new product deployment and are refinement of yield, utilization, cost and supply chain logistics as we ramp into production.

All the while, maintaining the industry's leading quality and reliability metrics and lowest warranty expense.

This week, we began volume shipment of another industry first, the two terabyte WD caviar green 3.5" hard drive implying our advanced 400 gigabit per quare inch aerial density technology, allied to our unique second generation WD green power energy saving technology.

This same two terabyte drive will also power a new capacity point in our My Book line of personal storage product sand enables an 8 terabyte capacity in our WD share space, NAS product line for home server media center and small business applications.

In our branded group, we launched several new Mac products during the quarter, including the My Passport Studio with fire wire connectivity, the My Passport for Mac in 320 gigabyte and 500 gigabyte capacities and and the My Passport Mac addition at 1 terabyte.

We also entered an entirely new branded product category with the launch of the WD TV HD media player.

A device that allows easy playback from any UBS storage device of music, photos, and video directly onto televisions in full 1080P HD format.

This is the first in a line of WD-branded products designed to bring users media content out of the home office and into the family room with a simple and elegant PC-free interface.

Tim Leyden will now provide our detailed report on the December quarter, our resizing and our outlook, Tim?

As John described, unprecedented macroeconomic conditions made the December quarter a challenging one for WD and the entire hard drive industry.

Nevertheless, in the face of these challenges, the WD team took swift action to reduce expenses, cut production capacity, and minimize working capital investments.

As we entered the quarter, we had expected sequential quarterly unit growth of about 5%.

At the low end of historical seasonal trends.

Instead, we had to make course corrections during the quarter to respond to a decline in our total serve macro unit demand of approximately 14%.

And desktop and notebook markets each declined about the same percentage.

Our revenue for the second fiscal quarter was $1.8 billion, down 17% from the prior year.

Hard drive revenue was down 13% from the prior year and 14% sequentially.

Shipments totaled 35.5 million units, up 4% from the prior year but down 10% sequentially.

Average hard drive selling price was approximately $51, down $2 from the September quarter and $10 from the year ago quarter.

Our Q2 ASP reflects a very competitive pricing environment as a result of all competitors having anticipated more robust demand and consequently having too much supply available for the demand that materialized.

For the December quarter, we saw sequential declines in desktop, notebook and enterprise SATA units that had shipped.

We experienced the first Q1 to Q2 decline in 2.5" drive market demand since entering the notebook market in September of 2004, our unit shipments of 2.5" drives drives were 13.8 million in the December quarter as compared to 14.6 million in the September quarter and 8.7 million in the year ago quarter.

On the plus side, shipments of consumer electronics and branded products were up sequentially.

We shipped 4.1 million 3.5" drives for use in digital video recorders in the December quarter as compared to 3.9 in the September quarter and 4.1 million in the year ago quarter.

And revenue from sales of branded products increased 5% from Q1 and 10% from the year ago quarter to $403 million.

Hard drive channel revenue was 57% OEM, 21% distribution and 22% branded products in the December quarter compared with 56%, 26% and 18% in the September quarter and 48%, 34% and 18% in the year ago quarter respectively.

There was one customer, namely, Dell, that comprised more than 10% total revenue.

The Q2 geographics that are our hard drive revenue was 23% Americas, 29% Europe, and 48% Asia.

As compared to 23%, 29%, and 48% in the September quarter, and 32%, 32%, and 36% in the year ago quarter.

Demand strength in Asia continues to be driven by the concentration of global manufacturing in that region.

Our gross margin for the quarter was 15.9% versus 20.1% in the September quarter and 23.3% in the year ago quarter.

Our December gross margin was impacted by the decline in overall market demand and the resulting competitive pricing pressures and factory under utilization.

Our media operations continue to perform as expected and we have achieved the 300 basis point cost savings objective outlined at the time of our acquisition.

Total operating expenses of $274 million, included $113 million of charges associated with the restructuring plan announced on December 17th.

Excluding these restructuring charges total R&D and SG&A was $161 million for the December quarter.

$29 million less than the September quarter.

Our quarterly operating expense benefited from the reversal of variable compensation incentives amounting to $16 million that had been accrued in the September quarter and the absence of similar accruals during the September quarter and a $6 million insurance recovery.

Our resizing plan includes the closure of one our hard drive manufacturing facilities in Thailand, one of our sub straight manufacturing facilities in Malaysia, and headcount reduction throughout the world.

We expect the plan to be implemented by the end of March, 2009.

Planned headcount reductions of about 7%, combined with attrition of 6% should result in total headcount reductions of about 6500 by the end of March.

When combined with work hour reductions of about 7%, the results should be about a 20% reduction in total capacity.

The total cost of the restructuring is currently expected to be approximately $140 million, $113 million of which has been recorded in operating expenses for the December quarter.

The total cash utilized by the resizing actions is expected to to be approximately $60 million.

Most of which will be spent in the March quarter.

There were no material cash expenditures related to the restructuring in the December quarter, annual savings from these actions are expected to be approximately $150 million.

Operating income was $16 million or 0.9% of revenue including the $113 million restructuring charge.

Excluding the restructuring charge, operating income on a non-GAAP basis was $129 million or 7.1% of revenue.

Interest and other non operating expenses were approximately $9 million, this includes about $6 million of unrealized losses on our previously-disclosed investments in auction rate securities.

These investments totaled $19 million at the end the quarter.

The Company recorded a net tax benefit for the December quarter of $7 million.

This consists of a tax provision of $6 million, offset by a $6 million tax benefit related to the extension of the R&D tax credit, which was enacted into law in October 2008 and a $7 million favorable adjustment to previously recorded tax accruals to reflect a change in the Company's outlook for future income before taxes.

Net income totaled $14 million or $0.06 per share.

Excluding the $113 million restructuring charge, and the related tax benefit of $4 million, non-GAAP net income was $123 million or $0.55 per share.

Turning to the balance sheet, our cash and cash equivalents at end of the quarter totaled $1.4 billion as compared to $1.2 billion at the end of September.

We generated $300 million in cash flow from operations during the December quarter.

Capital expenditures for the December quarter were $140 million and our non cash charges for depreciation and amortization expense totaled $122 million.

Capital expenditures for fiscal 2009 are expected to be about $500 million.

This is consistent with the update we gave on September 17th when we announced the significant reduction from our prior forecast of $750 million.

Depreciation and amortization for fiscal 2009 is expected to be about $480 million.

We did not repurchase any shares of stock during the December quarter.

We believe that in times of economic uncertainty and tightness of credit, the robust cash balance is an important strength.

We will continue to manage our cash accordingly during these uncertain economic times.

As of the end of December, we had 46 days of receivables outstanding, 27 days of inventory or 14 turn and 64 days of payables.

This resulted in a cash conversion cycle of nine days.

In accordance with the accounting rules for FAS 142, we reviewed the value of our goodwill and concluded our goodwill was not impaired as of quarter end.

This review must be done annually or whenever events or changes in circumstances indicate that goodwill will be impaired.

It's possible that an impairment charge under the FAS 142 rules could occur in future quarters.

Before I discuss the March quarter, I would with like to make a few comments about our stated business model.

As John indicated, we continue to believe that an 18% to 23% gross margin model is appropriate given our level of vertical integration.

The amount of investments in capital and R&D required to continue to provide the products demanded in the marketplace, and to generate an appropriate return for our shareholders.

As outlined in the restructuring plan, we have resized our cost structure with the objective of remaining profitable and cash flow positive at a $1.5 billion quarterly revenue run rate.

The critical remaining pieces of the equation are a balanced supply/demand environment and a product and segment mix that would support a revenue level commensurate with a value we are delivering.

I want to remind you that WD will have a 14 week quarter in this fiscal year and we will include that extra week in our fourth fiscal quarter that will end on July 3rd, 2009.

Now I will discuss our expectation for the third quarter of our fiscal year, 2009.

First let me outline the market situation situation as we see it.

Historically, the March quarter sequential unit decline has been in the range of zero to minus 8%.

Global macroeconomic conditions remain challenging the outlook in our industry and the PC industry mirrors that.

With demand, visibility continuing to the limited, credit continuing to be tight for our customers and inventory rationalization continuing throughout all channels.

We envision that these conditions will continue to render historical demand patterns less meaningful through the rest of this calendar year.

As a result, we are modeling quarter on quarter sequential market unit reduction of approximately 13%.

We believe that in a commodity marketplace such as ours that balancing of supply and demand continues to be critical and we are still seeking to find that equilibrium as an industry and so we anticipate pricing will continue to be competitive.

The capacity re-alignments undertaken by the 3.5" industry participant has led to a better balance between supply, demand and inventory holding patterns.

However, in the 2.5" segment, the willingness of multiple competitors to operate unprofitably continues to depress prices to a level that's insufficient to sustain investments.

In the branded products area, competition has intensified as competitors gravitate towards more attractive margins than those provided by comparable product in other segments.

Taking these factors into account, we expect current quarter revenue for WD to be in a range from $1.35 billion to $1.5 billion.

For comparative purposes you should note our fiscal revenue numbers included $89 million for revenue for external media sales as we fulfilled Komag's preacquisition contractual obligations.

We're modeling gross margin range from 14% to 14.5% R&D and SG&A are expected to total approximately $175 million.

Our net interest expense is projected to be about $4 million.

We anticipate tax expense of between $5 million and $10 million for the March quarter.

We anticipate our share count to be approximately flat with the December quarter.

These amounts exclude remaining restructuring charges, which we estimate to be about $27 million, this estimate may change open until the date of actual disposal or completion of the restructuring plan.

GAAP, EPS, including the restructuring charges is there for expected to be a loss of $0.11 and a profit of $0.02 for the March quarter.

Excluding the restructuring charges, we estimate non-GAAP earnings per share between $0.01 and $0.14.

The non-GAAP earnings per share are calculated using the same share count as the GAAP earnings per share.

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

(Operator Instructions) Our first question comes from Keith Bachman from Bank of Montreal.

I had two questions.

The $150 million savings that you identified in annual savings, could you just give us a little flavor about how you think that manifests itself.

How and when that shows up?

I think you said in the June quarter.

How that unfolds and particularly how we should be thinking of cogs versus outbacks and I have a follow-up.

We anticipate we'll be at that run rate from the first of April so consequently right through the June quarter, and at that new run rate and then on cogs versus OpEx, if we look at the $150 million savings it's about two to one.

Two to one?

OpEx versus cogs.

Now please remember that in the June quarter it's a 14 week quarter for us.

Right, right, fair enough.

Thanks Tim and my follow-up is; you've identified how much capacity that you anticipate taking out of your system, I just wondered through your industry analysis, how much you think the industry is looking to take out of total capacity?

Well I think, Keith, as we indicated we saw the industry demand come down by some 13%, 14% on a quarter-over-quarter basis into the December quarter, and we're modeling industry demand to go down another 13% into the March quarter.

Now we're talking about ATA, 3.5" and 2.5" combined and our view would be that the capacity should come down by the same amount that the demand is predicted to be down if we desire to achieve that supply/demand balance which is so critical to the health of this industry.

Right, fair enough.

Okay, thanks, guys.

Our next question comes from Shebly Seyrafi with Calyon, your line is open.

Thank you very much.

I just want to make sure I understand this math correctly because your headcount was reduced by 500 and something sequentially already out of the targeted 2500 or so.

So, I think you have 80% more to go in terms of the headcount target.

Should we think about 80% of $150 million divided by four is the quarterly difference between the OpEx in the December quarter and where you're going to be at end of June?

I'm not sure I understand the question, and can you please.

I'll be a little slower here.

You've already reduced your headcount by 20% -- I'm sorry by 20% of the target, right?

Because you want to reduce your headcount by 2500 and you've reduced it by 500 already, correct?

Yes.

Okay, so the $150 million annual savings, 80% of that is left so to speak.

If I look at headcount side.

Then you have divided by four.

I'm just trying to figure out what kind of OpEx number I should be thinking about say in the September quarter of this year?

Okay -- our business model.

What we've done is indicated that we're siding the business to to run at $1.5 billion in revenue and our business model for OpEx has been in the 9% to 10% region, and when we were operating at around $2 billion, a little above $2 billion in revenue.

So we've been operating somewhere in the $180 million to $190 million run rate from an OpEx view point.

We are going to try to get back to as John indicated in his remarks, get back to somewhere in the 9% to 11% region.

Probably more towards the 10% rather than 11% but we're going to try and see if we can keep it at that level.

So, consequently, when you do the math on that, it will be coming somewhere between $155 million and $165 million.

By the September quarter?

No, by the June quarter.

We're going to be at that run rate at the first of April.

Great.

13 week run rate.

One more --

Again, let me remind you it's a 14 week quarter in June.

Got it.

So you have to flex for the 14th week.

Should we think about the March quarter with this 14% or 14.5% gross margin as the low water mark how we should think about getting back to an 18% gross margin by the end of this year.

Is that a reasonable expectation?

Well, I mean it's back to what John mentioned about the critical factor in gross margin.

One of the critical factors, possibly the most critical factor is pricing, and it depends on how the industry sizes itself to match the demand and if it sizes itself to match demand, then yes, it's possible to get back to reasonable gross margins, but until that's done we can forecast when that's going to happen.

Thank you.

Rich Kugele with Needham & Co., your line is open.

Thank you and good afternoon.

Gentlemen, I guess can you talk about what you're seeing in terms of channel conditions.

Obviously that segment is primarily 3.5" ATA, but it seems people have been acting little better there.

See if you can comment on that?

As I mentioned in my comments, we're seeing that the actions that have been taken by the participants in the 3.5" segment are tending to firm up the actual situation between inventory, supply, and demand and we're beginning to see the firming up of pricing in that particular segment.

And there are a lot of of indications that overall channel inventories and even if you look at your own balance sheet and Seagate's balance sheet.

Lowest levels I've certainly ever seen.

Do you feel that now after two quarters, if let's say we're down 13%, after two quarters of that type of decline, has the industry gone too far and will too much capacity be coming off line or is the capacity that's coming off line primarily 3.5" and it kind of sets the stage for your expansion more on the 2.5" in the second half.

This John.

Visibility into demand still remains somewhat opaque and cloudy but the way we're thinking about it.

Yes, there's been significant reduction in inventories in the channel, particularly in 3.5".

In WD's case, we've taken 1.2 million units out of the channel on a quarter-over-quarter basis, end of December, versus end of September.

As you can see with our 14 turns we're managing our internal inventory in the way we always manage it, very well matched to the demand.

However, there are some elements of concern that I have.

I look at our own restructuring plan and one of the outcomes of that is that we have enough unutilized PCs in our business to last us into some considerable time into the future because to let go the users of those PCs.

We, therefore, are looking at all of the headcount reductions that are happening on a worldwide basis in multiple industries.

We believe those industries will have at same kind of condition and therefor we see a further depressed demand in the commercial segment as we look forward from a PC demand perspective.

The outlook on the -- and that's a commercial PC statement both desktop and notebook -- as we look at the consumer space, we think that's a little less effected.

There is some cannibalization effect to the notebook due to the surging of lower priced netbook offerings.

The good news for us there is that the vast majority of netbooks are shipping with hard drives, and one of WD's fortes is the design and manufacturer of very cost effective solutions to any kind of client system hard drive.

So net-net, we think that emergence of a lower price point with a reasonable functionality that relies a hard drive to deliver that functionality is medium to long-term a good thing for us and for demand in that segment.

Then we look at the direct external sales of drives in the retail-branded products arena where we see the cleanest demand profile of all and we feel very good about demand in that segment for us was good in the December quarter.

We were modestly up.

I think that's a reflection of our great products, great channel partnerships and why we expect that to diminish somewhat seasonably as it has traditionally done.

We believe inventories are managed and demand profile there is immediately visible and we can react to that.

Very helpful.

I guess my last question is just any thoughts the potential Toshiba Fujitsu merger and does this in any way change of your timing of your entrance into the enterprise.

Two answers, first, we have a long-standing tradition of not commenting on rumor, and second we continue with our investments in preparing to enter the enterprise space and we will let you know when we're shipping product in that space.

Ok, thank you very much.

Sherri Scribner with Deutsche Bank your line is open.

Tim, I was hoping you could go through the tax numbers again.

I would like to know what your normalized tax rate would be without the external items in.

It seem like there's about 10 million of extra times we won't see again.

Just trying to get a number there.

Our regular tax expense was $6 million throughout the course and then we had benefits of $13 million.

So the $6 million, and so if we look at the mix of your business in the quarter, it look like there's a lot of retail business.

I can understand that from the perspective of the seasonality and the holiday sales but I think some people would be concerned that maybe there is higher inventory levels in the retail channel.

Could you may be comment on the inventory levels in the branded products business and why that number jumped up so much?

Yeah, I think the inventory levels in branded products are very well in line with what we would normally expect.

In fact a little down on the prior quarter.

So we're very comfortable with that.

Do those typically have higher inventory levels?

Yes, I think we've noted this on several of the calls that the pipe there is a little longer than the traditional component distribution numbers.

You are probably looking at components at the end of this quarter were way down at the four-week level or slightly below and typically the retail pipeline run in the eight to nine week thing and that's at the low end of that.

Okay on, thank you.

Doug Reid with Thomas Weisel Partners your line is open.

Thanks and can you comment on pricing trends within the last three weeks specifically?

As we indicated again, the 3.5" has begun to show some signs.

The beginning of some element of firming up and 2.5" continues to be extremely competitive and again as I noted in my comments, we are seeing competition intensify in the branded products.

I was wondering if you could give more color on where the cuts have been made within SG&A and how quickly you can restore resources you may have in a event or when a recovery happens?

Cuts have been made across the OpEx and manufacturing areas.

In the OpEx area we're dealing with it by cutting out activities and trying to slim down the number of transactions and activities that people do, and we're able to operate efficiently at the current level and when we see the signs of more visibility and demand clarity coming back, we would visibility and demand clarity coming back, we would be able to resume normal hiring-type of activity.

I think if you review our progress over the last five years, responding to upside opportunity has never five years, responding to upside opportunity has never been a problem for us in.

Great, thank you.

Christian Schwab with Craig-Hallum Capital, your line open.

Great, thank you.

Good quarter.

My question, what is your capacity then when you get down with this.

Can you share with us what your total manufacturing capacity would be?

It will be whatever the market demands from us.

I thought you said earlier, you would have a total of a 20% reduction in your total capacity?

That's what we're sizing to support -- as Tim mentioned, the focus of our resizing plans was to be appropriately sized to be profitable and cash positive at a $1.5 billion revenue run rate.

Now around that model target for the baseline of the model, again, we have a fundmental business model that's quite flexible around the center line.

What we've done in the restructuring is to take our center line from $2 billion down to the $1.5 billion and then what we will do on a operational tactile basis from week to wee,k as we closely monitor demand and market activity, is to respond to that properly.

Whether that's up or down, around that median line and that's how we typically run our business.

If you look at what's different today than this time last year, I would have to say that we're being a little more conservative and tending to in a posture of chasing opportunity up once we verified it, rather than getting in front of it.

Okay.

That's fair.

Can you make a comment on what you believe the capacity of the industry is today and where it may be a couple quarters from now in aggregate quarterly volumes.

Seagate believes that the industry exiting December before all of the restructuring was about 160 million units a quarter.

Would you agree or disagree with that number and where it's headed?

That industry is the total industry number.

Our focus since we participate in the ATA segment, 2.5" and 3.5" ATA segment tends to be on that segment which is 131 in September, 113 in December and we're modeling at about 100 in the March quarter.

And so we're looking at our opportunity in that light, and in our sizing and maintaining our share in light of those expectations for market sides.

One last question if I may, not commenting on the rumor if Toshiba and Fujitsu were to happen, but what would you believe would be the impact to you and the industry if such a merger were to merge?

I think we're more focused on how we delight customers with great products that are of high quality and reliability, address their needs and are available at the right times, and frankly, the health of the industry, as we see it, relates to how the supply/demand balance is managed from a build perspective, and the health of our Company is derived from how much better we execute than our customers.

David Bailey with Goldman Sachs you're line is open.

Thank you very much.

Just to follow on a question earlier, how are you thinking about your mix and pricing within product lines this year.

In light of the shift to lower end desktops and notebooks as well as sort of the emergence of netbooks.

It definitely helps a unit side but doesn't this put more pricing pressure?

It potentially could put some depending on how netbooks gets on through the rest of 2009 relative to other PCs and relative to the other parts of the market.

Potentially has an outcome of mixing down the overall average gigabyte shift and as I mentioned, one of WD's fortes is the design and manufacturer of very cost effective product, and so we see that as an opportunity.

Now it does put pressure on ASPs, but on the other side of that equation, offsetting that, is that the branded product retail business is moving in the opposite direction.

As fast as the PC price point is being moved down to make it accessible to more people, the need for storage doesn't change in that use case for the customer.

So we expect that the attach rate of external storage to those minimally serviced products with low end storage devices.

We see that the opportunity to attach to those with high capacity external storage is greater than the opportunity to attach to high capacity full featured PC.

Great, thank you.

Mark Moskowitz with JPMorgan.

Your line is open.

Thank you, good afternoon.

Two questions.

More of a technology question, John.

Just given the macro back drop and how you talked earlier about the oversupply of even PCs with a neuron environment.

And how you expect corporate PC spending to be quite depressed relative to consumer.

Can we see something in the enterprise storage environment where folks decide to shift more to a lower cost solution such as SATA a lot quicker than may be a lot of us had anticipated and move away from fiber channel over the next 12 to 18 months and how do you feel positioned there if that were to occur?

I think certainly SATA and the enterprise has been an area of significant success for us.

It's an areas that been continually growing over the last several years as CIOs and there CEOs and CFOs began to focus more on the value proposition and how to service needs with properly tiered solutions relative to performance.

That process has been going on for several years now.

I think current economic environment accelerates more cost effective solutions and typically tiered storage that uses significant levels of enterprise SATA, rather than using more expensive SAS/SCSI fiber channel drives, which typically are higher priced and lower capacity which are primarily a performance device.

Yes, I think we're going to see an acceleration of deployment of large capacity drives in the lower cost drives into the enterprise.

If that acceleration does does occur, would WD need to spend any on R&D to flush out or bolster your SATA platform or are you already there.

We're happy with our positioning in that market.

Just lastly, I know it's an old type of practice in the old days but has there been any sort of bun plan when you're starting to secure package with both desktop and notebook and may be low-end server drives.

I think the trends you're seeing in the industry, I think on an overall basis the top three suppliers represented 77% of the industry in the December quarter compared 73.5% in the September quarter.

I think what you're seeing is a reflection of the value proposition that the large vertically-integrated broad product line Companies offered to the customer in terms of value for money, technology road map, long-term capability to support their product and satisfy need on into the future and I think that's going to continue.

Thank you.

Scott Craig with Bank of America, your line is open?

Good afternoon.

Hey Tim, could you take a look at the gross margins a quarter-over-quarter basis and just kind of breakout how much of the sequential decline was due to pricing versus volumes versus anything else that you might want to throw in and then John, from a 2.5" notebook perspective I think you threw out numbers there how you have more shipments in all five competitors, 2x the nearest competitive et cetera, what do you estimate your market share was in the 2.5" space in the December quarter, thanks?

So on quarter-over-quarter pricing and margin movements, obviously pricing was by far the largest component, we once again for the four consecutive quarters, so prices that were higher than we had seen in comparable quarters.

Price decline.

Thank you, price decline.

In comparable quarters, and the absorption as we had to make due with much lesser product volume was also a significant item and against that we had improvement that makes because of our branded improved from 18% to 22% and so pricing was the biggest item on the utilization was the second biggest item and we had some offsetting benefits from that mix.

And to the notebook question, the 2.5" product line, my reference in terms of related to the 400 and line, to the 400 and 500 gigabyte capacity point, that ability to rapidly ramp reliably in that space and the customer acceptance of our ability to do that overall that had the effect we think we gained about two points of share in the notebook market.

Okay, thank you very much.

Kevin Rottinghaus Cleveland Research, your line is open.

Thanks.

The 13% decline this quarter that you're saying for the industry.

How much do you think is demand versus inventory?

Still quite hard to separate that.

Taking an informed stab at it, probably 2/3 demand, 1/3 inventory squeeze.

Okay.

And you've said kind of your inventory at least in the channel at the retail level you think is okay.

Is the the inventory correction really just happening at the OEM level or do you think people in the inventory seeing an inventory correction happen?

I think it's throughout all channels and it's being driven by a number of things in.

As the demand ratchets down, the inventory that was appropriate last quarter was no longer appropriate.

You need to bring the inventory down in concert with the demand reduction.

So that's one item, the second item is credit availability where customers are looking to squeeze their inventory and turn those sales into cash and pay down credit lines and to house that cash for the future in fear that they won't be able to renew credit lines.

So there's some impact of those behaviors also on people changing their business models to run with lighter inventory in terms of weeks of inventory then they would have in the past.

Okay.

For WD, are you planning any manufacturing shutdowns this quarter?

We think we're sized to our opportunity within the market.

But we review this on a week by week basis as we map the demand profile against the production and our inventory levels and we manage all of that on an ongoing basis.

At this point it's too early in the quarter to determine.

And just one last question.

On the 3.5" side of the pricing stabilizing, do you think that's any indication at all of distress from some of your competitors not being able to go there on price anymore, but what do you attribute 3.5" price stabilizing here near term to?

I think it's a reflection of a more mature market with a smaller supply base, and so the visibility into the demand is a little more predictable.

And the reaction to that given that there's a smaller group of people trying to interpret that demand signal, tends to be better, and I think you see in that market, the predominance of that market supplied by three suppliers, CA, ourselves and Hitachi.

Again that kind of narrows and improves the visibility, and then:there certainly are indications that there's significant stress in that marketplace from a price versus cost perspective, and so the behavior we're seeing is to be expected.

Thank you very much, appreciate it.

Katey Huberty with Morgan Stanley your line is open.

What do you think your market share is now of netbooks and as volumes have accelerated over the last couple of quarters are the gross margin percentages of those lower capacity drives converging to more main stream capacities?

I think we have a representative share in that segment relative to our share in other segments, and it's a challenge right now from the margin perspective because we've not yet developed a purpose design solution for that segment.

As it relates to planning around $1.5 billion of revenue, is the model two quarters out to be back to a normalized margin off of $1.5 billion or to it be at least slightly profitable?

I mean a couple of quarters out, we don't anticipate economic conditions will not return to norm so we will continue to operate the model and to match the demand, and that again is the key factor.

I mean we will be able to size our business in order to be able to deal with the market conditions, and it's important that is understood throughout the industry.

That's really the most critical component in the gross margin equation followed pretty closely by segment mix also.

Gotcha, thanks.

Joel Inman with Robert W.

Baird.

Your line is open.

Hi, thanks.

Nice job on the quarter.

For your outbacks guidance do you say $175 million next quarter?

For OpEx.

And what's the reason that's going up?

14 weeks.

Oh, right, okay.

Q3 it's $175 million and the reason that's going up relative, Tim did call out that a component of the Q2 reduction quarter-over-quarter was a reversal of a bonus accrual from the segment quarter.

Right.

And so we don't have that pickup in the March quarter.

And that was what $16 million.

Okay.

And then on the branded side of the business how would you describe the competitive landscape there.

I know you said it's intensifying but as it pertains to third party suppliers that don't actually manufacturer the products, do you see consolidation in the space in the near term?

Our observation is that things are become more competitive in that space.

That will certainly put some pressure on people with marginal structures and marginal market access and so on.

We believe we've got a great product line.

We've got great customer relationships, and we have a very good product road map.

So we're very enthused about that market and we're very committed to continue to prosecute that market as the leader, and we're working on that as we speak.

Okay, and then just the new product that you announced, is that available today?

Yes that's been available since mid to end of September and we're very pleased with the sales level on that product and we're very pleased with the excitement it's creating and demand for incremental storage that's creating because it provides very simple and elegant straight-forward mechanism to take drive content directly to the TV.

Okay.

Thanks very much.

Thank you.

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

John Coyne.

Thanks.

In closing I wanted to thank the entire WD team.

I'm greatly appreciative of the loyalty and commitment to WD's success displayed by all of our employees as we resize our business.

Those who are unfortunately leaving us and those who are staying with reduced compensation packages.

Their integrity and class, sustained focus and commitment to success and outstanding execution in these trying times is truly inspiring.

Our results in such challenging market conditions are a testament to their capability and tenacity.

Despite the current state of the economy, we remain very encouraged by the long-term market opportunity for high capacity storage in the years ahead.

The applications driving the digitization of massive content are not going away.

We're taking what we believe are prudent and appropriate steps to size our business for the new economic environment we expect throughout calendar 2009.

We remain committed to provide the best customer value proposition in the industry, to deliver financial results which allow us to make the substantial investments required to continue to lead the industry and providing solutions to customer needs for high capacity, cost effective storage and to generate superior returns for our supply partners, our employees, the communities in which we operate and our shareholders.

I would like to thank you again for joining us today and I look forward to keeping you informed of our progress.

Thank you.

Thank you, this does conclude today's conference.