威騰電子 (WDC) 2014 Q1 法說會逐字稿

Welcome to Western Digital's first quarter financial results for fiscal year 2014.

(Operator Instructions)

As a reminder, this call is being recorded.

Now I will turn the call over to Mr. Bob Blair.

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 December quarter, our production levels and capital expenditures, customer response to our product offerings, and financial our performance including our financial results expectations for the December 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-K, filed with the SEC on August 19, 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 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 includes excludes amortization of intangibles related to insurance proceeds related to the Thailand flooding and expenses related to the acquisitions of HGST, Velobit, sTec and Virident.

Because the amount of these items is not fully known to us at this time, we are unable to provide guidance for or 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 participants limit their comments in the Q&A to a single question and one follow-up.

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

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

Thank you for joining us.

After my opening remarks, Wolfgang Nickl will provide commentary on our September quarter results and our outlook for the December quarter.

The Western Digital team performed well in the September quarter.

Outstanding linearity drove again helped drive great operating results, including strong free cash flow generation.

We posted gross margins above the midpoint of our model range, and our earnings per share were well above the high end of our guidance.

These results reflect continued strong execution by both our HGST and WD subsidiaries.

We expect the TAM in the December quarter to be roughly flat with the September quarter.

Longer term, we remain excited about the opportunity to address the 34% annual growth in data that we are forecasting through 2020.

Our strong financial performance has enabled us to invest in, and execute on, a strategic plan that we first outlined a little more than a year ago at our Investor Day.

At that time, we identified growth opportunities in the Cloud, and thin and light devices, and in the connected life for consumers, and the small and home office market.

In addition, we cited enterprise solid-state storage as an evolving growth opportunity.

We also defined a capital allocation program of returning 50% of free cash flow to shareholders, and potentially investing the remainder in strategic growth opportunities.

We have advanced each of these initiatives over the last year, putting ourselves in an even stronger position to create additional value through innovation and differentiation.

First, in our core business.

We are on track to launch our new seven-disc helium-based seal drive this quarter to a select group of customers who value the total cost of ownership savings delivered by this innovative product.

We are participating in the thin and light, ultra portable device opportunity, with a strong lineup of solutions, including our solid-state hybrid drives, as well as our 7 millimeter and 5 millimeter hard drives.

We recently introduced our My Cloud family of personal cloud solutions, which allow users to organize, centralize and access their digital content from anywhere in the world.

And to further strengthen our participation in the fast-growing SOHO NAS space, we recently expanded our industry-leading family of WD Red mass drives to include a 3.5 inch, 4 terabyte drive, and a 2.5 inch form factor.

In returning capital to shareholders, we have delivered on our year ago announcement by allocating approximately $1.2 billion to share buy-backs and dividend payouts.

On the strategic investment front, we recently strengthened our enterprise storage platform with several acquisitions related to the application of solid-state storage and data center architectures.

SSD and the enterprising Cloud is forecasted by IDC to grow from $2.5 billion in 2012, to $7.2 billion in 2017.

We entered this space in 2008 through our joint development agreement with Intel, and since then have established a strong position in SAS SSD devices.

Our recent acquisitions of sTec, Velobit and Virident augment HGST's existing enterprise SSD resources, including the Intel JDA.

Collectively, these assets provide us with a powerful platform to address this evolving growth space, with a broadened portfolio of products and technologies, including the full range of enterprise SSD devices, PCIE, SAS and SATA.

Mike Cordano, who heads our HGST subsidiary, will be discussing their data center strategy in the keynote address at the annual [NBM] storage conference on November 6.

I will now turn the call over to Wolfgang to review the first quarter results and our outlook for the December quarter.

Thank you, Steve.

We are very pleased with our September quarter performance, as we again demonstrated the consistency and strength of our business model, underpinned by great execution.

The hard drive industry shipped approximately 139 million units during the September quarter, up from the June quarter and flat with the year ago period.

The September TAM came in at the upper end of the guidance we gave in July.

In our business, we saw strength in consumer electronics due to gaming, stable quarter-over-quarter performance declined in enterprise, and an anticipated seasonal pickup in branded products.

Our distribution retail channel inventory remains very lean, and our analysis suggests that inventory levels at our OEM customers remain at reasonable levels.

Our revenue for the September quarter was $3.8 billion, including $106 million from enterprise SSDs.

Overall, 53% of our revenue came from non-PC applications.

We shipped a total of 62.6 million hard drives, at an average selling price of $58.

The quarter-over-quarter change in overall ASP was primarily driven by a change in business and product mix.

Our gross margin for the quarter was 28.6%.

Non-GAAP gross margin was 29.8%.

Excluding $36 million of amortization expense related to intangible assets acquired from HGST, sTec and Velobit, as well as $11 million of fixed asset impairments and other charges.

We exceeded our implied guidance for non-GAAP gross margin by 70 basis points, primarily due to lower than expected price declines and better than expected cost improvements.

R&D and SG&A spending totalled $533 million for the September quarter.

SG&A included the following items.

Charges of $30 million related to the acquisitions of sTec, Velobit and Virident, and $11 million of amortization expense related to HGST and sTec intangible assets, offset by a gain of $65 million for a flood-related insurance recovery.

We incurred additional interest charges of $13 million in the September quarter, relating to the accrued arbitration award.

Tax expense for the September quarter was $37 million, or 7% of pretax income.

On that income for the September quarter totalled $495 million, or $2.05 per share.

On a non-GAAP basis, net income was $514 million, or $2.12 per share.

Our non-GAAP earnings per share, excluding sTec, was $2.14, exceeding the high end of our guidance by $0.09.

Turning to the balance sheet.

We generated $680 million in cash from operations, and our free cash flow totalled $544 million.

This marks the seventh consecutive quarter with free cash flow in excess of $500 million.

Our CapEx for the September quarter totalled $136 million, or 3.6% of revenue.

Out of our capital allocation program, we repurchased 2.3 million shares for $150 million during the September quarter.

We also declared the dividend in the amount of $0.25 per share, or a total of $59 million, during the quarter.

We exited Q1 with total cash and cash equivalents of $4.9 billion, of which $1.4 billion was in the US.

During the quarter, we drew down the $500 million available to us through our revolving credit facility.

I will now provide our guidance for the December quarter.

We expect the total available market to be flat with the September quarter.

Revenue in the range of $3.775 billion to $3.875 billion.

Gross margin approximately flat with the prior quarter, excluding the amortization of intangibles.

R&D and SG&A spending of approximately $595 million, including a full quarter of sTec and Velobit, as well as 9.5 weeks of Virident, and excluding the amortization of intangibles.

A tax rate within our 7% to 10% model and a share count of approximately 242 million.

Accordingly, we estimate non-GAAP earnings per share of between $1.95 and $2.10 for the December quarter.

This EPS guidance includes a dilutive effect from our recent acquisitions of approximately $0.10.

As a reminder, we expect the sTec, Velobit and Virident and to be accretive early in calendar year 2015.

In summary, we're pleased with our continued strong performance, and we are excited about our opportunity to play an increasingly strategic role in the evolving storage market.

In my final call as CFO of Western Digital, I want to say I greatly value my 18 years of experience and relationships at the company, including relationships with many of you in the investment community.

Most importantly, I want to extend a special thank you to my fellow employees for the great teamwork in building such an outstanding company with such great promise.

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

(Operator Instructions)

Our first question comes from Aaron Rakers with Stifel.

Yes, thank you.

And Wolfgang, best of luck to you in your new role.

The question is on, as you look at the free cash flow generation, I know you mentioned seven consecutive quarters at more than $500 million.

As we look out, going forward, do we believe that is sustainable trend, especially now that we bring on the acquisitions that you guys have done?

And how are you thinking about, in that context, that free cash flow generation?

And any thoughts on changing whether or not the 50% return of that free cash flow is -- enters into the equation with these acquisitions behind you?

Thank you.

Thank you for your good wishes, first of all.

Yes, that is certainly the target, to keep the free cash flow up there, if we execute to our business model.

Again, the acquisitions, we're targeting to have accretive in the early part of calendar year 2015.

So we also think we have opportunities on the conversion cycle, for instance, on inventory turns.

So it's clearly the objective, and there is no change to the capital allocation strategy.

Yes, Aaron, this is Steve.

Just to clarify one thing.

When we are talking about free cash flow and we're defining it as exclusive of the acquisition itself, right?

Of course.

Yes.

Our next question comes from Rich Kugele with Needham.

Two questions.

First, if we were to go and look at ASPs, excluding the consumer electronics impact, can you give us a sense on what that might be?

And then I have a follow-up.

Yes, I don't have the exact number here in front of me, Rich, but it is safe to assume that the majority of the ASP quarter-over-quarter change came from the gaming business that was included in CE this quarter.

Would you also expected it to be material to the average gigs per shipped?

Yes, it would use as the average gigabytes shipped.

Okay.

And then, in terms of acquisitions, given their impact here, would you expect that, after the December quarter, for the OpEx level to decline?

Are you basically assuming, in the December quarter, that you really haven't had a chance to rationalize those businesses?

And then any comments on product road map rationalization?

Or even what they're offering today, on how you are going to combine the really four SSD entities in terms of products available to the public?

Yes, I'll take the first part.

Yes, we said when we announced the Virident acquisitions, that our OpEx will peak somewhere in the 595 to 590 range.

That is where we are right now.

We are going to be realizing some savings there over time.

We're going to be very prudent to make sure that we're not impacting the road map.

And I will let Steve talk about the second part of the question.

Yes, Rich, given that particularly the Virident transaction just closed last week, we are still in the process of rationalizing the road map for the various product lines.

So no update at this point on that.

Okay.

And best wishes, Wolfgang.

Thanks, Rich.

The next question comes from Ananda Baruah, with Brean Capital.

Hi, guys, thanks for taking the question.

And, Wolfgang, best of luck as well from our end.

This is for Steve and for Wolfgang.

What would need to happen -- or how would you guys envision dynamics taking place, going forward, to manifest to allow the growth margin to get to the higher end of the range?

And what would be the confluence of things that could get the gross margin to the higher end -- I guess the upper half of the range, over time?

Thanks.

And I have a follow-up, as well.

Yes, that's a -- that's an interesting question, difficult to answer in a real straightforward way.

Because generally, the thing that has driven gross margins up to the higher end of the range is supply and demand imbalances.

And so, obviously, we need to see some sort of a pickup from a demand perspective, and then presumably a supply constraint.

We don't see that at present.

But nevertheless, if you look at our margin performance, we're actually very pleased that our margins are where they're at in an environment with, frankly, pretty sluggish demand, pretty flat TAM that we have seen over several quarters.

And so that is a testimony to the effort of our teams in terms of bringing down costs, managing mix, and also moderating pricing pressure that we've seen.

And then if I could just follow up on that.

You said with regard to capacity utilization, as we think into 2014 -- calendar 2014, can you give us some sense of how you guys strategically are thinking about managing your capacity, say, if the environment were, for instance, be flattish TAM environment going through 2014?

Would you look to hold it flat?

Would you look to actually, you think, to increase capacity utilization?

How are you guys thinking about it?

Thanks.

We have been pretty proactive in terms of managing our capacity.

Our infrastructure and our capacity utilization to the reduced TAM environment that we've seen over the last several quarters, in terms of -- because the TAM was $160 million, $170 million, in that range.

Now it's in the -- call it $135 million to $140 million.

And so we're keeping a close eye on that, in terms of where on that might go.

And if, for some reason or another, the TAM were to contract, we would again take proactive measures to make sure that we're managing our capacity appropriately.

And right now, we don't have any plans to expand our capacity until we begin to see some indication that the market is going to pick up that would support that.

Great.

Thanks a lot.

Appreciate it.

Thank you.

Our next question comes from Bill Shope with Goldman-Sachs.

Okay.

Thanks.

Can you guys give us some more color on what you saw in terms of enterprise demand during the quarter, particularly in the business-critical segment?

And how you're thinking about that going into the fourth quarter?

Yes, demand in the enterprise space, it was a little bit stronger in the performance enterprise, or business-critical segment, as you referred to it, than what we expected.

Frankly, we're not entirely sure what drove that, and so -- but a little bit stronger.

We -- our share was a little bit off, and so -- but that is not reflective of long-term performance capacity.

Enterprise was about where we called it.

So generally, not too far off.

And how about the competitive landscape?

Obviously, you said the share was a bit off, but do you see any major change in terms of the competitive landscape, particularly heading into the fourth quarter?

I wouldn't call anything out.

I think it continues to be as competitive as it has been in the past, but I don't think that there is anything particularly unusual right now.

Okay.

Great.

Thanks a lot.

Thank you.

Our next question comes from Andrew Nowinski with Piper Jaffray.

Okay.

Thanks.

Congrats on the nice quarter.

With regard to notebook units, looks like they were down 11.5% year over year, which was a bit more than we were expecting.

Can you provide any color on what dynamics are impacting that segment?

Like I said in my prepared remarks, there is -- there's always -- we're always looking at the inventory at the OEMs as well.

And notebook drive shipments will not always coincide with PC system shipments.

That leads us to the conclusion that, both for us and for the market, that the inventories at the OEMs are very reasonable.

Any color you can provide in what you can expect in the December quarter, or perhaps the full year?

Yes, we expect for the December quarter, as we said, a [normal] TAM that flat.

We'll see client flattish, with the enterprise flat to slightly up.

Our branded products seasonally go up a bit into the December quarter, and then CE will ease off a little bit as the gaming systems that are being built reduce a little bit.

So just to add a little bit to that.

There has been a fair amount of commentary -- I guess I'll call it that, in terms of what's happening in the notebook space.

We are seeing some sign of -- or hearing of some signs may be the better way of characterizing it, of a little bit of pickup in terms of commercial notebook market.

There is still cautious stance or position on the consumer side, particularly as we enter the holiday period.

Those are kind of offsetting themselves right now, in terms of dynamics, because we're still seeing a year on year decline in terms of PC shipments, particularly in the notebook space.

I think it is a little bit too early, from our perspective, to call this a -- I'll call it turnaround in terms of what's happening in the commercial space.

There is some data points out there.

We'll have to see how sustainable that is.

And so we're taking a relatively cautious view, until we begin to see a little bit more sustainable pickup in terms of what's happening in the notebook space.

But there are some very moderate signs of some encouraging points of -- and we have to see how sustainable that is, and how prolonged that might happen to be.

Thank you.

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

Thanks a lot.

Good afternoon, guys.

Two questions from me.

One, maybe you could just talk about the inventory build up was up about 5% sequentially.

Seems like everything was on the raw material side.

I'm assuming it has to do somewhat with acquisition, but maybe you talk about what is organic versus due to sTec mostly?

Several -- it is mostly on the raw material side.

It is really staging for quarter -- December quarter is usually very linear, making sure that we can have the supply line into the customers be very steady.

There's a little bit of an impact from the acquisitions, as you can imagine.

We're also investing actively in FGI.

We're using ocean shipments where we can.

And again, we're making sure that we're monitoring the demand signals very well so that we have the units positioned in the just in time warehouses where we need them.

So we watch the inventory turns very carefully -- invest them carefully while watching the overall free cash flow.

Got it.

And then if I could just follow up on the gross margin line.

It was impressive.

It was up 70 to 80 basis points versus expectation, despite having the mix being severely negative and consumer up significantly.

So maybe you could A, talk about what drove that?

And then as you get to December, I suspect the mix is getting better for you, given that enterprise should ramp up.

So why don't you expect a gross margin improvement into the December quarter, given my assumption that mix is going to be better?

Yes, first of all, we have managed the business to have acceptable gross margin than all the businesses we serve.

In the September quarter, we came in at a TAM that was at the upper end of what we guided to, so we shipped a bit more volume.

That helps you in general with the cost, and the teams have done good work on general cost improvements.

And the price declines in the quarter were a little bit lower than we had originally modeled.

So it didn't come from one particular cost element or price element.

It was like a combination of a few things.

And then again, going into the December quarter, yes, we have shifts.

Branded is up a little bit, CE is down a little bit.

That is why we're saying the gross margin is flattish, as well.

Got it.

Best of luck, Wolfgang.

Thank you very much.

Our next question comes from Rob Cihra with Evercore.

Two questions, if I could.

One on cash.

The -- so you said, Wolfgang, you ended with $1.4 billion onshore.

I guess if you look out over the next couple of years, do you see US cash being a limiter to your capital allocation plans?

And if it was, would you just simply look at raising more debt, or repatriating?

Because I'm thinking your offshore cash could be pretty big.

I was wondering how you could approach that?

And then I have a follow-up, if that is okay, unrelated.

That is a good question, and there is several parts to the solution.

And we believe, with a couple of years runway, just from free cash flow that we create in the US, plus the opportunity to pay down our current debt and take it on onshore.

If you recall, we designed it that way when we made the HGST acquisition.

So the -- we have that flexibility in the credit facility.

Our leverage ratio with that is at a very modest level, so we have significant incremental debt capacity.

And we believe, depending on what we do on the strategic front with our capital allocation strategy, that that will get us through the next couple of years.

And then we'll have to see what happens in Washington, and -- because this is not a situation that we're in by ourself.

It is like $1.6 trillion of US profits [trucked] offshore, and either there is a change there, or in perpetuity, it will be someone repatriating cash and having a tax impact on that.

Okay.

Makes sense.

And I could ask an unrelated follow-up.

Just the strength you have been seeing in enterprise demand, especially in the capacity side, do you see that being driven -- is that traditional OEMs going into traditional enterprise?

Or is that cloud type data centers driving the upside?

Do you get a sense of -- I'm assuming the latter is certainly helping, but how much is it helping?

Rob, it is a little bit of both.

But certainly the hyperscale guys build out from a cloud infrastructure standpoint, helps a lot with them.

Right.

Okay.

Thanks very much.

Thank you.

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

Hi, thanks for taking my question.

Just as a follow-up to the last question, would it be possible to give us some idea (inaudible) hyperscale (inaudible) properties, how big is the revenue stream from them?

Maybe as a percentage of your enterprise revenue or total revenue?

At present, we don't provide that information.

Okay.

And then if I look at your enterprise SSD revenues, which you just reported this quarter, quarter over quarter sequentially, enterprise SSDs revenue is flattish.

Despite that, we have like three weeks of stack revenue in it.

Just wanted to understand that.

Yes, one of the things that we have been seeing in the [MAN] market is some constraints from a supply perspective.

We're beginning to see that free up a little bit.

And also, with the additional acquisitions, I think that we'll see, going into the future, a more robust quarter-on-quarter growth rate.

Thank you.

That's all for me.

Thank you.

Our next question comes from Jayson Noland with Robert Baird.

Great.

Thank you.

I wanted to follow up on linearity.

Steve or Wolfgang, you mentioned it was very good.

What is behind that, and is that something we should expect to continue?

It is really, fundamentally, the way that we run our business.

We really place a lot of importance on cash generation, and also managing our build and our inventory levels very closely to the way that our customers pull product.

And also not -- unnaturally, I'll call it, stuffing things in at the end of the quarter.

And so it's been something -- I can go back to my days at Western Digital back pre-2007, and it was a discipline that existed within Western Digital then.

And it's a discipline that we built over time within HGST.

And so it's just part of the way that we do business, and I would certainly hope that you'll continue to see the benefits of that from a financial performance perspective.

Okay.

Thanks, Steve.

And as a follow-up, I wanted to try one on the hyperscale cloud buyers.

I recognize you can't use names, but any color you can provide on your level of R&D engagement with this community, visibility you might have?

I just wanted to try to understand the depth of the relationship here as -- in general.

Yes.

Trying to think how to dimension that question.

We enjoy very strong relationships with a number of different customers, including many of the hyperscale guys.

And we see the benefits of that in our financial results.

I don't know if I can comment beyond that.

(laughter) I apologize for not being able to go deeper, but that is kind of where we're at.

Okay.

Good enough.

Thanks, guys.

Thank you.

Our next question comes from Sherri Scribner with Deutsche Bank.

Thank you.

I wanted to dig a little bit into your expectations for the margins for the SSD business as we go forward.

I know you said that you expect those businesses to be accretive in the -- I think you said early 2015.

What type of margins would you expect?

Would you expect those to be in line with Western Digital's corporate margins?

Or do you think they'll be higher than that, as we move into fiscal 2015?

First of all, we're managing our business based on ROIC, so the margins by business line greatly depend upon what CapEx and what we're putting into a business.

But we believe, based on the road map that we have outlined now, that we have all of the efforts of sTec, Virident and Velobit, that we will get to a gross margin profile that's around the current corporate profile.

I think the other thing to add is that, as we have added capability in terms of our enterprise SSD products, it also is allowing us to wrap enhanced value around the devices that we're providing, and we refer to that as intelligent devices and that sort of thing.

And there will be a software component.

Those clearly will carry higher gross margins than what our overall corporate average.

Now how that moves the needle in terms of our overall gross margin profile, I think it will depend upon how our growth plays out, and how the market also plays out.

Okay.

That's helpful.

And now that you've done a number of acquisitions in the SSD space, do you feel like you have all of the tools that you need to compete there?

Or do you think there is pieces that are missing?

Well, we're going to continue to evaluate that.

I think that right now, we feel pretty comfortable with where we're at.

Okay.

And Wolfgang, thanks.

All the best to you.

Thanks, Sherri.

Thank you.

Our next question comes from Steven Fox with Cross Research.

Thanks, good afternoon.

Just two questions from me.

First of all, in the context of wishing Wolfgang good luck, is there any update on the CFO search?

And secondly, Steve, just some of your preamble regarding new products.

I was curious, on the helium drive and the ultra portable products, are you saying that you're shipping in this quarter?

Or can you just clarify timing for commercial revenues?

Thanks.

Sure.

And in terms of the CFO update, our CFO search.

No update.

Search is continuing, and so that is where we're at with that.

And then on the new product front, we will be realizing revenue this quarter related to the seven-disk helium product.

And we are currently shipping and realizing revenue, of course, on our five millimeter, seven millimeter products, as well as hybrid versions.

Okay.

And any -- I don't know.

Just pushing here it a little bit.

But is there any comment in terms of how that is ramping, or what type of products you're having the most success with on the mobile side?

If you recall, when we talked about -- I'll talk about the hybrid product.

That was really -- we were envisioning that more of a 2014 story.

Yes.

So at present, the volumes and the revenue are not that significant.

But that's consistent, more or less, with what we were expecting.

Great.

Thank you very much.

Thank you.

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

Thank you very much.

I was hoping you could give us an update on A, the timing and, B, the range of scenarios or outcomes, as it relates to your discussions with Moth Com?

And then I have a follow up, please.

The timing, and what else did you --

(multiple speakers) The potential range of outcomes.

And what I mean by that, is there different scenarios on the potential size or magnitude of [release]?

Sure.

So the timing is that we have the opportunity to remind everybody two years after the closing of the transaction.

So coming up here in March in 2014, we have the opportunity to, I'll call it, reapply to Moth Com to have them reconsider the whole separate arrangement that we have.

At this point, we -- it is too early to speculate, and it is also too early to speculate in terms of the range of outcomes.

And not to sound facetious, but your guess is as good as mine in terms of what that might look like.

That being said, we are encouraged in terms of our ongoing relationship with Moth Com in terms of our compliance, and also beginning discussions in terms of the reapplication process.

Okay.

So then my follow-up is seasonality for the March quarter.

I think with a flat TAM in December, you're--I think the PC industry has been experiencing less of a seasonal bump in December quarter.

I think that there also might be some opportunities to have less of a seasonal down in the March quarter, given where the drives are ending up, or the PCs are ending up more in Asia, with Chinese New Year and whatnot.

But I just wanted to see if you wanted to provide us some [residual] thoughts, at least, and how you're approaching seasonality in the March quarter off a flat TAM in December?

I'll probably start it off with just how historically the TAM behaved.

What we do know is that our brand of business is declining a little bit.

We have still a strong January and February, but then it's, quarter over quarter, a little bit down.

Also, the CE business is, quarter over quarter, down a little bit.

Again mostly related to the gaming builds.

In terms of enterprise, we see that market steadily growing, and then the PC business is the one to watch.

Historically, it is flat to slightly down going into the March quarter.

But again, Steve mentioned that there are some signs of a commercial pickup.

We just got to watch that very carefully, and then just do what we always do, react to the downside or to the upside.

Okay.

All right.

Thanks, guys.

Good luck, Wolfgang.

Thanks a lot.

Thank you.

Our next question comes from Joe Wittine with Longbow Research.

Any commentary you can provide -- or any numbers, rather, on like for like ASP declines?

Or if no specific numbers, at least talk about which sub-segments saw lesser like-for-like declines than your expectations, and which may have seen more?

Thanks.

I think the only piece that is useful here is like-to-like price decline was less than the like-for-like cost decline.

And therefore, our gross margin increased.

So we didn't see anything extraordinary in any of the markets as we drove past down we ship that with our customers.

But there wasn't anything extraordinary in anything.

Okay.

And then on OpEx, I understand you're not guiding for the synergies you're going to have from the deals.

But can you confirm that, from where we sit today, that the December quarter will likely be your near-term peak from a dollar basis?

Yes, that's the intent.

We're not going to shut down an investment or make a hasty decision if we're not clear on the road map.

But that is the intent, like we outlined on the Virident announcement call.

Great.

Thanks.

Congrats on the GM.

Your next question comes from Mark Moskowitz with JPMC.

Good afternoon.

I want to fall back on the CapEx topic.

Steve, what is your view -- at some point, do you have to start spending more on CapEx just for next-generation technologies?

And could that provide any sort of incremental lift to CapEx, or is it already streamlined into the model?

And just given your continuous investments in technology?

We're investing today in next-generation technology, so I think it is embedded in the numbers that we're seeing already.

There may be some investments that come that may -- it's nominal in terms of the impact, in terms of, certainly, our CapEx range.

And then maybe some big piece of equipment we have to do a particular quarter, or whatever.

But we are not delaying anything in terms of new capital investments from a technology perspective to drive our free cash flow generation unnaturally in the short term.

Okay, so there is nothing on the horizon that could surprise us six to nine months out?

No, not anything that I have visibility on right now.

Okay.

Thank you.

Thank you.

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

I would actually like to also talk about CapEx here.

As a percent of revenue, it was around 4% for the second quarter in a row, which is below your target model of 5% to 7%.

So is -- are we looking at a new level of CapEx?

And if so, why is that?

And then also, can you talk little bit longer term about, in the context of potentially a flattish unit growth environment, but ahead in [planner] growth?

How would that also affect your CapEx rate?

It is like Steve said, really.

There is always different elements of CapEx in our model, and right now, we just don't need to spend on capacity.

And we're spending on things like tool upgrades for new aerial density.

We're spending on technology.

We're spending on solidifying our supply chain.

For instance, we are now have two slider fabs on the WD side.

There is no reason to update our CapEx model right now, and the final outcome for the fiscal year will really depend on what our view is at the tail end of the fiscal year in regards to the demand.

In terms of HET and media count, I do think that both our -- the -- a situation where the demand for gigabytes will outstrip what the technology can deliver on aerial density growth.

So naturally, the HET and media count will likely go up over the years, so that we'll first improve the utilization of our current assets, and then, at one point in time, drive us to do some incremental investments in capacity.

But right now, in terms of our component utilization, in terms of from a capacity perspective, that is probably the area where we are the most underutilized.

Yes.

Part of that has to do with the hold-separate situation.

In other words, there is a certain degree of mismatches between the two units, and so we're actually pretty comfortable, as a general statement, with where we're at.

And if component counts go up, and then depending upon what happens in terms of the hold-separate situation, we think we can be able to optimize our component utilization without necessarily adding lots of capital.

At the end of the day, is there room to potentially move below the target model, if demand does not pick up on a unit basis?

I think that is something that we have to continue to evaluate, but I think it is a little bit too early to make that call.

Okay.

Thank you.

Thank you.

Our next question comes from Eric Sterling with Barclays.

Hi, thanks for taking my question.

I was just wondering, how far out would you say, call it half a year, one year, until we can maybe get OpEx closer towards the long-term operating model?

It is going to depend upon -- we've said in the past that, in order to get into the 10% to 12% range of operating expense, it would require us to be able to realize synergies, as it relates to the combination of WD and HGST.

And so as long as the hold-separate situation persists in the current form, we will continue to operate at a higher level of OpEx than what our target range is.

Okay.

Thank you very much.

Thank you.

Our next question comes from Joe Yu with Citigroup.

Just wanted to get some clarification on the TAM guidance.

As you know, [Nedek] and LSI are suppliers both guided to a TAM closer to $135 million for the December quarter.

And historically, obviously, WD has been more conservative on the TAM guidance versus others.

So could you help us understand the discrepancy a little?

I'm not sure if I can help you with that, because I don't know the basis for Nedek or LSI.

But undoubtedly, my guess is it has something to do with their unique view.

And they're also one step removed from a supply chain perspective, so it may be something to do with an inventory situation, or what have you, that they're saying.

So I don't -- I'm not sure I can clarify that.

But we carefully evaluate where we think the TAM is going to turn out.

And I may say this and end up being wrong, but I think that we've done a pretty good job historically calling the market.

Okay.

Thank you.

And my follow-up is, maybe, if you could provide some color on the adoption of hybrids among OEMs?

Are you expecting any meaningful volume as you head into year end?

I commented on that earlier, in terms that we really think it, for us, is more of a 2014 story.

Okay.

Thank you very much.

And best wishes, Wolfgang.

In closing, I want to thank all employees for their dedication and outstanding performance in Q1, and our customers and our suppliers for their support.

And on behalf of the Board of Directors and all of our employees, I want to thank Wolfgang very much for his outstanding contributions and service to the Company, and wish him the very best in his new venture, which he begins in early December.

Thank you.

Thank you.

That does conclude today's conference.

That you for your participation, and you may now disconnect.