威騰電子 (WDC) 2013 Q3 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to Western Digital's third 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 call over to Mr. Bob Blair.

Thank you.

You may begin.

Thank you.

I want to mention at the outset 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 and opportunities in the industry, industry demand for the June quarter and calendar year 2013, our production levels and capital expenditures, customer response to our product offerings, and our financial performance including our financial results expectations for the June quarter.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-Q filed with the SEC on February 1, 2013.

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 quarterly fact sheet 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 other charges.

Because the amount of these items is not fully known to us at this time, we are unable to provide guidance for 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 measure.

We ask that analysts limit their comments to a single question and follow-up question following our commentary today.

I also want to note that copies of remarks by our CEO and CFO from today's call will be available on the Investor Section of the Western Digital website immediately following the conclusion of our call.

I would now like to turn the call over to President and Chief Executive Officer Steve Milligan.

Good afternoon, and thank you for joining us.

After my opening remarks, Wolfgang Nickl will provide additional commentary on our March quarter results and outlook for the June quarter.

I am pleased with our financial performance in the March quarter.

We continue to execute well and capitalize on the ongoing secular growth in digital data.

Industry demand was in line with our expectations, and we expect volume in the June quarter to be flat to slightly down with the March quarter.

We are cautiously optimistic about the potential for a modest seasonal uptick in demand for the second half of calendar 2013.

Our production levels will continue to be adjusted to prevailing demand patterns.

In the March quarter, both the HGST and WD subsidiaries continued to deliver outstanding financial results driving gross margin performance well within our model.

We continue to effectively manage the diverse elements of our business with a keen focus on operational excellence and value creation for our customers, shareholders, and employees.

Customers continue to respond favorably to our breadth of product offerings and value-based engagement model.

It is important to note that we have established a leadership position in the fastest growing areas of the storage industry.

These include our high-capacity drives and solid state drives for the cloud, branded product solutions for the personal cloud, and leading small form factor drives for thin and light mobile devices.

Given our strong pipeline of innovative new products, we have the opportunity to sustain this favorable momentum for the foreseeable future.

Currently, we are seeing strong market response to several new products, including our new family of 5 mm 2.5-inch hard drives and solid state hybrid drives for ultra-portable devices, our seven-disk helium-sealed drive platform aimed at delivering significant total cost of ownership benefits for hyperscale data centers and our expanding range of SSD offerings for the enterprise space.

We continue to be excited about the long-term outlook for storage and our increasingly strategic position within this vast digital data ecosystem.

Western Digital is one of the best positioned technology companies to leverage the ongoing creation, transfer, and storage of data, a trend linked directly to consumers' increasingly ubiquitous experience with data in all aspect of their lives.

We believe digital data growth will continue unabated for the foreseeable future with total exabytes shipped growing from 600 exabytes in 2012 to at least 5,900 exabytes by 2020, representing a 33% compounded annual growth rate.

Consistent with other recent commentary, we believe exabyte growth is a better and more relevant measure of the growth potential for the industry and our Company.

Western Digital is a market and customer driven Company focused on growth and innovation.

We develop deep and collaborative relationships with customers, an approach that is being manifested in our role as a trusted advisor and market maker.

We believe this approach will continue to be one of the key factors in helping us to achieve strong business performance.

The Western Digital platform is powerful, with growth drivers and unique competitive advantages that will continue to provide us the opportunity to expand our value creation model within the storage ecosystem.

I am confident that this approach will continue to result in strong and sustainable financial performance further differentiating Western Digital as one of the world's leading technology companies.

I will now turn the call over to Wolfgang.

Thank you, Steve.

I will first summarize the total market demand and our consolidated financial performance for the March quarter, and then conclude with a range of our expected financial results for the June quarter.

As Steve mentioned, we're very pleased with our March quarter performance as it demonstrates the resilience and strength of our business model.

The HDD marketplace shipped approximately 135 million units during the March quarter, flat to the December quarter and in line with our forecasted range in late January.

In our business, we saw strength in enterprise, stable quarter over quarter performance in client and consumer electronics and anticipated seasonal softness in branded product.

Our distribution retail channel inventory continues to be lean and our analysis suggests that inventory levels at our OEM customers are also in good shape.

Our revenue for the quarter was $3.8 billion.

We shipped a total of 60.2 million hard drives at an average selling price of $61.

We exceeded our revenue guidance due primarily to better than expected business and product mix and lower than expected like-for-like price declines.

The average capacity (inaudible) we shipped in the March quarter was 810 gigabytes, a 35% year over year increase.

This reflects strength in our branded and enterprise businesses, as well as solid mix-up in our client business to cope with the ever increasing amount of digital content.

Our gross margin for the quarter was 28.2%.

Non-GAAP gross margin was 29.2%, excluding $38 million of amortization expense related to acquired HGST intangible assets.

Non-GAAP gross margin was approximately 120 basis points better than our guidance as a result of better than expected cost improvements and product mix, and lower than anticipated price declines.

Our broad-based participation in the secular growth of digital data is resulting in a multi-diversified mix of our revenue.

Over the last five years, the revenue contribution of our non-PC-related business has grown from 35% in fiscal year '08, and is projected to account for more than 50% of our revenue in fiscal year '13.

As a reminder, our non-PC-related business is comprised of our branded products, consumer electronics, and enterprise business which includes SSDs.

R&D and SG&A spending totaled $581 million for the March quarter.

SG&A included $22 million of amortization expense related to acquired HGST intangible assets and other unrelated charges.

We incurred additional charges of $63 million in the March quarter reflecting continued alignment of our operations with anticipated market demand.

As a reminder, we'd already incurred total charges of $147 million in the prior three quarters reflecting ongoing infrastructure alignment, as well as an evolution of our organization to address growth opportunities.

Tax expense for the March quarter was $15 million, or 4% of pretax income.

The rate reflects the retroactive extension of the federal R&D tax credit.

Our net income for the March quarter totaled $391 million, or $1.60 per share.

On a non-GAAP basis, net income was $514 million, or $2.10 per share.

Turning to the balance sheet, we generated $727 million in cash from operations during the March quarter, and our free cash flow totaled $539 million.

Our CapEx for the March quarter totaled $188 million.

For the full fiscal year, we expect to be at the upper end of our CapEx model, including approximately $200 million for expenditures related to the floods in Thailand.

Excluding the flood-related spending, we would be close to the bottom end of our model range, reflecting our measured approach to capital spending in today's environment.

As part of our capital allocation strategy we repurchased 5.2 million shares for $243 million during the March quarter.

In addition, we declared a dividend in the amount of $0.25 per share or a total of $60 million which we paid on April 15 to shareholders of record as of March 29.

We exited (inaudible) with total cash and cash equivalents of $4.1 billion, of which $1.5 billion was in the US.

I will now provide our guidance for the June quarter which anticipates sustained strong performance within our business model during what is typically the industry's softest quarter.

We expect a flat to slightly down total available market when compared with the March quarter, revenue in the range of $3.55 billion to $3.65 billion reflecting the current demand and pricing environment and a seasonal change in business mix.

Gross margin, well within our model, at approximately 28.5% excluding the amortization of HGST intangibles.

We expect R&D and SG&A spending to be approximately $550 million, excluding the amortization of HGST intangibles.

We expect tax rate within our 7% to 10% model, and a share count of approximately 243 million.

Accordingly, we estimate non-GAAP earnings per share of between $1.65 and $1.80 for the June quarter.

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

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call.

(Operator Instructions)

Our first question comes from Sherri Scribner with Deutsche Bank.

(inaudible - technical difficulty) as in how it impacts your business.

I'm sure you've all seen that PC units were down substantially in the March quarter, but if we look at your PC business based on the desktop and the notebook you were up a little bit.

Now I know that those businesses are not exactly correlated, but I think some people are concerned there's some inventory building somewhere in the channel that would describe that difference between what you are seeing and what the PC market is seeing.

Can you give us some more detail on why there would be a difference there?

Sherri, this is Steve.

One of the things, I think, that we have to continue to in mind -- Wolfgang alluded to it in his prepared remarks -- is that we're becoming -- first thing is -- we're becoming less and less of a PC story and more of an overall digital data growth story.

Although we are still impacted by what's happening in the PC market, it's becoming less and less.

That being said, yes, the PC market was down.

It was only down a bit more than what we actually had forecasted, so our underlying assumptions did not expect there to be particular strength in the PC business.

So we were not that surprised on the downside in terms of what happened there.

The fact that our units are up was really more a reflection of our ability to gain a bit of share from an execution standpoint.

And then lastly, as Wolfgang indicated, we do not believe at present that there is any sort of an inventory issue in terms of the PC market that we're aware of.

Okay, that's helpful.

Thanks, Steve.

And then for my follow-up, I just wanted to get a little more detail on the near-line market.

How large do you think that market was?

What do you think your share was in that market?

And what type of growth expectations do you have for that going forward?

Yes, Sherri, that market grew healthy quarter over quarter.

We believe it was up from 7.5% to likely 8.5% -- 8.4%, 8.5%.

It's like a solid increase quarter over quarter.

Our share there is very solid.

Our share is very well distributed across all of our businesses.

Our average share, I believe, is 44.4% and I'd say all markets are plus or minus 2%, in that range.

We said before that is one of the markets that we believe will show solid growth in the future, and we've previously said that we expect double-digit growth in those markets.

And that's volume, and on top of that significantly more data growth in that market in particular.

Great.

Thank you.

You're welcome.

Our next question comes from Rich Kugele with Needham & Company.

Thank you.

I just wanted to dive a little deeper into one of your comments on the gross margin side for some cost savings, and, I guess, unanticipated or accelerated cost savings.

Was any of that head related or the transition to new aerial density benefiting, or if you can just elaborate a little bit more on those elements?

Yes, Rich, the teams executed very well.

We had extremely good linearity which helped us earn a bit more market share, so the volume was slightly higher than we thought.

That helps with the overall absorption.

We're not done with the aerial density transition, but we made solid progress.

And lastly, I think we've worked with our suppliers and we are now, what we would call, in a more normal area in terms of internal/external sourcing.

So all of these things paired with solid execution in both of our subs helped us do -- have better costs than [when] we thought.

Okay, that's great.

Thank you.

You're welcome.

Our next question comes from Aaron Rakers with Stifel Nicolaus.

Great.

This is Joe [Crashocki] for Aaron.

I was wondering if you could comment maybe on your days payable increased caused your -- I'm sorry, your CCC to increase to 12 days.

I was wondering if you could kind of give us an idea of how to model that going forward?

Our cash conversion is like a target model, it's four to eight days.

We're a tad over that.

It's less a function of the days payable, we like that in that range that we displayed.

We have made very conscious investments in inventory.

As you know, we're restructuring quite a bit in various operations and when you do that you want to make sure that you have sufficient buffer materials in place.

We also make sure that we take advantage on where we understand the demand signals very well of ocean shipments.

That's quite a cost saving.

And then lastly, in particular our enterprise customers, we want to make sure that we have solid just-in-time warehouse inventory in front of them so that they -- that we don't disrupt their pulls as they conduct their business.

So mid-term opportunity there, I would see it more on the inventory turns, but we watch this thing very, very closely.

But with a free cash flow of $539 million, we didn't make this one of our top priorities but it's an opportunity going forward.

Okay, that's helpful.

And then for my follow-up I was just wondering if you could comment a little further on OpEx?

It looks like it was up sequentially during the quarter yet headcount was down.

I was wondering when we might see an impact from the decrease in headcount going forward?

First of all, just bridging the $581 million to the $540 million that we had in our guidance.

The $540 million was a non-GAAP measure.

So there's about -- just shy of $20 million on incremental growth on incentive plans since we over achieved.

There is a $10 million or so standard amortization of intangibles, that's there every quarter.

And then we had a legal settlement there, as well.

So normalized for incentive payouts we were pretty much exactly right on with our guidance.

In terms of looking forward, we have a reduction in headcount that's mainly in the factories, which you would see in the COGs line.

But we're also reducing headcount in the OpEx areas, but not to bring the overall OpEx down, it's to create room to invest in the growth areas.

So we're investing in enterprise, in new platforms and we're investing in SSD and other areas.

So the target of the restructuring there is less to reduce the number for now from the [550-ish] kind of level, it's more to make room for the growth in the strategic growth areas.

Okay, that's helpful.

Thank you.

Our next question comes from Ananda Baruah with Brean Capital.

Hi, thank you, guys, for taking the question.

And congrats on a solid quarter.

I guess this is for either Steve or Wolfgang.

Why would gross margins be down in the June quarter off of March if pricing is -- it sounds like you're saying pricing is a little bit better than you expected and it feels like, just based on the margins you reported this quarter, that mix is probably leaning at least as good if not better than you expected.

We would just love to get your thoughts on the gross margin dynamics in June?

Thanks.

Yes, I'll give you like the -- some of the drivers.

First of all, we said the market is slightly down, so we anticipate that our volume will be down and that doesn't help with costs.

But the main driver here is, it's seasonally the softest quarter, but it's also seasonally a quarter where you have an interesting general mix dynamic going on.

You're shipping more to OEMs, you're shipping less to retail, and in particular, desktop distribution channel is down in this quarter.

So it's mainly a function of reduced volumes and business mix, and then we've modeled some price decline for the quarter, as well.

Got it.

That's helpful, Wolfgang, thanks.

Can you, you guys mentioned -- Steve mentioned in his prepared remarks, I guess -- of good adoption of new products, I know you guys have the hybrid drives are out.

I saw your 5 mm announcement, some new enterprise products are coming out and you have the single-platter drives.

Can you give us a sense, actually some drives in some new game stations as we go through the year that, I think, are actually higher caps -- can you give us some sense of how we should expect the mix to manifest itself on the business as you move through the year and what -- I know you're not going to give guidance on the gross margins but it seems like you have really nice mix up?

And so any help on how we should think about all those factors manifesting in results would be helpful as we go through the year?

Thanks.

Yes, so I'll comment on that.

We continue to expect our mix to improve.

It's a little bit, when I -- I'll talk a little bit about a longer-term view.

There's always seasonal things that happen quarter-to-quarter but the mix trends are very favorable from our perspective.

And it comes back to the fact that digital data growth continues to be very substantial and people need to store that data somewhere, and they need more storage as opposed to less storage.

And so we're going to continue to benefit from that, and as we mix up that provides better economics for us.

And so the longer term, if you want to refer to it, secular trend is favorable from that perspective.

Got it.

Thanks a lot.

Our next question comes from Scott Craig with Bank of America Merrill Lynch.

Yes, thanks, good afternoon.

Two questions.

First, Wolfgang, can you take us through the free cash flow usage as you see it for the rest of the year?

You talked a bit about CapEx but maybe where that is going to be spent outside of the $200 million on the Thai-related issues, and then as well as buyback and stuff like that.

And then secondly, maybe a question for Steve.

Can you discuss the investment in Skyera and just sort of your thought process behind that and maybe why not a PCIe guy, why all flash?

Just kind of take us through your thought process there?

Thanks.

On the free cash flow, it's fairly straightforward.

I think we had three quarters that we're above [$500 million] that we expect another solid quarter.

I think the [linearity] is going to be okay.

We've guided to a CapEx number that would let you conclude that we are somewhat lower than what we spent in Q3 in CapEx.

That CapEx now is mainly really focused on technology development, robustness of the supply chain, and then as we mix up in test capacity, as well.

In terms of what we do after the free cash flow, we stick to the [50%] capital allocation strategy to shareholders as a percent of free cash flow.

I think we're just a little bit shy of that and the intention would be to catch up by the end of the fiscal year.

In terms of Skyera, just to comment on that.

Skyera is a small company based in San Jose that is privately held, focused on SSD array technology.

We have been involved with Skyera for awhile, both in terms of an initial equity investor, as well as we worked with them on a number of different technical areas.

And we had the opportunity to participate in their latest equity round and we're glad to that, they've got a lot of interesting technology, not only from a equity perspective but also just from a technical collaboration perspective.

Very pleased to be working with them.

In terms of your comment, why Skyera versus something else, I don't think that it's an either or.

We're very interest in the broader solid state memory area, particularly in the enterprise area, and that includes things that we're doing in terms of our existing enterprise SSD business.

Also in terms of what companies like Skyera is doing, and also in terms of PCIe.

And so this just happens to be one equity investment that we were able to make in the past 90 days.

Thank you.

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

Hi, thanks very much, guys.

I was wondering if you could comment a little bit more about the TAM as you see it this year after -- you specifically identified that the TAM in the June quarter will be flat to down a little bit.

Could you talk a little bit about how we should be thinking about sequential growth, or second half growth in any more specificity?

And more broadly, just wanted to hear some thoughts on, if the PC market, most consensus, I think, are now down 6%, 7%, 8%, 9% in terms of units.

But if the PC market is down 7%, 8% for the next couple years what do you think the TAM growth would be for the HDD business against that type of backdrop?

Thank you.

Yes, I'll start it off, Keith.

Our own assumptions, I think Steve said it in his remarks, is a modest seasonal uptick in the second half.

The emphasis on seasonal, that is purely driven by back-to-school, holidays, and one of the prior speakers talked about the gaming business that is strong in the second half, as well.

If you would want me to put a number around it, it is somewhere around 140 million-ish or so, I think that's a prudent planning assumption.

In terms of the PC growth --

I'm sorry -- 140 million for the September quarter, I assume you mean?

Yes, September and December.

Okay, thank you.

And then, I think Steve said it that, yes, IDC and Gartner have both stated, I believe, 11% and 13% decline in the first quarter for the PC market.

That was not too far off what we had modeled in our assumptions.

I think we wouldn't disagree with an assumption of like 5% or so year over year decline of that market.

IDC and Gartner forecast the market then to resume modest growth.

I think we would agree with that.

And we continue to believe that our market from a volume perspective is increasing from this year on by like 3%.

And it's really driven by capacity and price and brand and we quoted the numbers on our PC and our non-PC related business, and we continue to see that trend to go to non-PC related businesses.

Right, so philosophically -- sorry -- philosophically, if the market is down 5% to 7% on a sustained basis you think you can have positive unit growth even against that PC backdrop?

(Inaudible)

Okay, thank you, guys.

We go back, Keith, I think that there's a couple of key points to emphasize.

One, we are not anticipating a meaningful change in terms of what's happening in the PC market.

We're not counting on that.

We're being very cautious with regards to our production plans in that regard.

Right.

The other thing is that we talked about at our investor day was a longer-term unit growth rate in terms of HDDs of 3%.

That continues to be our current assumption but that growth is not coming from PCs, it's coming from other areas.

Right, right.

Okay, thanks, guys.

Our next question comes from Amit Daryanani with RBC Capital Markets.

Good afternoon, guys.

Two questions for me.

One, you guys are guiding for a flattish TAM in the June quarter, flat down, but I think your sales guide implies sales down somewhere in the 4.5% range.

Could you talk about how much of that is pricing driven versus potentially you give up some of the share gains you had in the March quarter as you go through June?

The first impact is really from a segment mix like, for instance, pricing in our branded products is significantly higher than if we ship into a gaming solution, for instance.

And that's a big driver.

If you look for like-for-like pricing, we have modeled modest declines there.

And share is not really something that we plan for, that's more like an outcome.

We plan to have really good product and deliver it in a very linear fashion to the market and the share is what the share is.

Fair enough.

And then, if I look at just the enterprise side, it actually looks like you guys picked up a decent amount of share in the March quarter.

When you think about it, do you think that was more a reflection of just the right customers you have partnered with or some of the newer technologies, as you were talking of, that are starting to take more adoption and that potentially could then accelerate, I would imagine as you get through the year?

I don't know if I would draw any significant conclusions one way or the other in terms of the share.

We did pick up a little bit of share in enterprise.

Now if you go back, we had lost a little bit of share.

So there are share gains and losses that occur quarter to quarter occasionally within rough, moderate ranges and so I don't think I would point to anything significantly per se, other than the fact that longer-term thing we continue to provide compelling products to our customers and we engage with them in a way that they want to buy more of our product.

Fair enough.

Thanks a lot and congratulations on the quarter, guys.

Thank you.

Our next question comes from Cindy Shaw with DISCERN.

Hi, yes.

A couple questions for you.

One, there's been a lot of hopes within some in the industry about a pickup in the second half due to things like the Windows XP end of life April of next year.

Ultrabooks for some folks and some saying a better supply of touchscreen panels for Windows 8 notebooks would pick that up as we head into late this calendar year.

And I'm wondering, is that in your guidance or would that be providing upside?

Right now we, as well as many of our customers in the PC space, are being very cautious with regards to the demand expectations.

We'd certainly like to see, and hope to see, some of the dynamics that you're talking about to increase demand in the back half of the year.

Right now we are being pretty cautious in terms of our outlook from our standpoint, as we talked about earlier.

So it sounds like if that really transpires it would be an opportunity for upside for you.

Is that right?

That's possible.

That's possible.

Okay.

And then my follow-up question, with your 5-millimeter drives, it seems like you're getting a bit of a head start on the competition, and I'm wondering if that's really the case?

And also, I'm hearing that the connector for your drive is different than the industry standard and would not be a drop-in replacement for other 5-millimeter drives, and I'm wondering if that's true and if so what the philosophy behind that is?

We're working very closely with a number of different customers to look for them to adopt our 5-millimeter drive.

We've been pretty pleased, both in terms of the standard rotating magnetic drive as well as the hybrid drive, to get some adoption of that product as we move through the back half of the year.

So we're very encouraged with where we're at.

In terms of the adapter, you are right, it is not a traditional industry standard adapter.

We did that to provide for enhanced shock characteristics in terms of the mobility for that drive, and we're getting positive response from our customers so far.

Well, congratulations on the quarter.

Thank you.

Thank you.

Our next question comes from Scott Schmitz with Morgan Stanley.

Your line is open.

Thanks.

I'm just wondering if we can go back and if you can update us on your cost structure a little bit more, and more specifically, what percent is a variable cost?

And then as it relates to that, if we look at utilization, I know it's difficult to kind of paint with a broad brush, but what components have the lowest utilization and conversely what ones are the highest?

We haven't really given out the exact split between fixed and variable cost.

You can look at our -- if you take our non-GAAP depreciation amortization it's like $260 million a quarter.

You can assume that that is probably around 50% of our fixed cost.

The rest is factory engineering and utilities and maintenance and stuff like that.

So I think we have an industry leading cost structure in terms of what part is variable.

And then in terms of capacity utilization, that remains an opportunity in certain parts of our business.

I think you have characterized it well.

You can speak about capacity utilization in general.

There are certain aspects of our infrastructure that are very tight, like I mentioned that we're investing in test capacity.

And there are certain aspects that were not hit by the flood, and they are a little bit long right now.

I wouldn't want to go into exact detail where that is, but we're balancing that every quarter.

Thank you.

You're welcome.

Our next question comes from Maynard Um with Wells Fargo.

Hi.

Can you just help us think about the PC mix and ASP you're embedding going forward?

And I'm curious because on the one hand you have the PC OEMs that are under greater margin pressure and pressure to reduce pricing to drive some unit volume, so do you think that drives lower-capacity drives into the market?

It doesn't look like that's a trend you are seeing.

Or do you think there's an offset here from higher hybrid drive shipments?

Can you just talk about the industry dynamics and how to think about that impact to you?

OEM customers or PC customers, the primary issue that exists is that they've got to get compelling products out there at a cost point that compels consumers to purchase them.

And, sure, of course, they're cost sensitive, but I think the bigger issue is the product's got to be right.

And so if you look at what we're doing in terms of the 5-millimeter product, what we're trying to do is provide a thin and light storage device that our customers can design around that provides a more compelling product for them.

It's not going to make a big difference to them if they save a buck or two on how much they pay for the memory.

Got it.

That's helpful.

And then, just as a follow-up, with the PC market pretty much where you expected it, can you just talk about how far along you are in the actions to reset capacity where you are comfortable and maybe just give us some other quantitative or qualitative idea of where you are?

Yes, you have seen us with a couple of quarters of restructuring activity, and you see our gross margin well within our model.

We have been very, very active.

The little bit of something that we have to wait and see.

We've said that we expect a bit of an uptick in the second half of the year, so we'll just watch that very, very carefully.

We've proven historically that we can react in either direction in terms of capital deployment.

That's great.

Thank you.

Our next question comes from Monika Garg with Pacific Crest Securities.

Hi, thanks for taking my question.

I think Keith talked about the impact of PCs on your TAM.

I want to touch base on the impact from pure client SSDs on the TAM 2. So if you look at third-party data or what OEMs are saying, they think 2013 we can see at least 20 million fewer client SSDs.

So could you maybe talk about, first of all, do you think it's possible something like that kind of volume?

Secondly, how that could impact the business?

So what's interesting in terms of what we have seen is that the issue in terms of hard drive TAM, right, because obviously it's down, it's down from 170 million pre-flood to 135 million this past quarter.

Clearly, we've been impacted in that regard by lower PC sales.

But it's not because of SSD replacements within PCs.

In fact, we've actually seen that pure SSD as an alternative for hard drives has not changed significantly from what we expected or from what we've seen historically.

Now you are seeing dual-drive configurations where you've got SSD in a hard drive, and so that -- but we're agnostic to that.

That's okay from our perspective.

The issue is that there are competing devices, for example, tablets, that are more compelling to customers that they're buying instead of PCs.

And so if you go back to the 5-millimeter story or the hybrid story what we're trying to do as a Company is provide a more compelling storage alternative in a thin and light package that our customers can work around, design more compelling products to have them buy a PC or a PC-like ultra-portable device than versus a tablet.

Sure.

Thanks.

And then, just one last one here, regarding Skyera.

Skyera makes its own SSDs, so is it possible you might look at kind of selling the SSDs, not just the systems made by Skyera?

They're an SSD array company primarily.

Right.

Okay, thanks.

That's all for me.

Thank you.

Our next question comes from Mark Miller with Noble Financial Capital Market.

Thank you for taking my question.

I'm just wondering if you could estimate right now the percent of data being stored on the cloud that's gone on hard drives and where you think that might be in three years?

Mark, when we look at it in terms of data storage, we believe that -- I can't remember off the top of my head, frankly, what the time frame was, but that moving out into the future, I think it was either 2017 or 2020 that 85% of data will continue to be stored on rotating magnetic storage.

And then, also comment on the margin differential between the drives used in cloud storage and your typical lap drive in a PC.

The drives that go into the cloud, highest quality, highest engineered products, and they command the margin premium, so they are significantly higher than the margins in the PC space.

Would I be wrong to ballpark that between 75% and 100% higher on average?

You are not going to quit with your question, are you?

You are not going to back off.

And Wolfgang is not going to answer it, either.

(laughter)

All right, well, thank you.

That's all most of us really need to know anyway.

Thanks, Mark.

(laughter)

You're welcome.

Our next question comes from Rob Cihra with Evercore Partners.

Hi, thanks very much.

Two questions, if I could.

One, just wondering where you are in progress on a 500 GB per platter on notebook and 1 TB on desktop?

I'm assuming you won't say anything in terms of percentage of your mix or anything, but maybe just relative to your road map in terms of rolling out those capacity points this year?

And then my second question, just going back to enterprise, you had mentioned the good organic growth in near-line demand or capacity optimized.

Just wondering if, whether in the near-line or the mission critical these days you think there's any lingering recovery still from the September quarter inventory correction, if that's helping at all or if that's kind of long done and what we're seeing now is true demand?

Thanks.

Well, in the aerial density we're less than 50% on the latest and greatest, so that presents an opportunity over the next quarters for us.

And then what was your question on near-line was --?

Just how much, whether near-line or also on that traditional enterprise if any of the sort of sequential growth you saw in the quarter that you are seeing now still has anything to do with still recovering from September quarter last year's inventory correction, or if you think that's long past and what you are seeing now is true end demand?

We don't believe there's any inventory issue in that area of the market, and that our -- it represents true unit demand.

Great.

Okay, great.

Thanks very much.

All right, I want to thank you, again, for joining us.

In closing, I also want to thank all Western Digital employees for their dedication and outstanding performance and our customers and our suppliers for their support.

We look forward to being in touch with you.

Thank you very much.

That concludes the call for today.

You may disconnect at this time.