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Operator
Good afternoon.
Thank you for standing by.
Welcome to Western Digital's first quarter financial results for fiscal year 2010.
Presently all participants are in a listen-only mode.
Later we will conduct a question-and-answer session.
(Operator Instructions).
As a reminder this call is being recorded.
Now I'll turn the call over to Mr.
Bob Blair.
You may begin,
- VP IR
Thank you.
I want to mention as we begin that we'll be making forward-looking statements in our comments and our response to your questions concerning macroeconomic and industry conditions including, industry pricing and demand; our response to changes in demand; our growth opportunities; our share repurchase plans; our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2010; and our financial results, expectations for the December quarter, including revenue, gross margin, expenses, tax rate, share count 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 in our 10-K filed with the SEC on August 14, 2009, 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 also want to note that copies of remarks from today's call will be available on the investor section of Western Digital's website immediately following the conclusion of this call.
I will now turn the call over to John Coyne, President and CEO of Western Digital.
- President & CEO
Thanks, Bob.
Good afternoon and thank you for joining us today.
For the second consecutive quarter demand for hard drives was stronger than we expected as the positive industry conditions that first materialized in the June quarter continued throughout the September quarter.
The demand strength is primarily consumer driven and we believe it is underpinned by the growth social media phenomenon.
This is creating strong demand in mobile and desktop PCs, near-line enterprise and external storage markets.
We believe that overall hard drive industry shipments totaled 152 million units in the quarter, flat with the year-ago quarter and up 15% sequentially from the 132 million units in the June quarter.
Inventory of ATA drives in distribution was down from 33 to 30 days quarter on quarter, while drive manufacturers inventory was further reduced from a historically-low seven days of sales ending the June quarter to just under six days of sales at the end of September; reflecting both the unexpectedly strong demand and continued industry discipline in managing the vitally important supply/demand dynamic.
We are very pleased with our progress in fiscal Q1 in addressing our primary objective of sustained profitable growth.
For the second consecutive quarter we increased our weekly production rate by over 18% in a supply-constrained environment, providing strong support of our customers' growth opportunities.
Continued customer preference for WD products, upside in overall market demand and outstanding execution by the WD team generated record revenue on record unit shipments.
A moderate pricing environment, combined with our passionate focus on cost and efficiency, enabled gross margin above the high end of our model range.
We contained operating expenses under the low end of the model while growing our R&D investment 7% year on year and 8% sequentially.
We continue to realize tangible benefit from substantial investments we have made in technology, products, processes and capacity over the last several years.
We continue to lead the industry in time-to-market volume shipments of leading capacity points in all segments of the ATA drive market.
In Q1 we began shipping our WD Scorpio Blue 1 TB 750 GB and 640 GB hard drives utilizing 333 GB bytes per platter of technology.
Additionally we led the market with shipment of our 2 TB 3.5-inch drives to the near-line enterprise, external storage desktop and CE markets.
In branded products we continued to grow our business in Q1 even as we simultaneously refreshed our entire external storage product line up.
Our stylish new offerings include smaller, smarter, more portable and secure My Passport and My Book solutions that feature new WD SmartWare, back up, synchronization and content visualization software, hardware encryption and our innovative e-label display all delivering additional value and ease of use to the consumer.
This product refresh positions us we will for continued growth as we enter the holiday season and the year ahead.
We also expanded our line of media players with the introduction of the WD TV Mini with support for the RealVideo format providing an affordable and convenient way for consumers to play their stored digital content,.
and the WD TV Live featuring network connectivity and 1080p resolution.
Before I pass the call to Tim Leyden eye want to thank the WD team and our supply partners for outstanding execution in seizing the upside opportunities that emerged throughout the quarter.
Once again we have further strengthened WD in our long-term mission of generating sustained profitable growth.
Tim?
- EVP & CFO
Thank you, John.
Throughout the September quarter hard drive industry demand exceeded supply.
We again leveraged our agility in response to this unexpectedly robust demand.
As we entered the December quarter demand remains strong and our product lineup, availability and low-cost profile positioned us to benefit from the continuing growth opportunity.
As I discuss our quarter-on-quarter sequential changes I would like to remind you that our September quarter consisted of 13 weeks while the June quarter consisted of 14 weeks.
Revenue for our first fiscal quarter was $2.2 billion, up 5% from the prior year and 15% sequentially.
Hard drive shipments totaled 44.1 million units, up 12% from the prior-year period and 10% sequentially.
Non hard drive revenue, including sales of WD TV media players, solid state drives, media and substrates totaled approximately $36 million compared to $5 million in the prior year and $27 million in the June quarter.
Average hard drive selling price was approximately $49 per unit, down $4 from the year-ago quarter but up $1 from the June quarter.
Our Q1 ASP reflects a stable pricing environment, driven largely by the favorable market conditions.
Demand for our HDD products in the September quarter was stronger sequentially than we would have expected based on historical seasonal norms, and particularly so when compared to what we had perceived was an already strong June quarter.
We believe the total number of hard drives sold was 152 million compared to our original of 135 to 140 million units.
We shipped 19.2 million mobile drives in the September quarter compared to 14.6 million in the year-ago quarter and 16.9 million in the June quarter.
During the September quarter we shipped 3.1 million drives into the DVR market compared to 3.9 million in the year- ago quarter and 3.7 million in the June quarter.
Revenue from sales of our branded products, including WD TV, was $382 million, flat with the year-ago quarter and up 20% sequentially from the $318 million in the June quarter.
Industry pricing was more rational in this market during the quarter and supply and demand became more balanced.
Moving on to our sales channel and geographic results.
Revenue by channel was 52% OEM, 31% distribution and 17% branded products in the September quarter; compared with 56%, 26% and 18% in the year-ago quarter, and 54%, 29% and 17% in the June quarter, respectively.
There were two customers, Dell and HP, that each comprised more than 10% of our total revenue.
The geographics spread of our revenue was 22% Americas, 22% Europe and 56% Asia, as compared to 23%, 29% and 48% in the year-ago quarter, and 24%, 22% and 54% in the June quarter.
Our gross margin percentage for the quarter was 23.3%, up from 20.1% in the year-ago quarter; and 19.2% in the June quarter.
This improvement in gross margin was driven by stronger-than-anticipated demand leading to moderate price reductions, better factory and supply chain utilization, and favorable product mix.
Total R&D and SG&A spending was $195 million, or 8.8% of revenue.
This compares with $190 million, or 9% of revenue in the year-ago quarter and $184 million, or 9.5% of revenue in the June quarter.
Our current spending reflects increased investments in technological advancements, new products and programs and includes our recently acquired SSD business.
Operating income was $319 million, or 14.4% of revenue.
This compares with $234 million, or 11.1% of revenue in the year-ago quarter ad $209 million, or 10.8% of revenue in the June quarter.
Interest and other nonoperating expenses were approximately $2 million.
Tax expense for the September quarter was $29 million, or 9.1% of pretax income.
For fiscal 2010 we expect our book effective tax rate to range between 7% and 10% as we take into account our expected continuing profitability and the global mix of income by region.
Our cash tax rate is expected to be between 1% and 2% for the fiscal year.
Our net income totaled $288 million, or $1.25 per share.
This compares with $211 million, or $0.93 per share and $196 million, or $0.86 per share in the year-ago and June quarters respectively.
Turning to the balance sheet.
for the September quarter our cash conversion cycle was a negative four days.
This consisted of 47 days of receivables outstanding, 21 days of inventory, or 17 turns, and 72 days of payables.
We generated $434 million in cash flow from operations.
Capital expenditures were $176 million and depreciation and amortization totaled $121 million.
We also made our second quarterly debt repayment installment of $19 million.
Cash and cash equivalents increased by $262 million, ending at $2.056 billion.
We are carrying a healthy cash balance as we monitor the continuing macro economic uncertainty.
The 44.1 million hard drives we shipped in the September quarter represent a new output record for the Company.
Consequently, in order to support continued customer demand for WD products and, thereby, maintain the pace of our profitable growth, we now expect capital expenditures for fiscal 2010 to be $650 million compared with our original projection of $600 million.
Depreciation and amortization for fiscal 2010 is now expected to be about $540 million.
Over the medium term, we believe that the HDD market offers us substantial profitable growth opportunities in the existing markets we serve, as well as in market segments yet to be addressed and in new applications for storage.
Over the longer term, we will also evaluate investments in product line expansion, both internally and externally, to develop further growth opportunities.
We have $466 million remaining in our stock repurchase authorization.
We continue to weigh the merits of further repurchases against internal and external investment alternatives.
Now I will discuss our expectations for the second quarter of our fiscal year 2010.
First let me outline the market situation as we see it.
With the notable exception of last year, the December quarter has historically been the industry€™s strongest demand period, driven by consumer spending during the annual holiday season.
We are encouraged by the positive PC and consumer electronics demand commentary from related industry bellwethers and the continuing industry supply/demand discipline.
However, we expect that global macro economic conditions will remain challenging for both the consumer and the corporate buyer, as unemployment remains high and credit availability remains tight in all major economic regions.
Taking these various factors into account, we are modeling market volumes in a range of 152 million to 160 million units.
We remain focused on supply/demand equilibrium and we expect to use our flexible and agile business model to respond quickly to demand changes.
We anticipate that pricing will be rational based on supply/demand balance in all markets.
As a result, we expect current quarter revenue for WD to be in a range from $2.25 billion to $2.35 billion.
We are modeling gross margins of 23.3%, flat with our September quarter.
R&D and SG&A are expected to total approximately $200 million.
Our net interest expense is projected to be about $2 million.
We anticipate our tax rate to be about 9% of pretax income.
We anticipate our share count to be approximately 232 million.
Accordingly, we estimate earnings per share of between $1.26 and $1.36 for the December quarter
Operator, we now ready to open the call for questions.
Operator
(Operator Instructions).
Our first question comes from Rich Kugele with Needham & Company.
Your line is open.
- Analyst
Thank you very much, good afternoon.
A couple questions, first obviously on the CapEx side, can you talk about just from an industry perspective how linearly you can add the capacity as you see the demand situation unfold in 2010?
I think that that's one of the areas that is of primary concern to investors just to make sure the industry doesn't over expand but at the same time can adjust to upside as it sees it.
Any color on that?
- President & CEO
Sure, Rich, this is John.
I think we need to bear in mind the background in the industry.
Essentially since calendar Q4 of '07 the industry has had an installed demonstrated capacity in excess of 155 million units per quarter.
Since that time, on a quarterly basis I think the industry has reacted very well to the actual demand in the marketplace and adjusted utilization of installed capacity to address demand as demand emerged, particularly so since Q4 of '08 and through the first couple of quarters of this calendar year.
So I think the concerns about installed capacity are a little over blown.
Secondly from a Western Digital perspective we have been adding capacity on a just-in-time basis to address real demand from our customers as it has emerged.
We -- as Tim mentioned, our 44.1 million units last quarter was a record for the Company, an all time record for the Company.
We continue to see strong demand from our customers.
We continue to be very encouraged by the demonstration through the last six months in terms of the recovery of demand once an inventory adjustment had been made.
Says to me that PCs and the ability to store and distribute digitized content is becoming a necessity to today's lifestyle rather than an extra and so I believe there's very strong underlying demand that will continue.
As we look at -- we don't know what the industry plans are for investment going forward.
When we look at Western Digital CapEx plans our investments in heads and media tend to be on a six to 12-month outbound decision making so that we need to decide now what we think the market's going to look like a year from now in terms of our investments in our wafer fab and slider fab from a head perspective and in our media substrate and sputtering operations.
In our assembly operations, both the assembly of our heads into HGAs and head stacks, and the assembly of our drives, our lead times are much shorter horizon than that.
They tend to be in the three-month to six-month time horizon, so we're making decisions in relation to assembly capacity essentially on a three-month lead of our view of the market.
- Analyst
Okay, that's very helpful.
Just switching gears a little to margins, obviously the model was able to generate higher than your traditional target range.
What is your view now as we head into next calendar year even for the potentials for a PC refresh and such for what the margins can be going forward?
- EVP & CFO
Well, 18% to 23% is our long-term margin model and there's always room for margin expansion in the short term.
We can get that on the cost side through factory utilization, through efficiency and through product mix.
And of course, on the revenue side we can get it from capacity mix, segment mix, better linearity, et cetera.
We can be tactical with that in the near term, but over the longer term what we've learned from history is that it gravitates towards the high end of our margin model in seasonally stronger quarters and in seasonally weaker quarters it's below the midpoint of our margin model range.
So there's -- I think bottom line is there's room for margin expansion, it very much depends on market conditions, inventory, inventory supply/demand balance and, of course, behavior of the competition.
- Analyst
Okay, thank you very much.
Operator
Next question comes from Kevin Hunt with Hapoalim Securities.
Your line is open.
- Analyst
Hi, two questions actually, just a follow up on that question.
Is there any thought that your long-term gross margin modeling range is going to be probably up from where it's been?
- EVP & CFO
We've indicated that we're going to be entering the traditional enterprise market during the course of the year and when that happens we will review our model.
But I think if you look at our model right now and match it up with the model that our peers have, or Seagate specifically, we believe that we are aligned rather well with that margin model because we have primarily pretty much exclusively ATA product and segment mix and Seagate has the benefit of the traditional enterprise, and I think if you do the math I think that you'll see that the models align rather well.
- Analyst
Okay, and then you just queued up second follow-up question, which was maybe you could discuss longer term what you really think your opportunity is in the enterprise space given that historically you haven't really been there in the traditional sense but now we had EMC this morning talking a lot about solid state drives, penetrating that space.
You've indicated you're going to have something out sometime next year on that front.
Can you maybe just give us an update on competitively where you think you can go there?
- President & CEO
I think our objective is to be as competitive and as significant in that market over time as we have become in every other market segment that we have developed products for and provided availability, quality, reliability and service to.
- Analyst
Okay, thank you very much.
Operator
Sherri Scribner with Deutsche Bank, your line is open.
- Analyst
Thank you.
I was hoping to get a little more detail on the limitations you're seeing in the industry.
Some people have talked about component shortages and I was curious to see what you guys saw this quarter in terms of component shortages and what you see for the December quarter?
- President & CEO
I think the industry as a whole, the entire supply chain is tight pretty much across the board and I believe that's primarily an outcome of the strength of demand that significantly exceeded expectations; the expectations of our customers as communicated to us, our expectations as communicated to our supply base.
And I think the industry has been ratcheting up the our view of opportunity and consequently trying to ramp production to support that and that has stretched the supply chain.
There are -- so everything is pretty tight.
There's been some spotty shortages in that chain, primarily in substrates.
Glass substrates for 2.5-half inch media, is probably the tightest.
But overall I think the industry's performed pretty well in stepping up to the opportunities and satisfying the majority but not all of the demand and I think it's very important to continue to do that because if we fail our customers in terms of ability to supply to their needs to for them to satisfy their growth opportunities then they will find alternatives.
So it behooves us to ensure that we are finding away to address temporary tightness and shortages in the supply chain to take advantage of and to support the opportunities that our customers are providing.
- Analyst
Okay, that's helpful.
And then in terms of your visibility into the channel and into your OEM customers, I know some people have some concerns that there's been some over building, possibly some double ordering, maybe we have too many PCs out there in anticipation for a build up related to the new Windows 7 operating system and the holiday season, what are you devices seeing in terms of your business and what do you think about those concerns?
- President & CEO
I as I've mentioned the inventory situation in the drive business is extremely lean.
It's at the lowest levels that we've seen in over three years.
So if we then move on to the -- what visibility we have into our customer base and the pipelines between them and the end consumer, it's our belief looking at all of the available data that the back-to-school builds were pretty much correctly targeted at the market demand that emerged during the back-to-school season.
We're now -- kind of based off that positive we're looking at the builds that are in transit to the market for the holiday season and the seasonal indicators seem to be lining up very well for a positive holiday season.
- Analyst
Okay, great, that's helpful.
Thank you.
Operator
David Bailey with Goldman Sachs, your line is open.
- Analyst
Great, thank you very much.
A question on your internal inventory.
Are the current turns sustainable, or do you need to add more internal inventory to meet demand as you go forward?
- President & CEO
17's probably a bit sporty from a turns perspective and I think we indicate in our model it's in the 14-ish kind of range, 14 to 16.
- Analyst
Thank you.
And then you were very constructive on the consumer, have you seen any signs of improvement in the corporate space?
- President & CEO
We've seen a little uptick in the enterprise side of the corporate space.
We've not seen much in the way of tick-up in the commercial PC environment.
- Analyst
Okay, great.
Thank you.
Operator
Mark Moskowitz, with JPMorgan, your line is open.
- Analyst
Good afternoon.
Earlier in your prepared remarks you talked about how in the September quarter demand out stripped or outpaced supply, can you talk ,set against that backdrop, about how WD has been able maybe to pick and choose revenues in terms of winning placements at higher margin business.
Any change there and can you talk about some of the underlying factors there in terms of either OEM decisions or maybe your competitors having trouble, particularly over in Asia?
- EVP & CFO
As far as competitors are concerned we really don't have any insight into that.
We always execute our business by balancing customer support and tactically optimizing margins.
You just saw there was a slight swing towards Asia in terms of regional and I think there was maybe a 2% switch from OEMs to distribution in the channel, and we were strong pretty much across all business units.
- Analyst
Then as far as the refresh of the external back up, Passport and the My Book, just curious, [all these things are a] channel sale or will that become a measured outreach to your customers in terms of that new product placement?
- President & CEO
Well, we pretty much end-of-lifed the existing product line and positioned the new product lines during the course of the month of September and early October.
So we are now pretty well positioned across all regions, all channels with the refreshed products, both in the mobile 2.5-inch passport and in the 3.5-inch My Book product line.
So we are feeling very good about the management of that transition, the fact that while typically you tend to get a pause in sales in those while you're trying to take out the old and restock the new.
We've actually maintained and grown very significantly quarter over quarter while we were accomplishing that.
- Analyst
Then just lastly, if I could, building off of the earlier questions related to the enterprise and the potential margin up take, how should investors think about any sort of OpEx one-time hit in terms of maybe a quarter or two whereas you've ramped your enterprise business and you have maybe a little more hand holding with some of the customers and maybe some micro code rewrites, what have you, anything like that in terms of OpEx maybe taking off more than expected as you first bring out the enterprise drives or --?
- President & CEO
I mean -- sorry, go ahead.
- EVP & CFO
We've been spending in order to make our entry into that marketplace for quite some time because it takes quite awhile in order to be able to design the product and then work through the particular issues with the customers, the qualification issues.
So we anticipate that there'll be maybe a small uptick in customer support but other than that it'll be very, very minimal and we expect to stay within our margin -- our OpEx margin range, which is 9% to 10%.
- President & CEO
To amplify that, the vast bulk of the OpEx related to our enterprise business is already embedded in our current spending.
- Analyst
Okay, thanks, gentlemen.
Operator
Bill Fearnley with FTN Equity Capital, your line is open.
- Analyst
Yes, good afternoon.
Had a question on competitive environment, have you seen any benefits in terms of pricing from the recent competitor consolidation?
In addition, have you been given any additional consideration from OEMs as a primary source or a secondary source here as a result of the recent combination and does that have any effect on your near-term guidance?
And then I've just got a quick follow up.
- President & CEO
Well, I think, as you've seen over the past couple of quarters since the announcement of the latest combination in the industry and very typical of all previous combinations in the industry, there were some significant share shifts during the two quarters immediately following the announcement and we were beneficiaries of some of that.
The real -- what we're observing in the market today is that primary attribute is availability and if you look at WDs performance over the last two quarters, compared with the rest of the industry WD has stepped up and supplied the majority of the incremental product that was demanded by the market within short lead time.
So we feel very good about the business model, which we have hoped over the years that is highly focused on speed and agility and responsiveness and we believe that one of the critical factors that has driven our success is that not only do we provide -- offer great products to our customers, but that we make them available in a timely manner relative to their desires, and that has allowed us to consistently over the past five to seven years demonstrate market-leading share growth and margins to match.
So being consistently profitable is a reflection of a value that our customers place in our business model.
- Analyst
Okay, that's helpful.
Thank you.
And then a follow-up question on margins, if I could.
You're Kind of looking at a perfect -- almost a perfect situation here, a perfect storm so to speak, is there -- what other things should we be thinking about from a gross margin standpoint as the utilization rates decline as you add in capacity and inventories grow from these levels.
What other levers should we be thinking about outside of mix and the enterprise here in the next few quarters?
- President & CEO
Well, I think -- our utilization rates don't change as we add capacity because we add capacity in line with demand.
Certainly our utilizations were lower during the period from October through March last year, October '08 to March '09, because we had not predicted a huge drop in demand that was the result of the economic meltdown and you can't shed capacity quite as rapidly as you can build it but you can stop using it, which is what we did.
But as we add capacity we add capacity in very relatively small increments to match our market opportunity and our aim is to keep our utilizations high at all times.
- Analyst
Thank you.
Operator
Next question comes from Aaron Rakers with Stifel Nicolaus, your line is open.
- Analyst
Yes, thanks, guys.
Congratulations on the quarter.
First question, I believe last quarter you had alluded to a morning Western Digital-like mix of business as a driver to the gross margin.
I'd just like to understand, did we see that more normalized mix of WD business or should we expect that to happen here still going forward as we see the commercial market start to improve?
- EVP & CFO
I think what we alluded to last quarter was that we were tactically selective in how we pursued the business and in this quarter, obviously with supply chasing demand, we've actually pursued the business that is most beneficial to us and our customers.
So we're more in line, what I would say, a market mix at this stage but we still have opportunity to be able to deploy more recent technology.
As a matter of fact in the last quarter we were deploying more older technology because of the fact that we were being tactical in the markets that we chose to pursue -- or in the (inaudible) products we chose to pursue.
- Analyst
In a follow-up question, if I can, on the share repurchase front obviously you guys have a decent authorization still at hand, any color on what you're looking for, either be it market dynamics or other things in order to become more active on the share repurchase.
Do you any gauge on what -- when or maybe how we might expect you guys to start to become active on the share repurchase front?
- EVP & CFO
On the -- when we are weighing the opportunities for the cash balance, our long-term goal, obviously, is to create shareholder value and we've got lots of factors to weigh and we've got to weigh near-term versus long-term opportu -- objectives and we've got to weigh and be prepared for opportunities versus what the macro risk is and we've got to look at the opportunity costs of replacement capital if we have opportunities after we've actually purchased shares.
And we're weighing all that on an ongoing basis, but we're satisfied with what our choices are at this particular point in time.
We're also cautious as we approach the market because what we've learned from the lessons of history is that when there's a significant change in market factors that the velocity of the departure of liquidity can be fairly astounding.
- Analyst
Great.
Thanks, guys.
Operator
Next question comes from Ananda Baruah with Brean Murray.
Your line is open.
- Analyst
Thanks, guys, for taking the question.
Could you comment or give us some sense of what your capacity is currently?
- President & CEO
I guess it would be 44.11 million units.
- Analyst
Or maybe 44.2.
Forget it.
- President & CEO
So we were (inaudible) very high rates of utilization and we are adding capacity to support the guidance that Tim just gave a few moments ago.
- Analyst
Got it.
I guess of the incremental CapEx spend is there any way to parse out how much you think will go towards capacity of -- (inaudible) capacity of the different components?
Drives versus media versus heads?
- EVP & CFO
Yes, it's probably a little bit weighted towards heads and 50/50 for the remainder.
So it's about 40% heads and then 30%, 30% the other two.
- Analyst
Okay, great.
That's helpful.
And then I guess on -- just circling back on uses of cash, away from potentially getting the buy back going again, what should we think of in terms of the core uses of the cash as we head into the first half of 2010?
- EVP & CFO
Our primary bias will be operational.
We're still fairly cautious relative to the macro situation and we're also looking -- as I indicated in my comments we're also looking at longer-term growth opportunities in related-type markets.
So those are the all primary biases but it's more operational bias than alternatives.
- Analyst
Got it.
With the levels you have, does that increase?
You guys have always been pretty active on the M&A front, prudently but active, does it increase your appetite at all just knowing you have that -- the kind of cash that you on the balance sheet to go out and do something?
- President & CEO
That specifically doesn't increase our appetite.
What increases our appetite is looking at the long-term creation of shareholder value and just paying attention to how do we best execute that the near term and in the long-term.
- Analyst
That's it, thanks a lot.
Appreciate it.
- President & CEO
I just want to circle back for a second on the -- give you a little more color on the capacity and CapEx question.
In the last six months we have been running our capacity close to 98%, 99% utilization.
That's very good for the short-term margin and absorption benefit; however, it inhibits our ability to provide one of the critical values that we provide to customers, which is availability and responsiveness.
So our target is to run at about a 90% utilization and we will -- we're adding capacity in order to do -- to accomplish two things.
One, to keep up with the demands of our customers and, two, to restore our flexibility enable to -- in order to being able to meet their day-to-day, week-to-week changes and provide the right products at the right time.
- Analyst
I appreciate that.
That's actually quite helpful commentary, so if I could just throw up a quick follow up in off of that one.
Understanding that you're going to add capacity, whatever you add you're going to do it prudently, given your outlook for the December quarter '10 and then whatever your internal thinking is right now about what follow through could be into Q1 and given what you are thinking that your incremental add could be as we go through the December quarter, is there any reason to think -- this is really a gross margin question, is there any reason to think in a stable ASP environment that the gross margin ticked down in the March quarter would be anything more significant than what it has been over the years in a normalized environment, stable environment?
- EVP & CFO
It's hard to answer that question, there are so many variables.
There is -- the various product segment mix.
It's the interaction of price, volume, mix and cost.
And the most significant weighting factor is, obviously, supply/demand balance and inventory management.
But what we've seen historically, as I mentioned earlier, is that for our margin range, in the weaker quarters we tend to be below the midpoint of the 18% to 23% range and in stronger quarters we tends to be above the midpoint.
So that's about as much color as we can probably figure out at this stage.
- Analyst
Okay, thanks a lot.
Much appreciated.
Operator
Katie Huberty with Morgan Stanley, your line is open, Huberty.
- Analyst
Thanks, good afternoon.
You mentioned that channel inventory's at three-year lows, how much of that is a function of strong demand pull through the channel versus strong OEM sales and just not having enough product to ship into the channel?
And then as a second question, how many quarters do you think it will take for those channel inventories to get back to more normal levels?
- President & CEO
I think what we are actually seeing in the channel is partly a result of the tightness in credit.
That has -- I believe, has reset the model in the channel to -- and it has leaned out inventories and is creating a much tighter link between sell through and sell in.
So I think we're seeing an adjustment to the model and the distributors are finding a way to operate with much tighter inventories and I suspect they'll like it.
And so I suspect that as the economy recovers and credit loosens and so on that the model will stay leaner than it was before the economic meltdown of last year.
- Analyst
Okay.
So the volatility in channel inventory levels was probably less than it maybe was in the past and you wouldn't expect a snap back but more of a gradual increase as the economy recovers?
- President & CEO
Right.
- Analyst
Okay, got it.
Thank you.
Operator
[Robert Spidey] with equity ASF Capital, your line is open.
- Analyst
Thanks, gentlemen.
That 98% capacity number seems almost unsustainably high.
When you think about the CapEx ledger that you guys have going forward and what you guys expect [yet totally] to be produced how much long do you think it's going to take you to get down to that more reasonable 90% level of capacity?
- President & CEO
Well, it depends on demand.
We're modeling our CapEx, Tim just gave me the uplift to our CapEx number for the full year of $50 million, which is designed to take us back to our normal operating model, which is in the -- we like to operate in the 90% to 95% range and for the last two quarters we've been -- in the first of the June quarter we were bringing idled capacity back into play and in the September quarter we were stretching our previously-installed capital to its maximum.
And by -- as we move into this quarter we're bringing some new capital online in order to support the strength of demand that we have and hopefully in the early part of next year we begin to get back into our 90%, 95% where we can be even more responsive to our customers in terms of giving them the things they want when they want them.
- Analyst
In relation to idle capacity, with bringing on the other Fab2 like in Thailand, can you give an understanding of how much incremental available capacity that gives you guys when it runs for a full quarter in Q2 that you guys didn't have in Q1 and Q4 of last year?
- President & CEO
I think I've given you pretty much as much as I can give you.
We were flat outlast quarter.
That facility was online last quarter.
- Analyst
For the full quarter?
- President & CEO
Pretty much.
- Analyst
And can you just give an idea of the trend of demand through the quarter?
Was it generally as -- like a normal Q1, or was it a little flatter or a little more steep than normal in relation to a run for the holiday season and for the Windows 7 releases?
- President & CEO
It's probably-- the last two quarters have probably been the most linear that we've had in the history of the Company.
- Analyst
All right, thank you so much, gentlemen.
Operator
Keith Bachman with BMO Capital Markets, your line is open.
- Analyst
Thanks, it's John [Peck] for Keith Bachman.
Your headcount increased pretty significantly during the quarter, can you provide more detail on the reason for the increase?
- President & CEO
44.1 million drives and associated components, heads and media.
- Analyst
Okay.
And for your consumer business, specifically the DVR business, it was much lower than your competitors' results, can you provide more color on what's going on there?
- President & CEO
I think -- well, our number relates to the DVR market.
I believe the competitor number you're referring to relates to DVR surveillance and gaming.
- Analyst
Okay, thank you very much.
Operator
Arun Sharma with UBS, your line is open.
- Analyst
Yes.
Hi, thank you.
I just had quick question.
You commented last quarter that the linearity for the June quarter was actually the most linear quarter had you had.
How would you describe the linearity you saw during the September quarter for a surprise September quarter and thus far through October if you can comment?
Any idea how December may play out in terms of linearity?
Thanks.
- EVP & CFO
John also mentioned that the December quarter was one of the most linear quarters that we've encountered and in the December quarter generally that tends to be a pretty linear quarter anyway, because leading up to Christmas you get the strength of demand in October and going into November to go towards Black Friday.
So we would characterize it as being pretty normal.
- President & CEO
(inaudible) I think the fact that the strength of demand was relatively unforecasted tends to help linearity in that we're building as much as we can build.
- Analyst
Great, thanks.
Operator
Doug Reid with Thomas Weisel Partners, your line is open.
- Analyst
Thanks.
You've acknowledged some tightness in components but I'm wondering what your assumptions are for component cost increases in the December quarter underpinning your gross margin guidance?
- EVP & CFO
We have we have forecasts for the costs are and those costs are rolled into our gross margin guidance, so we've taken them into account.
We're -- we've very good relationships with our vendors and our suppliers and we work those all the time.
- Analyst
But are you expecting an increase relative to the -- or rather are you expecting a slower rate of declines this quarter relative to September given that tightness?
- EVP & CFO
I'm hardly going to say that on the phone, Doug.
- Analyst
Sure, looking for some color, though.
- President & CEO
Okay, I want to thank all of you for joining us on today's call.
We look forward to keeping you informed of progress in the quarters ahead.
Thank you.
Operator
Thank you.
This does conclude the conference call.
You may disconnect at this time.