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 data storage 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; and
• other factors listed in our periodic SEC filings and on this Web site in Risk Factors.
  

Robert Blair - 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: inventory levels in the June quarter; our ability to respond to future changes in demand; future investments in technology; acceleration of our solid-state drive programs by the intellectual property and technical expertise added through our acquisition of SiliconSystems; the results of our restructuring activities and our expected costs and savings from these activities; our continued profitable growth; capital expenditures and depreciation and amortization for fiscal year 2009; and our financial results expectations for the June quarter, including revenue, gross margin, expenses, restructuring costs, share count, and earnings per share. 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 January 29, 2009, 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.

In addition, references will be made during this call to non-GAAP financial measures. Investors are encouraged to review the reconciliation of the differences between these non-GAAP measures to the comparable GAAP financial measures in our press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today, a copy of which can be found under the “SEC Filings” link in the Investor Relations section of our Web site at www.westerndigital.com.

John Coyne - President & Chief Executive Officer

Good afternoon and thank you for joining us today.

We are pleased with our March quarter financial performance, a result of crisp execution by the WD team, maintaining a focus on profitability and cash generation. We managed our market participation, product mix and costs, to optimize our returns in a challenging environment. We maintained our overall market presence, while holding gross margins flat with last quarter.

Demand for ATA hard drives in the March quarter remained depressed from year ago levels – falling 12% year-over-year and 9% sequentially to 103 million drives, due to the continuing effects of the worldwide economic downturn. This demand was slightly better than the 13% quarterly decline we had expected.

WD took a disciplined approach to supply during the March quarter. We reduced production to match drive shipments which were down by 8% year-over-year and 11% quarter-over-quarter to 31.6 million units. Additionally, we reduced finished goods by 1 million drives.

We are encouraged by the supply / demand dynamic in the industry. In response to customers’ significant inventory reductions, as they aligned with reduced demand levels, hard drive production was rapidly scaled back during the quarter. Manufacturer’s inventories exiting the quarter, for both 3.5-inch and 2.5-inch ATA drives, were just over one week, while component inventory in distribution was at the low end of the normal 4 to 6 week range.

As we anticipated, the pace and timing of demand reductions and inventory realignment have been different for the 3.5-inch and 2.5-inch markets:

The 3.5-inch market is approximately 50% distribution and the majority of OEM supply chains are short, with drives air-freighted to system assembly sites in the region of sale. These supply chain characteristics lead to a very transparent and responsive market which adjusts rapidly to demand changes. In November and December we saw this market undergo rapid demand decline, amplified by inventory adjustments in line with that demand change. The December quarter demand dropped 8 million units, or 12%, quarter-over-quarter to 60 million units. We estimated that approximately half of this was inventory adjustment. March quarter 3.5-inch ATA sales were flat with the December quarter; distribution inventory was maintained flat as sell-out equaled sell-in, while manufacturer’s inventory was reduced by 1 million units to 1.25 weeks.

In contrast, the 2.5-inch market for hard drives is approximately 80% OEM, with the majority using a China-ODM-assembly and ocean-freight supply chain model. This, combined with the fact that this has historically been a high growth sector, meant that adjustments to the new market demand realities took somewhat longer to move through the chain. Starting in January we saw a massive inventory squeeze, which took 10 million units out of the market demand in the first two months of the quarter. This reduced demand, from 53 million units in the December quarter to 43 million units in the March quarter, a 7% year-on-year and 18% quarter-on-quarter reduction. Again, the industry was quick to react on the supply side, matching output closely to demand and additionally reducing manufacturer’s inventory by over 3 million units to 1.1 weeks of supply. The industry built 12 million less 2.5-inch ATA hard drives than in the prior quarter – a 20% quarter-on-quarter reduction in manufacturing activity.

The balanced supply / demand dynamic created in the quarter and the low level of inventory in both distribution and OEM channels are positives as we look forward into the June quarter. However, the most important determinant of our business performance in the quarter and into the second half of this year will be the true consumption trends. Significant uncertainty still remains about the magnitude and direction of end-user demand. We will keep our operations highly flexible to respond to whatever direction demand will take, while remaining highly focused on inventory, cash, cost and profitability.

The actions we have taken and are taking to resize and structure the business to remain profitable and cash flow positive at a $1.5 billion revenue level are well advanced and are already showing up in our cost of goods and operating expense lines.

While very focused on the control of operating expense, we continue to make substantial investments in future technologies and products. Indeed, despite the constraints of the current economic cycle and our consequent restructuring actions, we increased our March quarter R&D spending, excluding variable compensation, by 6% compared with the same period last year. This investment was funded by reductions in base SG&A of some 10% year-on-year.

Complementing our internal investments, we are continuing our strategy of utilizing externally developed technology by strengthening our relationships with industry leading suppliers. In April, we concluded a new agreement with Showa Denko, extending our long time partnership with them, as a strategic supplier of advanced media.

Our sustained investment in technology and product breadth continues to bear fruit, with our shipments of the industry’s first 2TB drive growing throughout the quarter, supporting multiple applications in our component and branded products businesses. This week, we announced an additional version of this 2TB drive for the high duty-cycle business-critical enterprise SATA market, again demonstrating WD’s ability to rapidly mature industry-leading technologies in mass production.

We also extended our technology and product breadth during the quarter with the acquisition of SiliconSystems, which has become the WD Solid-State Storage Business Unit. With revenue in 2008 of $47 million, and an established footprint in the industrial, network communications, medical, aerospace and military markets the business is modestly accretive to WD. The addition of SiliconSystems' technical expertise will accelerate WD's solid-state drive development programs as we assess opportunity in the netbook, client and enterprise markets, providing greater choice for our customers to satisfy all their future storage requirements. Integration into WD is well under way and proceeding according to plan.

Our overall results continue to demonstrate the effectiveness of the WD business model in all environments. Tim Leyden will now review these results for the March quarter in more detail and provide our outlook for the June quarter.

Closing remarks

In closing, I want to thank the entire WD team. Our strong results, in such challenging market conditions, are a testament to their adaptability, perseverance, capability, focus and motivation.

Despite the current state of the economy, we remain very encouraged by our long-term market opportunities. The applications driving digital content continue to multiply. Drive storage, delivering appropriately tiered cost effective high-capacity storage and high performance low capacity transaction oriented solutions, will continue to provide great customer value in these markets.

We remain committed to provide the best customer value proposition in the industry, to deliver financial results which allow us to continue making the substantial investments required to lead the industry and to generate superior returns for our supply partners, our employees, the communities in which we operate and our shareholders.

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

Tim Leyden - Executive Vice President & Chief Financial Officer

During the March quarter, the WD team continued its’ disciplined approach to market participation. Having sized capacity to match our expectation of demand, we paid close attention to the fundamentals of cash generation and profitability in a challenging macro-economic environment. We did this by optimizing product mix, limiting our participation in certain markets and concentrating on cost reduction and factory utilization. We are pleased with the results of our actions to size the business to reflect the demand realities that the industry faced and we sacrificed some near-term share-growth in order to make progress towards industry supply/demand equilibrium. We are monitoring the market size and the supply/demand balance and we are poised and well positioned to leverage our asset velocity model to take advantage of profitable growth opportunities as the industry continues to cope with unpredictable demand patterns.

Our revenue for the third fiscal quarter was $1.6 billion, down 21% from the prior year hard drive revenue of $2.0 billion and down 13% sequentially. Shipments totaled 31.6 million units, down 8% from the prior year and 11% sequentially.

Average hard drive selling price was approximately $50, down $1 from the December quarter and $9 from the year-ago quarter. Our Q3 ASP reflects a continued competitive pricing environment, particularly in the notebook market where supply exceeded demand in the early part of the quarter, and in the branded products market, where price degradation continued throughout the quarter.

Demand for our desktop products in the March quarter was stronger than historical seasonal-norms, resulting in increased volumes as compared to declines in all other markets. The relative strength in desktop was somewhat favorably impacted by a replenishment of our customers’ inventories, as they had cut back their orders significantly towards the end of the December quarter. This phenomenon was more pronounced, and happened earlier in the desktop market, than in other markets. WD’s flexible supply model allowed us to quickly respond to these changes in the overall demand profile.

Demand for other products was affected more significantly by further inventory reductions driven by the overall weak consumer and commercial spending environment.

Our unit shipments of 2.5-inch drives were 10.1 million in the March quarter, as compared to 10.2 million in the year-ago quarter and 13.8 million in the December quarter. In this market, and particularly in the earlier part of the quarter, we were selective in the business that we chose to pursue.

We shipped 3.5 million 3.5-inch drives for use in digital video recorders (DVRs) in the March quarter as compared to 3.1 million in the year-ago quarter and 4.1 million in the December quarter.

Revenue from sales of branded products was $343 million as compared to $330 million in the year-ago quarter and $403 million in the December quarter. Industry pricing was particularly competitive in this market. We believe this was primarily driven by a large competitor liquidating excess inventory. With the industry’s leading cost structure and compelling product line-up, we continue to view this market as a key contributor to WD’s long-term profitable growth.

Hard drive channel revenue was 48% OEM, 30% distribution and 22% branded products in the March quarter compared with 50%, 34% and 16% in the year-ago quarter, and 57%, 21% and 22% in the December quarter, respectively.

The Q3 geographic split of our hard drive revenue was 26% Americas, 28% Europe and 46% Asia, as compared to 28%, 31% and 41% in the year-ago quarter, and 23%, 29% and 48% in the December quarter. Demand strength in Asia, while more muted than in recent quarters due to the inventory correction in the 2.5-inch market, continues to be driven by the concentration of global manufacturing in that region and, more recently, by the effect of the Chinese government’s stimulus policy.

Our gross margin for the quarter was 15.9% down from the 22.6% we reported in the year-ago quarter and flat with the December quarter.

Total operating expenses of $192 million included a $14 million charge for in-process R&D related to the SiliconSystems acquisition and $4 million of costs associated with the restructuring plan announced in the December quarter. Excluding these items, total R&D and SG&A was $174 million for the March quarter, $13 million higher than the total R&D and SG&A reported in the December quarter. December opex benefited from a $16 million reversal of a prior quarter bonus accrual and a zero bonus for the period, whereas the March quarter included a $14 million bonus accrual. Adjusting for these changes, the R&D and SG&A for the March quarter was down $17 million from December.

Restructuring charges related to the resizing plan we announced in December of 2008 have totaled $117 million to date, $4 million of which was incurred in the March quarter. We now expect the total cost of our restructuring to be about $122 million. This is lower than the $140 million forecasted on our January call.

We have temporarily extended the operation of our Sarawak substrate facility through June while we continue to explore the option of disposal vs. closure.

We continue to expect the annual savings from the restructuring to be approximately $150 million, once all actions are completed.

Including the $14 million in-process R&D charge and $4 million restructuring charge, operating income was $61 million, or 3.8% of revenue. Excluding these charges, operating income on a non-GAAP basis was $79 million, or 5.0% of revenue.

Interest and other non-operating expenses were approximately $3 million. This includes about $1 million of unrealized losses on our previously-disclosed investments in auction-rate securities. These investments totaled $18 million at the end of the quarter.

Tax expense for the March quarter was $8 million. For fiscal 2009, we expect our book effective tax rate to range between 8% and 10% as we take into account our expected continuing profitability and the global mix of income by region. Our cash tax rate is expected to be between 2% and 3% for the fiscal year.

Including the $14 million in-process R&D charge and the $4 million restructuring charge, net income totaled $50 million, or $0.22 per share. Excluding these charges, net income on a non-GAAP basis was $68 million, or $0.30 per share.

Turning to the balance sheet for the March quarter, our conversion cycle was 5 days, which consisted of 47 days of receivables outstanding, 26 days of inventory, or 14 turns, and 68 days of payables. We generated $355 million in cash flow from operations. We paid out a net of $44 million related to the SiliconSystems acquisition. Capital expenditures were $106 million and depreciation and amortization totaled $119 million. Cash and cash equivalents increased by $203 million, ending at $1.6 billion.

In the June quarter, we will be paying out an additional $19 million related to the SiliconSystems acquisition, bringing the total net cash paid to $63 million. We will also be making our first quarterly debt-repayment installment of $19 million. A summary of our debt-repayment schedule was included in our most recent 10-Q filing. Capital expenditures for fiscal 2009 are expected to be about $500 million. This is consistent with the reduced forecast we provided on our January call. Depreciation and amortization for fiscal 2009 is expected to be about $480 million.

We will be providing a fiscal 2010 capital forecast during our July earnings call.

We did not repurchase any shares of stock during the March quarter. We continue to carry a healthy cash balance as we navigate the current economic downturn. We will continue to manage our cash conservatively until demand visibility becomes clearer and the economic uncertainty abates.

Now I will discuss our expectations for the fourth quarter of our fiscal year 2009.

You will recall that we indicated on several occasions that this quarter will be a 14-week quarter, with our fiscal year ending on July 3, 2009.

First, let me outline the market situation as we see it.

Historically, the June quarter sequential unit volume has been flat to slightly down. Global macro economic conditions remain challenging and while we have seen much progress towards inventory rationalization in the industry, we expect demand patterns to be less predictable than would be the case if normal seasonal conditions were present. Taking into account the inventory situation, our 14-week quarter and other known variables, we are modeling market volumes that will be essentially flat with the March quarter. We believe, in a commodity marketplace such as ours, that balancing of supply and demand continues to be critical and we remain focused on maintaining that equilibrium. Our sequential ASP declines have been about 5%, and we anticipate that pricing will continue to be competitive. The production realignment undertaken by the 3.5-inch industry participants has led to a better balance between supply/demand and inventory holding patterns, and we are now seeing that dynamic extend to the 2.5-inch marketplace.

Taking these factors into account, we expect current quarter revenue for WD to be in a range from $1.45 billion to $1.60 billion.

We are modeling gross margin at 15.5%

R&D and SG&A are expected to total approximately $175 million. This includes the combined incremental impact of opex spending related to our recent acquisition as well as the 14th week in our current quarter.

Restructuring costs are expected to be $5 million.

Our net interest expense is projected to be about $4 million, assuming no further losses on our investments in auction-rate securities.

We anticipate tax expense of about $10 million.

We anticipate our share count to be approximately 227 million.

As a result, we expect GAAP earnings per share to be between $0.14 and $0.24. Excluding the $5 million of restructuring charges I outlined earlier, we estimate non-GAAP EPS of between $0.16 and $0.26.

This guidance excludes any impact from the possible disposal of our Sarawak facility.

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