威騰電子 (WDC) 2013 Q1 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to Western Digital's first-quarter financial results for fiscal year 2013.

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 will turn the conference over to your host, Mr. Bob Blair.

You may begin.

Thank you.

As we begin, I would like to mention that we will be making forward-looking statements in our comments and in response to your questions concerning growth in the storage industry and our position in the industry, our investment and capital allocation plans, HDD demand for the December quarter and fiscal 2013, and our financial results expectations for the September quarter and fiscal 2013.

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 20, 2012.

We undertake no obligation to update our forward-looking statements to reflect new information or events.

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

Reconciliations of the differences between the historical non-GAAP measures that we provide during this call to the comparable GAAP financial measures are included in the investor information summary posted in the Investor Relations section of our website.

The forward-looking guidance we provide during this call excludes certain items such as amortization of intangibles, and the dilutive impact of sales of drives to Toshiba in connection with our divestiture transaction.

Because the amount of these items is not fully known to us at this time, we are unable to provide guidance for, or a reconciliation to, the most directly comparable GAAP financial measures.

The impact of these excluded items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures.

We ask that analysts limit their comments to a single question and one follow-up question during the Q&A portion of our call.

I also want to note that copies of remarks from today's call l will be available on the investor section of Western Digital's website immediately following the conclusion of this call.

I now turn the call over to Chief Executive Officer, John Coyne.

Thank you, Bob.

Good afternoon, and thank you for joining us today.

I have with me our President, Steve Milligan, and our Chief Financial Officer, Wolfgang Nickl.

In this, my last earnings call, I'm happy to report another quarter of strong financial performance, continuing our track record of consistent execution.

During my six-year tenure as CEO, we have experienced and successfully addressed many different challenges and opportunities.

Throughout, we have continued to hone our time-tested and flexible business model, delivering outstanding returns and value under varying scenarios.

The results include a doubling of market share, a tripling of revenue, and a five-fold increase in profits.

I'm proud of the sustained performance by the team and I'm confident as I pass the leadership of the Company to Steve, ably supported by Tim, Mike, and Wolfgang, that they will continue to build on that momentum.

While the macroeconomic environment is dampening near-term demand, we remain confident in the continued long-term growth in the creation, storage, and management of digital content.

This is seen in every aspect of our lives and monetizing it provides a compelling long-term opportunity for the Company.

We have built strong relationships with customers in all of our markets by consistently delighting them with high quality, reliable products based on superior technology and delivered through the industry's most efficient supply chain.

We have developed a tremendously broad product portfolio, great depth and breadth in our people and technology resources, and a powerful platform.

Western Digital has never been better positioned to succeed as it continues to thrive on change and deliver great value to all its constituents.

I want to take this opportunity to thank our customers, our supply partners, and our investors for their support, and I especially want to thank our employees around the world who have consistently delivered such outstanding performance.

With that, I'll turn the call over to Steve Milligan.

Thanks, John.

We are very pleased to report strong financial results for our September quarter, demonstrating our continued ability to deliver value under varying market conditions.

There are several dynamics currently limiting market demand.

First, global macroeconomic weakness which is impacting overall IT spending.

Second, product transitions in the PC industry.

And, third, the continued adoption of tablets and smartphones which is muting PC sales growth.

These headwinds notwithstanding, the Western Digital team remains focused on creating outstanding economic value, building on our strong multi-year track record.

There is a tremendous opportunity as we innovate and enable customers to store, manage, and connect the massive and growing amounts of digital data in their personal and professional lives.

This opportunity extends well into the future.

Looking across our markets, the needs of customers are becoming more diverse, resulting in greater market segmentation.

Computing is no longer a general purpose proposition, and that evolution plays to the strengths of Western Digital with our technology breadth, people, and product portfolio.

Currently, we are focused on three key initiatives, to broaden our portfolio, to meet the evolving needs of our customers, enabling continued value creation.

First, the delivery of innovative and cost-effective storage products including hybrid drives for thin and light mobile devices.

Second, a portfolio of enterprise products that fit the varying needs of the public and private cloud environments, including high performance SSD systems and high performance and large capacity hard drives with the lowest total cost of ownership.

Third, providing easy to use, integrated solutions for the personal cloud environment in our connected lives.

We have received very positive customer feedback on our latest differentiated solutions to address these trends.

All major PC OEMs have shown strong interest in our 5-millimeter and 7-millimeter hybrid designs as an alternative to solid state and dual-drive configurations.

In the cloud environment, our new seven-disk high capacity sealed-drive announcement has been extremely well received, confirming the need to seek better total cost of ownership solutions for this growing market.

For the connected life, we introduced today the My Passport enterprise, one of the industry's first portable hard drives designed specifically for use with Microsoft -- Microsoft's Windows To Go, enabling Corporate customers to provision a fully featured Windows 8 work space on a USB drive.

For fiscal 2013, we remain focused on realizing the $10 EPS target established in July of this year, despite a significant change in underlying industry growth assumptions.

We will continue to manage closely those aspects of our business that we control.

Namely, delighting our customers, executing to our product road map, remaining diligent with regards to managing costs and expenses, and strategically allocating our capital.

Looking forward, I am very excited about the future of Western Digital.

We have the people, platform, technology and financial resources to continue to invest in growth opportunities while at the same time returning approximately 50% of our free cash flow to shareholders.

Wolfgang will now provide a report on our Q1 performance and our Q2 outlook.

Thank you, Steve.

I will first summarize our consolidated financial performance for last quarter, and then provide a range of expected financial results for the December quarter.

Revenue for the September quarter was $4 billion.

Excluding shipments to Toshiba under our divestiture agreement, we shipped a total of 62.5 million hard drives into the market at an average selling price of $62.

OEM sales represented 63% of revenue, distribution channel sales, 24%, and retail sales, 13%.

Our gross margin for the quarter was 29.6%.

Excluding $38 million of amortization expense related to acquired HGST intangible assets, non-GAAP gross margin was 30.5%.

R&D and SG&A spending totaled $575 million for the September quarter.

SG&A included $11 million of amortization expense related to acquired HGST intangible assets.

In order to align our production with anticipated market demand, we incurred charges of $26 million in the September quarter.

Net interest and other nonoperating expense was $14 million.

Tax expense for the September quarter was $59 million or 10.2% of pretax income.

Our net income for the September quarter totaled $519 million, or $2.06 per share.

On a non-GAAP basis, net income was $594 million, or $2.36 per share.

Turning to the balance sheet.

We generated $936 million in cash from operations during the September quarter, and our free cash flow totaled $554 million.

We used $218 million to repurchase 5.2 million shares.

As of the end of September, an authorization of $2.6 billion remains available for future repurchases.

We declared the first dividend in Company history in the amount of $0.25 per share, for a total of $61 million, which we paid on October 15 to shareholders of record as of September 28.

We exited fiscal Q1 with total cash and cash equivalents of $3.5 billion, of which, $826 million was in the US.

Subtracting our total debt of $2.1 billion, our net cash balance was $1.4 billion.

I will now provide our guidance for the December quarter.

We expect a total available market of approximately 140 million units.

Revenue in the range of $3.55 billion to $3.7 billion, reflecting the muted demand environment, a seasonal reduction in our gaming business, and a planned reduction of our 3.5-inch contract manufacturing for Toshiba.

Gross margin of approximately 28%, excluding the amortization of HGST intangibles, which is within our new business model, despite continued cost challenges stemming from the floods in Thailand last year.

We expect R&D and SG&A spending to be approximately $525 million, excluding the amortization of HGST intangibles.

A tax rate of approximately 8.5% and a share count of approximately 248 million.

Accordingly, we estimate non-GAAP earnings per share of between $1.65 and $1.85 for the December quarter.

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

(Operator Instructions)

Our first question comes from Jayson Noland with Robert Baird.

Your line is open.

Okay.

Great.

First, wanted to ask Steve about macros, cyclical and secular.

I know it's tough to divide that up, Steve, but if you could talk about how much of this is secular versus cyclical, assuming the macro comes back or gets better next year, just some more color there?

Yes.

Jason, you kind of hit the nail on the head.

I think that it is -- it's a difficult question to answer.

We've got -- as we indicated in our prepared remarks, there's a lot of different factors at play.

Clearly, the global macroeconomic environment -- and it's not just the IT industry, but there's a lot of headwinds in terms of what's happening on a global basis.

Additionally, the IT segment is not immune to that, so we've seen other announcements come out that have talked about weakness in terms of overall IT spending.

And then, clearly the PC industry is weak, right, and some of that is due to product transitions with Windows 8. But undoubtedly, there is an impact as we're seeing, if you want to call it cannibalization in terms of tablets and smartphones or other kind of connected devices.

I think the important thing to really refer to is when we had our Investor Day, we talked about a longer term growth rate in the HDD industry of 3%.

When we put that together, we attempted as best as possible to estimate the impact of all these different factors, and right now, we don't see a reason to alter that 3% longer term growth rate in terms of number of hard drives sold.

Okay.

Thank you.

Wolfgang, you maintained $10 for the full year.

You must be assuming gross margins come up off that 28% level in the second half of the year -- fiscal year?

Yes, Jason, $10 is the target and remains the target.

Our complete focus is on the items that we control, or at least influence.

We're focusing heavily on cost.

We're focusing on OpEx and spending.

We somewhat impact the share count as well, and obviously, try to optimize volume, price, mix decisions.

We're focusing on what we control or influence.

We have made an assumption when we originally stated the $10 target in July, I believe.

Yes, in July, that we assumed the TAM to increase by 5%.

And, if you do the math, that would be a TAM of 630 million units.

And, with the first two quarters at 139 and 140, respectively, we need a bit of an uptick in the second half of the fiscal year to continue to be able to do the target.

I believe that we get in the 600 range, it's very doable, and like we said, we focus on the levels that we control.

It remains the target, and that's what we're shooting for.

Thank you, gentlemen, and John, best of luck in future pursuits.

Thank you.

Next question come from Rob Cihra with Evercore Partners.

Wondering within the product mix in the quarter if you could give us any more color both within PC -- but even more so I guess on enterprise?

How much of that decline in the quarter, and that you're expecting again, do you think is inventory kind of draw down versus actual slowdown in end demand.

And again, maybe perhaps more so on the enterprise side, given the fact that we kind of already know that PCs have been weak.

But, any view you have in the enterprise demand -- what it's looking like?

Thanks.

Sure, Rob.

In the enterprise space, there's a couple different dynamics going on.

First thing is, if you go back to the floods, really a couple different things there.

First off, the enterprise segment was the one segment that was least impacted from a drive output perspective as it relates to the floods.

We all -- the various different companies independently did as much as we could to protect the supply in that critical part of the market.

Nevertheless, our customers, because of concerns about shortages, I would say bought ahead from a demand perspective, in order to protect themselves in that segment.

Additionally, if you look at some of the impact of the LTA contracts that were out there, that also resulted in customers purchasing ahead from a supply perspective, ahead of the demand.

And then, sure, we have seen some slowdown in terms of end user demand if you want to refer to it that way.

But fundamentally, the overall dynamics in the enterprise space remain positive as we're seeing substantial data growth and buildout of infrastructures from that perspective.

However, in terms of the units that we shipped as an industry and we shipped as a Company, we are seeing the impact of that inventory correction roll through the latest quarter, and hopefully, we'll be able to work our way through it as we finish out the year.

Great.

Thank you.

Next question comes from Steve Fox with Cross Research.

Your line is open.

Thanks.

Good afternoon.

Just a couple quick clarifications.

Just on the $10 target -- just to return to that for a second.

If you're talking about potentially doing 600 million units as the bogey, what would be the levers that you think you can most control putting aside capital allocation?

Would it be more on the expense side?

Or, would it be shipping new product sooner than maybe has been advertised, et cetera?

Secondly, is there any other mix issues that we should think of maybe over the next couple quarters within the segments in terms of average capacity within notebooks versus desktops, et cetera, as we model out?

Thanks.

Yes, Steve.

The biggest lever is clearly cost, and we're assuming a standard mix between the segments in our forecasts.

I would just add to that, and I mean, certainly what we can do on the cost and expense side, it's always important to manage that in a diligent fashion.

But, our number one priority is to continue to take care of our customers because if we can earn their trust and continue to earn their business, that helps provide the runway for stronger financial results for us.

And, just real quick to clarify, in terms of any kind of excess inventories you're looking at, there's no emphasis on one type of capacity versus another?

You're saying it's pretty broad-based?

I think that's a good assumption.

Okay.

Thank you very much.

Next question comes from Aaron Rakers with Stifel Nicolaus.

Your line is open.

Yes, thanks, for taking the questions.

First question is sticking to the topic of the inventory, when I look at your finished goods inventory build standing at $508 million, how do we think about that in the context of gross margin?

How does that build flow through the gross margin?

And, how should we think about that line item in reflection of the 28% gross margin going forward?

Another way of putting it, have you aggressively pulled back on your production to see that finished goods inventory come down here going forward?

First of all, the number is up a little bit, and that has to do with us resuming ocean shipments in both subs, and it also has to do that we were very, very focused on not over-shipping to the market at the end of the quarter.

In terms of its impact on the 28%, it has an impact in a sense that if you walk this inventory down a little bit you build less drives in the December quarter, and one of the impacts is absorption the fewer drives you build.

And, we mentioned the gaming effect, and we mentioned the Toshiba effect, and the fewer drives you build in a quarter, the more challenging it is to get to your cost objectives.

From that perspective, coming in with a bit of a higher inventory makes it certainly more difficult to get to the gross margin, and it had a bit of a contribution to the quarter-over-quarter decline.

Okay.

And, maybe a follow-up, somewhat tied to that but more importantly looking forward.

As I think about the levers in your model, and we think about it from a -- let's say COGS per unit basis, you're still running about $45 COGS per unit.

I know prior to Hitachi, you were running closer to the mid-$30, high $30 range.

How do we think about that in the context of getting back to normalized internal versus external heads?

And then also, where do we stand on the areal density transition?

I'm going to give a general comment to that, Aaron.

I think that one of the things that -- and I certainly don't mean this is a defensive way -- but one of the real optimistic parts of our numbers, we put a range out there of 27% to 32% in terms of gross margins.

First thing is, that you would expect that the low end of that margin model would have a higher likelihood of hitting when you're in adverse market conditions, right?

So, we're at 28%, and the other thing is that if you look at some of the issues that we're facing from a cost perspective and you get at the absorption issues, and not only that, we're still working to get back into a pre-flood cost level.

Frankly, at some level at both subs.

And then, you also look at the dislocation in terms of absorption as kind of a sub-point that as we transition out of this Toshiba contract manufacturing situation, we've got to rebalance our factories on the HGST side to do that in a more cost-effective way.

You start thinking about that in the context of that 28%, it actually makes that number look a lot more -- look a lot better than what the headline might allude to.

In terms of the areal density transition, we won't provide any particular numbers on that, but I can tell you they were in the very early stages, and as we cut over to the new areal density, that certainly helps us achieve our target cost as well.

Very good.

Good luck, John.

Thanks.

Next question comes from Bill Shope with Goldman Sachs.

Your line is open.

Thanks.

I was wondering if you could give us a little more color on the competitive landscape within the enterprise side of the business?

Where the market share sort of settled out this quarter?

And, how you're thinking about that in your forecast for the December quarter and for the full fiscal year?

So, Bill, I'll take that.

This is Steve.

I think that we have done -- and this is really on both sides -- but certainly particularly on the HGST side, we have worked very hard over, frankly, several quarters to, one, fill out our product portfolio.

And, not only that, provide a more compelling value equation for our customers.

Certainly in terms of the way that our products function, quality levels, et cetera, et cetera.

And, as a result of that, we've been fortunate enough to gain a meaningful amount of market share, and we continue to expect to maintain that level.

In the past quarter, there were some puts and takes in terms of the different elements of that.

We maybe lost a slight bit of share in certain segments, but we continue to not only maintain our momentum, but hopefully, if we can continue to do our job, increase our momentum in that space.

Okay.

Thank you.

Thank you.

Our next question comes from Nehal Chokshi with Technology Insight Research.

Your line is open.

Yes, thank you.

For the nearline segment, can you first give us what the units were for that?

And then secondly, can you help us try to separate out how the enterprise portion of the nearline demand trended?

Clearly, that was not very positive.

And, how the cloud portion of the nearline demand trended?

And then, I have a follow-up question as well.

I'll give you the numbers.

The TAM was just shy of 7 million units, which was down quarter-over-quarter.

And, we're not breaking out our specific details between performance and capacity enterprise shipments.

So, if you look at it from a demand perspective, both the traditional performance segment and the capacity enterprise segment were affected by the inventory overhang that we spoke of -- that I spoke of earlier.

I would say -- and this is our view -- that the inventory adjustment in the capacity enterprise space is behind us, and we expect some modest growth in that segment here in the calendar Q4.

Now, just to remind everybody, the demand in that segment, and this is maybe becoming a little bit less so than in the past, but it tends to be a little bit more project-based.

So, it can be a little bit lumpy.

But, we are anticipating some modest growth here in the final quarter of the calendar year.

Okay.

Thank you.

And then, could you just discuss the drivers of expected sequential decline in gross margin?

Is that purely mix?

Or, does that have something to do with higher cost components here?

Yes.

I'll take a crack at that, Nehal.

First of all, I think Steve mentioned it earlier.

We have a range of -- in our gross margin model, 27% to 32%, that provides that at certain times we have different utilizations, our different points with product transitions, et cetera.

But, for this quarter-over-quarter decline, it is mainly a cost issue.

Stemming from some more underabsorption -- we mentioned the gaming business.

We mentioned the Toshiba business.

There is also some price alignment in there -- some quarter-over-quarter price take-downs.

But, we're actually fairly happy with the fact that given the macro headwinds and the demand situation that we can be well within our business model.

Okay.

Thank you.

The next question comes from Keith Bachman with Bank of Montreal.

Your line is open.

Hi.

Thank you.

I have two also.

If you go back and just speak to the difference, you're guiding the TAM to be flat sequentially and revenues to be down quite materially sequentially.

Could you talk about your pricing assumptions versus the mix assumptions implicit with that revenue guidance, please?

And then, I have a follow-up.

Yes, there's really three factors, Keith, that contribute to the revenue down.

First, is the gaming business and it's a project-based business as well, and that's a couple of million units going down quarter-over-quarter.

The contract manufacturing for Toshiba on the 3.5-inch divestiture really peaked last quarter and is quite a bit down as well.

And then, there are some price adjustments in the quarter -- quarter-over-quarter, price declines.

It's really tough to put exact percentages, but you should think about it roughly one-third, one-third, one-third.

Okay.

Any comments on what you think like-for-like pricing will be?

We'll not spec that out.

If you want it-- Keith, I'll add a little bit of color there.

It continues to be a competitive marketplace, and we've asserted that for a long time.

But, in terms of pricing behavior, I would not characterize anything that we're seeing as anything out of bounds.

Okay.

Or, to use another word, irrational.

Great, thank you.

My follow-up though, if I could sneak that in.

I may be over my quota.

But, what are the conditions that would enable the TAM to be up in the March quarter which is implicit within the 600 number -- 600 million unit number?

I'm a little surprised and not sure how we get there.

Are you assuming within that a big 8 bounce -- a Windows 8 bounce?

I'm not sure that we know how to get there either.

But, I think that you'd have to see one of a few different things.

One thing working in our industry's favor, potentially, is we can get some of this inventory adjustment stuff behind us.

Okay.

That certainly has been suppressing our TAM, and we, in terms of our Company and what we're trying to do -- we don't want to carry that over.

We'd like to see that adjustment work its way through as soon as possible.

Right.

We don't want to push on that string.

Additionally, it would be nice to see some improvement in the macroeconomic environment, whether that happens to be some certainty -- you know all this, but we've got elections.

We've got changes in government.

We've got fiscal cliff, et cetera, et cetera, right?

Lots of different things that undoubtedly are impacting spending at a corporate and a consumer level.

So, I think that some clarity on those kind of activities would be helpful, and then also, it would be nice to see some excitement around Windows 8.

Right, right.

We're actually relatively -- when I say bullish, maybe we're -- people are looking for good news, but my experience I think it's got some excitement to it.

I think the thing that has really lacked is that we've got to create some more excitement around the products out there, and we're trying to do our best in terms of some of these hybrid designs and smaller form factor designs that maybe enable our customers to add a little more excitement back to the product set.

Thank you very much, and John, best of luck to you.

Thank you.

Katy Huberty with Morgan Stanley, your line is open.

Yes, thank you.

Just a follow-up on the last conversation.

Just curious, any more specifics you may have around -- now that we're days away from the Win8 launch, when we might see an uptick in hybrid or the thin HDD shipments with some of the new form factors that are planning to come to market?

When we talked about our hybrid designs, what we're doing right now is we are providing engineering samples to our customers.

And then, in the first half of calendar 2013, we will be supplying qual samples and gearing up for volume kind of activity the back half of 2013.

So, we'll have to watch our traction and our continued ability to execute from an engineering standpoint.

And so, we're still a bit far away, but so far the response from our customers has been encouraging.

And, it sounds like that lines up with the second iteration of thin and light Win8 products that we'd get after the Intel Haswell launch in the second quarter next year.

Correct.

And then, just a quick clarification.

There was a big jump in CE units in the September quarter.

I know gaming has come up a number of times.

But, can you just talk about what drove that incremental 4 million units?

And, how much of that you would expect to give back in the next few quarters?

Thanks.

The upside was driven by gaming.

It's a very seasonal business.

I won't give you an exact number, but it's several million that can go up and down in a given quarter.

Thank you.

Sherri Scribner with Deutsche Bank, your line is open.

I just wanted to revisit the cost-cutting and the reduced operating expenses.

Wolfgang, I don't know if I got this number right, but I think you guided to $525 million for operating expenses for the December quarter which is down about $40 million.

Wanted to get a sense of where you think you can take those cost actions, is that reducing some of your R&D?

Clearly, you'll have to do something in SG&A.

And then, just trying to get a sense of what type of percentage you expect R&D to be as a percent of sales as we move forward.

Yes, so let me state first we are not cutting R&D at this point.

Where we're cutting cost out from the $550 million level is in discretionary spending, and we have also some of our variable pay programs that are not paying at the historical levels.

In terms of R&D, in total, it's about 70% of our OpEx.

If you're operating right now at about 14%, 15%, you're close to 10% on R&D.

Once we get into the future and our target model of 10% to 12%, it would be around 8%.

Okay.

8%.

Thank you.

And then, thinking about investments as we move forward in terms of CapEx spending, what are your expectations for investments in adding new equipment as we move forward?

It looks like we kind of peaked at CapEx here at $382 million in the September quarter.

I would assume that would go down.

How much capacity would you be expecting to add over the next couple quarters?

Thanks.

First of all, I think you're right, that the $382 million is probably a peak.

I want to remind you that we report CapEx on a cash basis so the $382 million includes flood-related spending that was actually for capital that was received in Q4.

We said before that, in total, we expect for flood recovery about $400 million, of which approximately half will be in fiscal year '13.

Our spending is focused on a couple of things.

We're obviously investing in technology ramp.

We're investing in process improvements and product transitions.

And, we're also investing in security of the supply chain and flexibility.

We're investing almost nothing in capacity, other than what is required to transition a line from an older generation to a newer generation.

We expect that we will be well within our business model of 5% to 7%.

If you take out the flood-related spending at the lower end, possibly we'd lower the lower end of the model.

Thank you.

You're welcome.

The next question comes from Ben Reitzes with Barclays.

Your line is open.

Thanks a lot.

My first question is just with regard to the inventory that you talked about in the industry.

Did you quantify that?

And, any idea on when that is lifted, and why it's there?

A little more detail on that?

We did not quantify it, and it would be speculation to try to actually estimate it.

But we -- now, it obviously depends upon -- we're one player, granted, a big player in the industry, and also it is -- we've got customers and their behavior.

But, our intent would be to try to eliminate that inventory overhang here before we exit calendar 2012.

It's also important, Ben, we continue to operate the channel in an extremely clean fashion, the distribution inventory, including in transit is significantly less than three weeks -- excuse me, four weeks.

Oh, okay.

Thanks.

Just my follow-up is real quick on share repurchase.

If you take your $10 guidance as literal, it means about $3 in earnings probably in the March and June quarters.

Is there any thought about accelerating share repurchase now so that you have a lower share count for when have you to hit those numbers?

Or, I guess my question is, why not buy back more now and front-load the year with regard to returning your 50%, or however much of that goes to buybacks now versus later.

Thanks.

Certainly one of the levers available to us, and we're exploring that.

Thanks a lot.

Mark Moskowitz with JPMorgan Chase.

Your line is open.

Just building on Ben's question there around the $10 target, I had a question in terms of the three initiatives that Steve mentioned earlier in the call.

Are those tantamount or necessary to get that $10 target?

Do you need those to step in as buffers to some of these other dynamics around cannibalization of PCs from smartphones and tablets and other stuff?

I think if you go back, Mark, and you look at what we've talked about in terms of hybrid drive as well as the helium drive -- I assume that's what you're referring to.

Both of those are not expected to contribute materially to our financial results until the back-half of 2013 -- calendar 2013.

Calendar.

Okay.

But obviously, we need to continue to execute on our broader product road map, bring on improvements in terms of our execution against areal density curves -- all those different kinds of things.

Then, my follow-up question is related to the inventory overhang.

Do you think the inventory overhang was driven by some of these long-term agreements that were signed with your competitor earlier this year?

And, that they lent to maybe a selective supply chain overage here from some of the OEMs, and that's what we're having to clean out?

That certainly contributed to it, yes, Mark.

Maybe as a last follow-up, as a result of those long-term agreements probably ending here pretty soon, have you seen increased discussions from the server and storage OEMs to do more and more business with Western Digital going forward because I know a lot of OEMs are kind of disappointed how Seagate didn't take advantage of that unfortunate situation in Thailand last year.

I think that we talked about it earlier in terms of what we've done in the enterprise segment, and I think there's a lot of different dynamics.

The commercial aspect of the relationship is only one aspect.

There's also the product aspect, quality aspect, just how you deal with the relationship.

So, I don't -- I think it's difficult to isolate one particular variable, and what we really have been focused on, frankly, for quite a while is building longer term, endearing relationships with our customers, and we're going to continue to do that.

Thank you, John, for your consistent execution and messaging over the years.

Really appreciate it.

Good luck.

Thank you very much.

Mark Miller with Noble Financial Capital Markets.

Your line is open.

Also like to add that sentiment, John, you've done a very good job with this firm.

I guess the question that everyone has, and I know you were asked this before, but there are scenarios out there saying that there's currently production constraints, shortages of flash chips, and with the fabs that are going up it's going to be hard for flash and solid state drives to keep on taking -- to keep on cannabilizing drive and PC sales at the rate they've been doing that over the last couple of years.

Do you agree or disagree with that?

I think that -- I'm not sure I agree or disagree.

I think that there's a lot of different dynamics that are going on, and I think that demand is down for a lot of different reasons and to try to isolate it to -- it's not so much that SSD or solid state is taking over the world.

Right now, demand just isn't very good across the board.

And so, I think that we've got to look at it in a broader context.

Yes, there is some impact.

But, I don't think that that is the only dynamic that's occurring.

Just to follow up on that question, I believe Steven [Louzos] said it during our Investor Day that he actually thought that the macro environment as well as some product transitions were having a bigger effect on demand than the tablet cannibalization.

Do you agree or disagree with that?

I think that's a fair statement.

I would tend to agree with that.

Thank you.

That concludes today's call.

Thank you, everyone.

We appreciate your questions and look forward to being in touch in the months ahead through our Investor Relations activities.

I want to finish with an expression of thanks, admiration, and congratulations to John Coyne for his 30 years of dedicated service to Western Digital, including the last six as CEO.

He and his team have put Western Digital on a course to create significant additional value for our customers, employees, and shareholders in the years ahead, and I look forward to being part of that next phase in the Company's rich history.

Thank you.

This does conclude the conference.

You may disconnect at this time.