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:

• the impact of current negative global economic conditions;
• 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;
• 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 WD’s investment portfolio; and
• other factors listed in our periodic SEC filings and on this website in Risk Factors.
  

Robert Blair - Vice President Investor Relations

Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning: our business model; our ongoing research and development investments; our potential extension into the gaming market; demand in the hard drive industry for the December quarter; cost improvements from our media operations; fiscal 2009 capital expenditures; use of our cash; seasonality of the hard drive industry; and our financial outlook for the December quarter, including our revenue, gross margin, operating expenses, net interest expense, tax rate, share count and earning per share expectations.  These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-K filed with the SEC on August 20, 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.

John Coyne - President & Chief Executive Officer

Good afternoon and thank you for joining us today. I am pleased to report that WD again delivered solid, profitable growth in the first quarter, in an environment of subdued demand.

• Looking at the WD served-markets for 2.5” and 3.5” ATA hard drives, in the September quarter and including Seagate’s fourteenth week, the market grew 15%, both year-on-year and sequentially.
• However, we believe that a comparison based on thirteen weeks is more useful in trying to understand the impact of current macro economic conditions on seasonal market demand. 
• On a thirteen week basis our served markets grew by 10%, both sequentially and year-on-year, to 131 million units. While this is substantially below the average 20% year-on-year growth rate of the last three years, it is worth noting that HDD storage remains one of the few markets overall that is demonstrating significant year-over-year growth in the face of current macro economic conditions.
•  The 2.5” market continued to grow strongly, up 37 % year-on-year and 22% sequentially to 61 million units.
• The 3.5” market contracted by 7% year-on-year but grew 2% sequentially to 69 million units.

In this environment, WD continued to outperform the market.

• Our unit sales for the quarter were up 34% year-on-year and 12% sequentially to 39.4 million units.
• We grew 2.5” shipments by 147% year-on-year and 25% sequentially to 14.6 million units.
• We grew our 3.5” shipments 6% year-on-year and sequentially to 24.8 million.
• WD’s hard drive revenue was up 22% year-on-year and 7% sequentially at 2.1 billion dollars.

By presenting customers with a compelling product set, being selective in market and product mix, being responsive in availability and by maintaining focus on quality, efficiency, cost and execution, we again grew profitably in Q1, demonstrating the strength of the WD business model and the WD team’s discipline and execution. In challenging conditions, we delivered gross margins in excess of 20%, an increase of 180 basis points year-on-year, controlled operating expense to 9% of revenue and generated earnings-per-share of $0.93.

Continued close attention to working capital management produced inventory turns of 14 and generated an ending cash balance of $1.2 billion dollars.  Finished-goods inventory was maintained flat, as a percent of sales, both year-on-year and sequentially, while we controlled inventory in the component distribution channel in the low end of the normal 4 to 6 week range.

We continue to realize returns on our ongoing, targeted R&D investments, with several important new technology and new product shipments in the first quarter, including:

• The second-generation WD Caviar® Green™ hard drives with significantly improved power, efficiency and performance,
• The WD ShareSpace™ high-speed network storage system that provides cost-effective, centralized storage of up to 4 TB, for small office and home networks,
• An expanded enterprise product line with the addition of high-capacity, high-performance WD RE3 750 GB and 1 TB 3.5” SATA hard drives,
• The new 2.5” and 3.5” backplane-compatible
  WD VelociRaptor™ hard drives, the latest additions to the company’s 10,000 RPM SATA drive series.
• The WD Scorpio® Blue™ 2.5” notebook hard drive family with capacities up to 500 GB at 250 GB-per-platter,  extending our  leadership position in delivering the industry’s most advanced areal density products in mass production today.
• Off the same platform, we also introduced the 500 GB My Passport™ Portable USB drives for easy storage and portability  of music, videos, photos and data files.
• Our strategic initiative to focus on the 2.5” business is enabling us to participate strongly in this, the fastest growing market segment for hard drives - from high performance and mainstream notebook PCs to external storage devices to the emerging netbook market, an incremental opportunity for hard drives.
• We continue to assess the appropriate timing to extend our 2.5” expertise and value proposition to the gaming market.

Now, let me briefly address our view of the hard drive industry, in the context of the current macro-economic environment. 

• The deterioration in the economy has led to a slow-down in both business and consumer spending, most noticeably in big ticket items such as housing and automobiles, but to a lesser degree as we look at products with significantly lower price points.
• We have seen dampening of demand in the September quarter and expect conditions of subdued demand to continue into the December quarter, the industry’s traditionally strongest season.
• At this point in the quarter, we have limited visibility as customers are unwilling to commit to the usual demand profile early in the quarter, as they focus on reducing inventories and preserving cash, in light of broad concerns on both demand and credit availability.

Having said that,

• The WD business model is very adaptable, due to our focus on high velocity and low-cost.
• We watch demand very closely in each of our markets and adapt accordingly.  When we see pockets of weakness, we have the ability to shift focus and adjust build plans and mix quickly.
• We continue to plan strategically for the long term and optimize tactically in response to short term conditions. 
•  Accordingly, we have already lowered our build plans to meet an adjusted demand profile for the December quarter, to ensure that we don’t build unnecessary inventory as we enter the seasonally slower first half of calendar 2009.
• If the demand exceeds our expectations in the weeks ahead, we will chase that volume and do our best to meet customer requirements. Thus far in the quarter, the overall industry build seems well aligned with demand.

Tim Leyden will now provide our detailed report on the September quarter and review our outlook for our second fiscal quarter.

CLOSING REMARKS

In closing, I want to thank the WD team – our employees and supply partners - for delivering another excellent quarter.

We remain very encouraged by the long-term market opportunities for profitable WD growth in the years ahead and are confident in our ability to continue to make the WD business model work effectively in all market environments.

Thank you for joining us today, I look forward to keeping you informed of our progress.

Tim Leyden - Executive Vice President & Chief Financial Officer

Revenue for our first fiscal quarter was $2.1 billion, up 19% from the prior year.  Hard Drive revenue was up 22% from the prior year and 7% sequentially, and hard drive shipments totaled 39.4 million units, up 34% from the prior year and 12% sequentially.  

Average hard drive selling price was approximately $53, down $3 from the June quarter and $6 from the year-ago quarter. Our Q1 ASP reflects the ready availability of comparable products from most competitors across the entire product range compounded by the continuing competitive pricing environment.

We shipped 14.6 million 2.5-inch drives in the September quarter, as compared to 11.7 million in the June quarter and 5.9 million in the year-ago quarter.  These increases were driven by continued strength in notebook PC and external storage demand.

In consumer electronics, we shipped 3.9 million 3.5-inch drives for use in digital video recorders (DVRs) in the September quarter, 4.1 million in the June quarter and 3.7 million in the year-ago quarter.

Sequentially, desktop showed sustained growth, branded revenues were essentially flat and sales of our enterprise products were in line with our expectations.

Hard drive channel revenue was 56% OEM, 26% distribution and 18% branded products in the September quarter compared with 57%, 24% and 19% in the June quarter; and 50%, 31% and 19% in the year-ago quarter, respectively. There was one customer – namely Dell - that comprised more than 10% of total revenue.

The Q4 geographic split of our hard drive revenue was 23% Americas, 29% Europe and 48% Asia, as compared to 29%, 25% and 46% in the June quarter; and 34%, 33% and 33% in the year-ago quarter.  Our continuing strength in Asia is driven by our increasing 2.5” shipments and though this is the region where the product is requested and integrated by our customers, many of these drives are incorporated in computer products that are marketed and sold in other regions.

Our gross margin percentage for the quarter was 20.1% versus 21.3% in the June quarter and 18.3% in the year-ago quarter. This gross margin was achieved, despite the competitive pricing, through excellent team execution of improvements in cost, resource utilization and product mix, together with increased volume.  Our media operation continues to perform in line with our expectations and we are on track to achieve the 300 basis points cost improvements that we anticipated by the end of the December quarter.

Operating expenses totaled $190 million, or 9.0% of revenue, up slightly from the June quarter as a result of increased R&D spending. As compared to the prior year, R&D expenses are higher due to the integration of media operations and the addition of in-house hard-disk controller and software development activities as well as expansion of our new product and technology capabilities.  SG&A increases reflect investment in our sales and marketing infrastructure in support of our expanding product line and customer base.  Prior year’s operating expenses included $49 million of in-process R&D related to the acquisition of Komag. 

Operating income was $234 million, or 11.1% of revenue.

Interest and other non-operating expenses were approximately $4 million. This includes about $3 million of unrealized losses on our previously disclosed investments in auction-rate securities. These investments totaled $25 million at the end of the quarter.

Tax expense for the September quarter was $19 million, or approximately 8% of income before taxes.  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 income by geographic location.  Fiscal 2009’s cash tax rate is expected to be between 1% and 2%.

Our net income totaled $211 million, or $0.93 per share.

Turning to the balance sheet, our cash and cash equivalents at the end of the quarter totaled $1.2 billion as compared to $1.1 billion at the end of June. 

We generated $301 million in cash flow from operations during the September quarter. 

Capital expenditures for the September quarter were $162 million and our non-cash charges for depreciation and amortization expense totaled $117 million. 

We now expect fiscal 2009 capital expenditures to be about $750 million, including about $150 million for our ongoing 8-inch wafer fab conversion.  This is down from the $800 million that we anticipated in our July call as we take into account the uncertain demand environment. Depreciation and amortization for fiscal 2009 is expected to be about $475 million.

We repurchased 1.2 million shares of stock at a total cost of $35.6 million during the September quarter.  Since May 2004, we have repurchased 17.8 million shares at a total cost of $284 million, for an average price of about $16 per share.  A total of $466 million remains under our existing stock repurchase authorization. We believe that in times of economic uncertainty and tightness of credit that a robust cash balance is an important strength.  Going forward, and against this background of prevailing market and credit conditions, we will be selective with our cash usage as we weigh opportunities between growth of our current business, new market entries, strategic investments, share repurchases and prepayments of our outstanding debt.

As of the end of September, we had 47 days of receivables outstanding, 26 days of inventory, or 14 turns, and 66 days of payables. This resulted in a cash conversion cycle of 7 days. 

Before I address Q2 earnings guidance I want to once again remind you 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 second quarter of our fiscal year 2009.  First, let me outline the market situation as we see it.

• Historically, the December quarter sequential unit growth has been in the range of 6% to 9%.  However, in light of the current uncertain macro economic environment, the tightening of credit worldwide and the impact of Seagate’s 14-week September quarter on current quarter demand, we are modeling a more modest expectation of market demand growth of approximately 5% for the December quarter. We also expect that average selling prices (on an absolute basis) will show some degradation - contrary to historical trends. In addition, you should also note that for year-on-year comparative purposes our fiscal Q2 revenue numbers last year included approximately $120m of revenue for external media sales as we fulfilled Komag’s pre-acquisition contractual obligations.
  
  
• While we have continued our leadership in 2.5-inch hard drives with the September launch of our 500 GB WD Caviar® Blue™ hard drive and My Passport™ mobile storage solution, most HDD competitors are in a position to provide other mainstream capacities across the entire 2.5-inch and 3.5-inch product lines in this quarter. 

Taking these factors into account, we expect current quarter revenue for WD to be essentially flat quarter to quarter. Consequently, we are forecasting total revenues for the current quarter to be between $2.025 billion to $2.15 billion.

We are modeling gross margin at 19.3%.

Operating expenses are projected to be approximately $190 million.

Our net interest expense is projected to be about $6 million. We anticipate our tax rate to be 7% of pretax income, and our share count to be approximately flat with the September quarter.

Accordingly, we estimate earnings per share of between $0.80 to $0.90 for the December quarter.

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