Special Note

Statements in these posted remarks that relate to future results and events, and other forward-looking statements in these remarks, are based on Western Digital Corporation’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. These risk factors include:

• supply and demand conditions in the hard drive industry;
• actions by competitors;
• unexpected advances in competing technologies;
• uncertainties related to the development and introduction of products based on new technologies and expansion into new hard drive markets;
• business conditions and growth in the various hard drive markets;
• pricing trends and fluctuations in average selling prices;
• failure to continue to effectively integrate WD’s media and head technologies;
• changes in the availability and cost of commodity materials and specialized product components that WD does not make internally;
• negative impacts of the conditions in the global credit markets on our current investment portfolio; and
• other factors listed in our periodic SEC filings and on this Web site in Risk Factors.
  

Robert Blair - Investor Relations

I want to mention that we will be making forward-looking statements in our comments and in response to your questions concerning: our financial and operational performance; our business model, cost structure and customer satisfaction; demand, growth, pricing and inventory in the hard drive industry; our expectations for the September quarter; our growth opportunities, new product designs and our execution capabilities; our expectations regarding our WD VelociRaptor™ products and GreenPower™ technology; our investments in technology, capacity and infrastructure; our aspirations to serve every mass storage market segment; the efficiencies of our in-house hard drive controller design and development and how it will enhance the efficiencies of our development process with our existing SOC supply; the cost benefits of the integration of our media operations; our effective tax rate; repurchases of our stock; our cash conversion cycle; and our financial outlook for the September quarter and the second half of calendar year 2008.  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 May 6, 2008, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today. We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments we make today are still valid.

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

John Coyne - President & Chief Executive Officer

Good afternoon and thank you for joining CFO Tim Leyden and myself today.  Following my remarks, Tim will review our financial performance in fiscal year 2008 and our fourth quarter and provide our outlook for the September quarter.

Fiscal 08 was an outstanding year for WD, capped off with the solid fourth quarter financial performance reported earlier today.  For the year, we grew revenue 48 percent and earnings 54 percent—delivering on our primary goal of profitable growth. We generated $ 1.5 billion in cash from operations during the year. We also successfully concluded our $ 1 billion acquisition of Komag, and have completed the integration of the new media operation and are already generating solid technology and cost contributions to the overall business. 

Our fiscal 08 performance provides further evidence of disciplined operational and financial performance and the continued scalability and execution excellence of the WD team.
 
Customer satisfaction with WD’s broad product line, high quality and reliability, service excellence and overall value proposition continues to drive our business growth. We are very pleased with the continued, consistent performance of the efficient business model that we have built and refined over the last several years. 

While maintaining focus in the high-volume desktop segment, we have made major strides in diversifying the business, by establishing our footprint in newer, faster-growth markets such as 2.5-inch notebook drives, branded products, consumer electronics and SATA drives for the enterprise. As a result of this activity in higher-growth areas, we saw our hard-drive revenues from non-desktop markets expand to 56 percent of revenue in fiscal 08, compared with 43 percent in fiscal 07 and 29 percent in fiscal 06 and we exit the year with 63 percent of Q4 revenues derived from non-desktop, higher-growth applications. It is worth noting that in the June quarter, WD was less reliant on the desktop business as a share of revenue and units than either Seagate or Samsung.

Now, let me briefly address industry conditions as we ended the June quarter and enter the new fiscal year. My remarks are confined to the markets served by WD, for 3.5-inch and 2.5-inch SATA and PATA hard drives.

Despite concerns with macro-economic conditions, June quarter industry demand was strong relative to seasonal patterns and expectations, coming in flat with the March quarter, and increasing 19 percent year-over-year. 3.5-inch demand in the quarter was down 4 percent sequentially, and up 6 percent year-over-year, in line with expectation.  2.5-inch demand was stronger than expected, up 7 percent sequentially and up a very healthy 45 percent year-over-year.

Strong year-on-year sales growth in Asia for the quarter reflected our success in the 2.5-inch notebook market, offsetting muted demand in the U.S. and Western Europe.

Industry shipments of 21.5 million units in the last week of the quarter represented 18 percent of total shipments in the quarter an increase of half a week compared to the 14 percent shipped in the same week last year.  This increase was likely due to the fact that certain hard drive companies ended their quarter on June 30th, a Monday this year but a Saturday last year, adding extra days of shipment opportunity.

Industry inventories for manufacturers and distribution exiting the June quarter were down sequentially and compare favorably with the same time last year, up only 10 percent over last year while supporting a market which grew 19 percent year-over-year.  This represents a reduction of one full week of supply on a year-on-year basis. Manufacturers’ inventory reduced by over 4 million units sequentially and is at a little over 1 week of supply.  Distribution inventory was also down some 700,000 units sequentially and is in the middle of the normal 4 to 6 week range. 
    
Pricing in the distribution channel, which accounts for some 20 percent of the total hard drive revenue stream, is driven more than any other industry segment by short term supply/demand dynamics.  The desktop market is uniquely weighted toward distribution with a roughly 50/50 split between distribution and OEM customers. Distribution pricing was especially tough last quarter because of a competitor’s large inventory overhang exiting March, which led to the industry’s highest quarterly price erosion in the desktop distribution channel since 2001, at 16 percent.

We expect that the conditions created in the June quarter will have some residual impact on the industry and our business through the current quarter.

I would now like to describe the recent results of our multi-year diversification effort on a market-by-market basis and tell you why we think we are well positioned to continue our profitable growth in the year ahead, primarily based on compelling products that are currently shipping.  Continued execution of our demonstrated product design and deployment capability is also important in driving the continued potential of the WD profitable growth story in future years. 

Looking at our individual markets:

We tripled our 2.5-inch drive shipments, year-over-year, to 36.6 million units, demonstrating technology and product leadership throughout the year.  Even with this success, we have yet to ship meaningful volume to three of the world's top ten notebook OEMs, leaving significant growth opportunities in our mainstream 5400 RPM product line. In June we began shipping our new line of WD Scorpio® Black™ 7200 RPM 2.5-inch SATA hard drives in capacities up to 320 gigabytes for high performance notebook computers.  This important product expansion offers our customers another opportunity to embrace the WD value proposition of quality, reliability and availability in the notebook segment. 

We grew revenue in our Branded Products business by 60 percent year-over-year to $ 1.4 billion and we continue to add new products and product features to the line up, to strengthen our leadership position and expand our available market. In the June quarter, we completed the rollout of the popular My Passport™ Essential™ series with a refreshed design in multiple colors and over the last several months we began shipping many new and next-generation branded products, including:

• The My Passport Elite™ fully-featured portable USB hard drive in capacities of 320 and 250 gigabytes;
• The Mac®-formatted My Passport Studio™ portable hard drive for Apple® Mac users, targeting a discerning, fast-growing sub segment of the branded business;
• The newest model in the 3.5-inch My Book® series, the Mirror Edition™ dual drive storage system which automatically stores content not once but twice to maximize safety and security of users’ valuable content; and
• A USB version of the WD My DVR Expander™, significantly expanding the recording capacity of Dish Network HD DVRs.

In Enterprise SATA, a fast growing segment of enterprise storage, we continued to innovate with the introduction of our 3.5-inch SATA GreenPower™ drive series and the WD VelociRaptor™ drive family, the industry’s first 300 gigabyte 10,000 RPM, 2.5-inch drive.  Over the last few years the fastest growing segment in the mainstream enterprise market is 2.5-inch SAS drives for blade servers and storage.  This market is now approaching 4 million units per quarter with annual growth in excess of 40 percent.  We expect the WD VelociRaptor 2.5-inch SATA products to establish a niche for SATA in this market just as the 3.5-inch WD RE offerings did in the large form factor space, following their introduction in 2004. 

The introduction of our power-saving technology to our WD AV™ hard drives for the CE space, combined with improved costs and our demonstrated field quality performance, have been the catalysts in helping us resume growth in this important segment, leading to enhanced value for our customers and improved contribution to WD’s business.

To underpin our medium to longer term growth:

We continue to work and invest to constantly roll out new platforms, capacities and features to timely meet the needs of our existing served market segments.  We are also investing in the underlying technology to facilitate entry into our currently un-served market sectors of mainstream enterprise, gaming and automotive .We continue to aspire to serve every segment of the mass storage market and will do so as these segments offer adequate return on the investment required to serve them properly.  As is traditional with WD, we will announce all new products only when they are available and shipping in volume.

Now I’d like to turn to the longer-term future.   

The global hard drive industry continues to present great opportunities for those with an appropriate business model.  Storage demand and applications for hard drives continue to proliferate in both computing and consumer markets as both workplace and lifestyle changes continue to generate increasing volumes of content to be stored securely, conveniently and cost effectively on hard drives. 

• The HDD market in fiscal 08 generated revenues in excess of $35 billion with 540 million hard drives shipped, while forecasted demand for fiscal 09 exceeds 620 million units.
• On a unit basis, the overall hard drive market is looking at a five year CAGR of approximately 13 percent, while those markets served by WD are forecast to grow in excess of 16 percent annually.
• We continue to see the strongest growth potential in the notebook PC and Branded Product segments, areas of continued focus for WD.

We are encouraged by these opportunities for profitable growth, both for the near term as we head into the seasonally strong second half of the calendar year and as we address the longer-term prospects represented in these industry forecasts.     

I’d like to highlight some of the important actions we have taken during fiscal 08 to ensure our continued success in addressing these outstanding market opportunities.

• We have made and continue to make investments in the technologies and infrastructure that will enhance our ability to compete as a full-line industry leader, with the product portfolio required to capitalize on these growth trends and the capacity and cost structure to do so efficiently and profitably.
• We added to our design and development capability with significant expansion of our technical workforce in Lake Forest and San Jose and Asia and the addition of a new design center in Longmont, Colorado.
• In June, in a further strategic step to accelerate our technology development and deployment, we acquired the Hard Drive Controller IP- rights, design tools and design team from ST Microelectronics.  This in-house HDC capability will enhance the efficiencies of our development process with our existing SOC supply partners. 


• Our previously announced plan to upgrade and expand our Fremont wafer facility is on track and we have already produced first wafers from our new 8-inch pilot line, ahead of schedule.
• As indicated earlier, the integration of media operations has greatly enhanced our technology capability and overall cost structure.

Closing remarks

In closing, I want to thank you again for joining us. We are very encouraged by the overall market opportunities for growthWD in the hard drive markets in the years ahead and I look forward to keeping you informed of our progress.

Tim Leyden - Executive Vice President & Chief Financial Officer

Our fiscal 2008 and June quarter results demonstrate continued strong execution by the WD team. During the year we improved and refined the basic WD business model in which we profitably satisfy our customers’ demands by efficiently providing a broad range of quality products at competitive costs.  In the seasonally softer June quarter, our results reflect our capability to thrive in a very competitive pricing environment. The growing segment and geographical diversification of our business provided us with the basis to generate strong results - despite the impact of the excess inventory which was carried into the quarter by our competition.  This diversification resulted in continued strong revenue growth, operational results that delivered 630 basis points of gross margin improvement over the same quarter last year, and earnings that exceeded expectations.

For our full fiscal year 2008, total revenue was $8.1 billion, hard drive shipments were 133 million units, and hard-drive ASP was $59.    

The corresponding numbers in fiscal “07 were $5.5 billion, 96.5 million units and $57, respectively. Gross margin in ”08 was 21.5% vs. 16.5% in ”07.  Operating income for “08 was $1.0 billion vs. $415 million in ”07 and net income for “08 was $867 million vs. $564 million in ”07. Fiscal “08 EPS was $3.84 vs. $2.50 in ”07.  Net income in ”08 included the impact of $75 million of tax charges related to the license of intellectual property to subsidiaries and $49 million of acquired in-process R&D expenses, whereas ”07’s net income included a favorable tax adjustment of $126 million related to the valuation of our deferred tax assets.
  
Turning to the fourth quarter results, revenue was $2.0 billion, up 46% from the prior year, and hard drive shipments totaled 35.2 million units, up 41% from the prior year period.  

Average hard drive selling price was approximately $56 per unit, down $3 from the March quarter, but up $1 from the year-ago quarter. Our Q4 ASP reflects our response to the pricing environment created by the stress of the excess inventory liquidation push mentioned earlier, as well as expected seasonal pricing factors. The percentage of our hard drive revenue generated by non-desktop applications was 63% in the June quarter, 54% in the March quarter, and 46% in the year-ago quarter.

We shipped 11.7 million 2.5-inch mobile drives in the June quarter, as compared to 10.2 million in the March quarter and 3.8 million in the year-ago quarter.  These increases were driven by continued strength in notebook PCs coupled with increased customer preference for WD product offerings, as we also benefited from the recent refresh of our WD My Passport range of portable storage solutions for people on the move.

In consumer electronics, we shipped 4.1 million 3.5-inch drives for use in digital video recorders (DVRs) in the June quarter, 3.1 million in the March quarter and 2.7 million in the year-ago quarter. The refined WD value proposition in this space is resonating with a broad set of discerning customers. 

Sales of our enterprise products were in line with our expectations.

On the desktop side, we increased the percentage of our business going to OEMs.

Hard drive channel revenue was 57% OEM, 24% distribution and 19% branded products in the June quarter compared with 50%, 34% and 16% in the March quarter; and 47%, 36% and 17% in the year-ago quarter, respectively. There were two customers – Dell and HP - that each comprised more than 10% of total revenue.

The Q4 geographic split of our hard drive revenue was 29% Americas, 25% Europe and 46% Asia, as compared to 28%, 31% and 41% in the March quarter; and 40%, 26% and 34% in the year-ago quarter.

Our gross margin percentage for the quarter was 21.3% versus 22.6% in the March quarter and 15.0% in the year-ago quarter. The decrease in gross margin vs. Q3 came primarily from the competitive 3.5-inch desktop channel pricing. We largely offset the normal seasonal pricing trends with a richer product mix, a changing segment mix, a higher OEM mix, increased volume and improved cost.  We have completed our media integration and are on track to meet our previously stated plans of full cost benefit by the December quarter.   

Operating expenses totaled $184 million, or 9.2% of revenue, up slightly from the March quarter as a result of increased R&D spending. As compared to the prior year, operating expenses are up as a result of the Media acquisition, higher incentive compensation associated with stronger financial performance, and increased investments in new programs to support technological advancements and our broadening product portfolio. 

Operating income was $241 million, or 12.1% of revenue.

Interest and other non-operating expenses were approximately $4 million. This includes about $2 million of unrealized losses on our previously disclosed investments in auction-rate securities. These investments totaled $28 million at the end of the quarter.

Tax expense for the June quarter was $24 million and includes a $15 million incremental tax charge related to the license of intellectual property to subsidiaries.  For fiscal 2009, we expect our book effective tax rate to range between 7% and 10% as we take into account our expected continuing profitability and the global mix of taxation by geographic location.  Our cash tax rate for fiscal “08 was approximately 1%, and fiscal 2009’s cash tax rate is expected to be between 1% and 2%.

Our net income totaled $213 million, or $0.94 per share.

Turning to the balance sheet, our cash and cash equivalents at the end of the quarter totaled $1.1 billion as compared to $917 million at the end of March.  These amounts exclude the $28 million in auction-rate securities that were reclassified as long-term investments during the June quarter, as their immediate liquidity continues to be constrained by the market. 

During fiscal “08, we generated $1.5 billion in cash flow from operations.  Cash generated from operations during the June quarter totaled $318 million.  

Capital additions for fiscal “08 totaled $615 million and included approximately $120 million for our 8-inch wafer-fab conversion.  Depreciation and amortization expense for fiscal “08 totaled $413 million.

Capital expenditures for the June quarter were $146 million and our non-cash charges for depreciation and amortization expense totaled $113 million. 

We expect fiscal 2009 capital expenditures to be about $800 million, including about $150 million for our 8-inch wafer fab conversion.  Depreciation and amortization for fiscal 2009 is expected to be about $475 million.

We did not repurchase any shares of common stock during the June quarter. Since May 2004, we have repurchased 16.6 million shares at a total cost of $248 million, for an average price of about $15 per share.  A total of $502 million remains under our existing stock repurchase authorization. Going forward, we will weigh opportunities to repurchase our stock against other investment opportunities and prepayments of our outstanding debt as we take our typical opportunistic approach to share repurchases.

As of the end of June, we had 46 days of receivables outstanding, 27 days of inventory, or 14 turns, and 69 days of payables. This resulted in a cash conversion cycle of 4 days.  Going forward, we will continue to weigh working capital investments against opportunities for growth and opportunities to reduce shipping costs.  During Q4, we increased our ocean shipments of certain products to help offset price increases from higher fuel costs.  Airfreight continues to be a key element in our ability to satisfy changes in customer demand for our hard drives.

Before I address Q1 earnings guidance I want to point out that WD will have a 14 week quarter in this fiscal year and we will include that extra week in our fourth fiscal quarter that will end on July 3, 2009. 

Now I will discuss our expectations for the first quarter of our fiscal year 2009.  First, let me outline the market situation as we see it.

• Compared with established historical demand, it is important to note that last year’s September quarter was extraordinary. However, based on the demand patterns that we have seen thus far in this quarter, we expect a return to the more seasonally normal Q1 demand patterns of 8-14% sequential unit growth in the markets we serve.
• All the HDD companies are now in a position to provide most required capacities across the entire 2.5-inch and 3.5-inch product lines.
• As John indicated in his remarks, the higher than expected distribution price erosion in Q4 “08 established the starting point for Q1 “09 and also affected OEM pricing negotiations for this quarter. 

Taking these factors into account, we expect current quarter revenue growth for WD in a range of between 3 and 8%. Consequently, we are forecasting total revenues for the current quarter to be between $2.050 billion to $2.150 billion.

We are modeling gross margin at approximately 19.3%

Operating expenses are projected to be approximately $190 million.

Our net interest expense is projected to be about $4 million, assuming no further investment losses.  We anticipate our tax rate to be 8% of pretax income, and our share count to be approximately flat with the June quarter.

Accordingly, we estimate earnings per share of between $0.81 to $0.89 for the September quarter.

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