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 website 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: our inventory levels; industry conditions and demand; our gross margin and operating expense model; our future investments in technology, products and processes; our future product offerings and market segment participation; our cash usage; our expected capital expenditures, depreciation and amortization and tax rate for fiscal 2010; and our financial results expectations for the September quarter, including revenue, gross margin, expenses, tax rate, 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 April 24, 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.

Our fiscal 2009 and June quarter results continue to demonstrate the effectiveness of the WD business model and the passion, nimbleness and capabilities of the WD team.

In a very challenging year, we were continuously profitable and cash flow positive, despite absorbing $112 million in restructuring charges. As the economic environment deteriorated and impacted hard drive demand in the December quarter, we initiated actions to reduce our fixed cost structure in anticipation of a prolonged downturn in demand, relative to the previous trajectory of the industry. The results of these actions, which were largely completed in the March quarter, are reflected in our strong June quarter results.
 
Prompt and effective action by all industry participants quickly brought supply in line with the new demand levels and also dramatically reduced inventory by the end of March to the lowest levels in the last five years.  Inventory has been further reduced in the June quarter with manufacturers’ inventory down from 9 days of sales at the end of March to just 7 days at the end of June, while distribution inventory, already at historically low levels exiting the March quarter, was reduced by a further 1 million units at the end of June. WD inventories exiting fiscal Q4 remain tightly controlled and have declined a little more than the rest of the industry.

With the major adjustment of inventory levels now behind us, supply-demand balance restored and all industry participants appearing to be focused on the fundamentals of supply-demand discipline, profitability and cash management, we have seen some moderation in the rate of price erosion in the industry in the first half of calendar 2009. All of this heralds a better industry environment as we head into fiscal 2010. 

In the recently-completed fourth fiscal quarter the market was much stronger than we originally anticipated in our April conference call which contemplated a market that was flat with the March quarter. Actual demand was up 18% quarter-over-quarter at 132 million units and flat with the prior-year period.

In this environment, we used our adaptability and responsiveness with telling effect, as we capitalized on this unexpected market upside, which we promptly converted into financial results that significantly exceeded expectations. This included a return to our targeted gross margin and operating expense business model parameters.

Customer preference for WD’s quality, reliability, product breadth and responsiveness, drove record shipments of 40 million units up 27% sequentially and 14% over the prior-year period. Revenue of $1.9 billion was up 21% sequentially but down 3% year-on-year. Reflecting the damage done by a year of extraordinary industry price declines, year–on-year ASPs were down $8 to $48, while gross and net margins, were down 210 and 50 basis points respectively. However, sequentially, gross margins and net margins improved by 330 and 710 basis points to 19.2% and 10.2%, respectively, while our ASP erosion of $2 in the quarter reflects both a moderation in like-for-like pricing pressure and a WD mix-shift to take advantage of volume opportunities in the emerging netbook market. Our ability to make acceptable margins at the low end of the market, while at the same time returning to our targeted gross margin and operating expense model, speaks to our advantaged cost structure.

We remain convinced of a continuing long term increase in demand for digital content storage. However, it remains difficult to predict the short and medium term influence of the continuing recession on true demand and historical seasonality. While we expect that the current quarter will provide continuing sequential growth, we are vigilant about macro economic developments that may lead to some choppiness in demand over the next several quarters. Consequently, we continue to supplement our customer demand forecasts with close monitoring of industry inventory, production and sales data and remain focused on further refining WD’s ability to adjust supply quantity and mix by product and regional market to ensure that we best serve our customer needs while we optimize our revenues and margins and continue our quest for sustained profitable growth.

Our strategy to focus on the industry’s highest growth sectors of external storage and mobile PCs, combined with our intense emphasis on quality, cost and efficiency in both manufacturing and engineering, continued to pay dividends as our technology and product leadership in these high-growth markets served us well in fiscal 2009 and positions us well as we advance into the new fiscal year.

Our consistent profitability and asset management have generated the strongest balance sheet in the industry. This has enabled us to continue to make substantial investments in the technology, products and processes needed to maintain the momentum we have been building over these last few years. Indeed, despite the fixed cost reductions we made mid-year, we have increased our R&D investments, year-on-year. Likewise we continue to make prudent, well timed, capital investments to ensure that we have the capability to produce the product volumes which are required by market growth, increasing customer preference for WD’s existing products and to support our plans to further broaden our product offerings and market segment participation in the coming year.

Throughout fiscal 2009, WD demonstrated increasing returns on its investments in technology, product breadth and production capability, with consistent delivery of compelling first-to-market products. The company maintained its momentum as an industry innovator with the announcement yesterday of another industry first – the 1 TB My Passport™ Essential™ SE external storage device which utilizes our newest WD Scorpio Blue™, the industry’s only 2.5-inch hard drive with 333GB-per-platter.

For the balance of fiscal 2010 we have very exciting set of product plans to further enhance our competitive advantage in the segments we have traditionally served.    

Additionally, we will enter the mainstream enterprise market with a family of 2.5-inch, 10,000 RPM, SAS hard drives.

We will extend our WD TV™ Media Player product line to further expand this consumer segment.

We have entered into an agreement with HP® to design and manufacture a range of HP-branded external storage solutions for retail markets further increasing WD’s reach into the consumer space.

In the longer term, we are already engaged in the development of solid state storage solutions for the enterprise market which we expect to launch in fiscal 2011.

Before I pass the call to Tim Leyden, I want to thank the WD team and our supply partners for outstanding execution in seizing the upside opportunities that emerged in the fourth fiscal quarter and for their responsiveness and commitment throughout a difficult but rewarding year in which we have further strengthened WD in our long-term mission of generating sustained profitable growth.

Closing remarks

Thank you all for joining us on today’s call. We look forward to keeping you informed of our progress in the quarters ahead.

Tim Leyden - Executive Vice President & Chief Financial Officer

Fiscal 2009 brought macroeconomic challenges for the hard drive industry and for WD but these challenges gave us the opportunity to differentiate ourselves in the marketplace with our financial performance.

We have consistently portrayed the WD competitive advantages and capabilities in varying market conditions. These differentiators include our business model, our cost leadership, the adaptability and flexibility of our people, our data driven approach to identifying and satisfying market demands, our ability to make the desired product available to customers when required, and our willingness and capability to invest in R&D, component manufacturing, and capacity in order to broaden our product and production base.

Our performance in the last two quarters demonstrates these abilities. We are now ideally positioned to leverage these strengths and continue to consolidate our position due to our balance sheet strength and our upside potential in unaddressed markets.

For our full fiscal year 2009 total revenue was $7.5 billion. Hard drive revenue was $7.4 billion, shipments were 146 million units, and ASP was $51. Non-hard drive revenue, including sales of WD TV™ Media Players, solid-state drives and external sales of media and substrates totaled approximately $75 million.

The corresponding numbers for fiscal '08 were total revenue of $8.1 billion, hard drive revenue of $7.8 billion, shipments of 133 million units and ASP was $59. Non-hard drive revenue for fiscal 2008 totaled approximately $271 million consisting of external sales of media and substrates.

Gross margin in fiscal '09 was 17.9% versus 21.5% in fiscal '08. Operating income for '09 was $519 million versus $1 billion in '08. And net income for '09 was $470 million versus $867 million in '08.

Fiscal '09 EPS was $2.08 versus $3.84 in '08. Net income in '09 included a $14 million in-process R&D charge related to the acquisition of SiliconSystems, $112 million of restructuring charges, an $18 million gain on the sale of assets from the company’s media substrate manufacturing facility in Sarawak, Malaysia and $4 million of tax benefits related to the restructuring. Excluding these amounts, the 2009 non-GAAP net income was $574 million, or $2.54 per share.

Fiscal 2008 net income included $60 million of net tax charges related to the license of intellectual property to subsidiaries, and $49 million of acquired in-process R&D expenses related to the acquisition of Komag. Excluding these amounts, 2008 non-GAAP net income was $976 million, or $4.32 per share.

Turning to the 2009 fourth quarter results, total revenue was $1.9 billion, down 3% from the prior year but up 21% sequentially. Hard drive shipments totaled 40 million units, up 14% from the prior-year period and up 27% sequentially. Non-hard drive revenue, including sales of WD TV Media Players, solid-state drives and external sales of media and substrates totaled approximately $27 million.

Average hard drive selling price was approximately $48 per unit, down $2 from the March quarter, and $8 from the year-ago quarter. Our Q4 ASP reflects our response to the robust market demand for mobile and lower-capacity desktop products.

The percentage of our hard drive revenue generated by non-desktop applications was 63% in the June quarter, 58% in the March quarter, and 63% in the year-ago quarter.

We shipped 16.9 million 2.5-inch mobile drives in the June quarter, as compared to 10.1 million in the March quarter and 11.7 million in the year-ago quarter.

These increases were driven by strength in notebook and netbook PC demand, coupled with increased customer preference for WD product offerings.

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

Demand in the near-line enterprise segment exceeded our expectations. Our line-up of leadership products in this segment enabled us to continue to gain momentum in this market. On the desktop side, demand was modestly stronger than expected. We maintained position in this segment.

Revenue by channel was 54% OEM, 29% distribution, and 17% branded products in the June quarter, compared with 48%, 30% and 22% in the March quarter, and 57%, 24% and 19% in the year-ago quarter, respectively. In the Branded products segment we maintained our leading market position while we focused on pursuing margin enhancement through cost and mix improvements.

There was one customer, Dell, that comprised more than 10% of total revenue.

The Q4 geographic split of our revenue was 24% Americas, 22% Europe, and 54% Asia, as compared to 26%, 28% and 46% in the March quarter, and 29%, 25% and 46% in the year-ago quarter. Our notebook shipments contributed to the relative strength of Asian sales.

Our gross margin percentage for the quarter was 19.2% versus 15.9% in the March quarter and 21.3% in the year-ago quarter.

The increase in gross margin versus Q3 came primarily from increased plant utilization due to higher volumes, improved efficiency, cost management and better pricing than expected while we had some offsetting impacts from product and segment mix.

Total R&D and SG&A spending was $184 million, or 9.5% of revenue, up from the March quarter primarily as a result of increased incentive compensation accruals and SSD engineering additions. On a year-over-year basis, we were able to fund increased investments in new products, programs, technological advancements, SSD engineering additions and higher incentive compensation accruals with the cost savings realized from our restructuring actions.

Operating income was $209 million, or 10.8% of revenue, including the $5 million favorable restructuring adjustment and $18 million gain on sale of our Sarawak assets.

Interest and other non-operating expenses were approximately $2 million.

Tax expense for the June quarter was $11 million.

Our net income totaled $196 million or $0.86 per share.

Turning to the balance sheet, we generated $1.3 billion in cash flow from operations during fiscal ’09, including $349 million during our fourth quarter. 

Our cash conversion cycle for the fourth quarter was a positive two days. This consisted of 47 days of receivables outstanding, 24 days of inventory or 15 turns, and 69 days of payables.

Capital expenditures for the June quarter were $111 million. And our non-cash charges for depreciation and amortization expense totaled $122 million.

Capital additions for fiscal '09 totaled $519 million.

Depreciation and amortization expense for fiscal '09 totaled $479 million.

We did not repurchase any shares of common stock during the June quarter.

We exited the fourth quarter with cash and cash equivalents of $1.8 billion as compared to $1.6 billion at the end of March as we continued to strengthen our balance sheet. The macroeconomic situation and the credit markets have not yet returned to normal and we will evaluate cash usage opportunities with this in mind. We remain focused on putting our available cash to use primarily through investments in areas that accelerate our business objectives. 

Now I will discuss our expectations for capital, depreciation and tax for fiscal 2010, and wrap up with our guidance for the first fiscal quarter.

We expect capital expenditures for the year to be about $600 million, and depreciation and amortization to be about $530 million.

We expect our book effective tax rate to range between 7% and 10% and our cash tax rate to be between 2% and 3%.

Now I will move on to our guidance for [fiscal] Q1 2010.

Positive indicators are emerging for the hard drive industry, but forecasting product demand remains challenging given the continuing worldwide economic uncertainty. With this in mind, and taking into account the strength of the demand in Q4, we are forecasting a sequential increase of between 3% and 6% in industry demand from 132 million units to between 135 and 140 million units. From a WD viewpoint it is important to note that we had the benefit of 14 weeks in the June quarter. Taking this, the market growth forecasts and an expectation of normal seasonal pricing into account, we are forecasting total revenues for the current quarter to be between $1.9 billion and $2.0 billion.

We're modeling gross margins to be approximately flat with fiscal Q4 2009.

Operating expenses are projected to be approximately $175 million.

Our net interest expense is projected to be about $2 million.

We anticipate our tax rate to be in the middle of the 7% - 10% range, and our share count to be approximately 230 million.

Accordingly, we estimate earnings per share of between $0.75 and $0.82 for the September quarter.

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