Western Digital (WD): Fiscal 2Q12 Financial Results and Thailand Impact

HDD shipped down 51% sequentially, average selling price up 50%

(in US$ millions)	2Q11	2Q12	6 mo. 11	6 mo. 12
Revenues	2,475	1,995	4,871	4,689
Growth		-19%		-4%
Net income (loss)	225	145	422	384

Western Digital Corp. reported revenue of $2.0 billion, hard-drive unit shipments of 28.5 million and net income of $145 million, or $0.61 per share, for its second fiscal quarter ended Dec. 30, 2011.

Excluding charges and expenses related to the Thailand flooding and the planned acquisition of Hitachi Global Storage Technologies, non-GAAP net income was $358 million, or $1.51 per share.

During the quarter, the company incurred charges and expenses of $199 million related to the flooding and expenses of $14 million associated with the planned acquisition of HGST.

In the year-ago quarter, the company reported revenue of $2.5 billion, net income of $225 million, or $0.96 per share, and shipped 52.2 million hard drives.

The company generated $378 million in cash from operations during the December quarter, ending with total cash and cash equivalents of $3.9 billion.

Non-GAAP net income for the second quarter fiscal 2012 consists of GAAP net income of $145 million plus $199 million for charges and expenses related to the flooding and $14 million of acquisition-related expenses. Non-GAAP earnings per share of $1.51 for the second quarter is calculated by using the same 237 million diluted shares as is used for GAAP earnings per share.

Operations Update
The company also announced it has made significant additional progress to restore its manufacturing capacity following the recent flooding in Thailand. It has continued to ramp HDD production in Thailand and yesterday resumed slider production which had been suspended since October 10. The company now believes its manufacturing capacity will be back to pre-flood capabilities in the quarter ending September 2012.

" We have made substantial progress in restoring WD's manufacturing capabilities in the aftermath of the historic flooding in Thailand, and this is reflected in our second quarter financial results and in the resumption of our operations there," said John Coyne, president and chief executive officer. "While much work remains to be done over the next several quarters to reach our pre-flood manufacturing capabilities, the progress thus far is significantly ahead of our original expectations and is a tribute to the dedicated and effective actions of our employees, contractors and Thai government agencies, the efforts of our supply partners and the support of our customers. We are grateful to all involved in this extraordinary effort."

HGST Acquisition
The company's plan to complete the acquisition of HGST is on track to close by March 2012. The company continues to work on obtaining the regulatory approval of the transaction from the remaining government agencies. 

Abstracts of the earnings call transcript:

John Coyne, president and CEO:
"We believe industry shipments in the December quarter were about 119 million units, which included approximately 11 million units of pre-flood inventory. Today, one quarter after the floods hit and despite the industry's heroic recovery efforts, supply remains significantly constrained. We believe this condition will persist throughout calendar 2012 with gradual improvement during the year, with industry production in the June quarter approaching pre-flood quarterly build levels.
"However, with the expected uptick in demand in the back half of the year, rollover demand from the current shortages and inventories throughout the supply chain at record lows, from component supply through HDD and system manufacturing and distribution and retail channels, we believe the pipeline will not be refilled to normal levels until the first half of calendar 2013.
"On November 18, 2011, an arbitration award of $525 million was rendered against WD. Earlier today, the arbitrator awarded prejudgment interest in the amount of $105 million. WD will promptly file a petition to vacate the award on the grounds that the arbitrator exceeded his authority and failed to consider relevant evidence. We anticipate that the court will hear our arguments on our petition in March or April of 2012, and issue a decision sometime thereafter.
"So we think that while there will be a gradual reduction of the pricing that's being driven by the imbalance between supply and demand in a stabilized situation where inventories have been rebuilt throughout the chain to normal levels, which we anticipate will be in the first half of 2013 calendar year. That when prices stabilize in that environment, we expect they will be at a higher level than pre-flood due to the incremental costs that I just outlined."

COO, Tim Leyden, COO:
"We are enhancing our infrastructure by extending slider production capacity and capability into Malaysia in order to mitigate risk. We expect to have Malaysian sliders shipping in our HDDs in the June quarter.
"We are currently shipping 1 terabyte per platter of 3.5-inch and 500 gigabytes per platter of 2.5-inch drives in volume.
" (...) we have our 900-gigabyte 2.5-inch SAS product in qualification at multiple OEMs.
"In general, channels with shorter inventory pipelines are getting higher and more immediate product allocations, while channels with longer inventory pipelines are expected to deplete available inventory before receiving further product allocation.
" (...) we are targeting throughput to approach 60%, 80% and 100% of pre-flood production volumes in the March, June and September quarters, respectively.
"Average selling price was approximately $69 per unit, up $22 from the year ago quarter and up $23 from the September quarter. There were two customers, which each comprised 10% or more of our total revenue: Acer and Dell.
"OEM sales represented 59% of revenue, up from 45% in the prior year and 53% in the September quarter. Distribution channel sales represented 25% of revenue, down from 33% in the prior year and 29% in the September quarter. Retail sales as a percent of revenue were 16%, down from prior year's 22% and September's 18%.
"Revenue from sales of our branded products was $328 million, down 40% from the year ago quarter and 33% from the September quarter.
"Our gross margin for the quarter was 32.5%, up from 19.2% in the year ago quarter and 20.1% in the September quarter."

Jillian Mansolf at Overland Storage recognized as one of the top 100 women in the channel

SAN DIEGO - August 26, 2009 - Overland Storage, Inc. (Nasdaq: OVRL) today announced that Jillian Mansolf, vice president of worldwide sales and marketing, has been recognized by Everything Channel’s CRN Magazine as one of the Top 100 Women in the Channel. The Top 100 Women in the Channel were chosen by the editors of the magazine based on the women’s achievements as executives and the amount of influence they wield over the technology channel. The Top 100 Women in the Channel represent a changing trend in what traditionally has been an all-male industry.

“We are very pleased to see women executives reaching the highest levels in a wide range of dynamic companies. It is with great pleasure that we honor the women who have made a profound impact in the technology marketplace,” said Robert C. DeMarzo, senior vice president and editorial director, Everything Channel. “We offer our congratulations to Jillian Mansolf for her significant contributions to our industry."

For the past 13 years, Mansolf has leveraged her significant channel sales and marketing expertise to execute highly successful global channel programs for a variety of high-technology organizations. Most recently, she joined Overland to lead the company’s sales organization and expand its strategic marketing efforts worldwide. Overland continually reinforces its channel commitment through the ongoing development of customer-centric resource and lead-generation programs designed to help its channel partners accelerate sales cycles while driving increased revenue and profitability.

“It’s an honor to join this group of inspirational leaders who are being recognized for making an indelible mark on the channel,” said Mansolf. “At Overland, our unwavering’ dedication to building and sustaining long-term channel relationships is reinforced by a constant focus on providing innovative products, sales tools, training and the educational resources our partners need to address their customers’ ever-increasing business requirements.”

EPA begins long process to green storage specification

The U.S. Environmental Protection Agency (EPA) is looking to develop standards for making data storage devices more energy efficient, although it's probably years away from having an industry-standard green storage specification.

The EPA issued an industry letter indicating that it's taking formal steps to develop an Energy Star specification for enterprise data storage devices. Meeting the voluntary Energy Star spec would allow data storage equipment manufacturers to use the familiar Energy Star marketing label to promote product energy efficiencies. The EPA already has a similar Energy Star program for computer servers, and the server specification is expected this week.

There's a lot of talk about green storage from vendors, but customers have no formal way of comparing products to determine their power efficiency.

Andrew Fanara, program manager for the EPA's Climate Protection Partnership Division, said the agency wants to develop more standardized information to measure the energy consumption of data center products.

"The long-term Holy Grail, if there is one, is to be able to measure how efficient systems are when they're actually doing computing," Fanara said, "and then presenting that information to users and buyers in an industry-standard format."

No deadline has been set for establishing the green storage specification. Fanara said the process could take anywhere from six months to three years, depending on technical issues, industry interest and manufacturer support. Greg Schulz, founder and senior analyst at Stillwater, Minn.-based StorageIO Group, said he expects the initial specification in 18 months to two years.

Challenges to data storage industry agreement
Schulz said the EPA's biggest challenge will be getting the data storage industry to agree on an initial specification and a roadmap for future green storage specifications. "In some ways, the EPA is tasked with herding cats," he said.

The specification is a blueprint that will define the energy guidelines enterprise data storage devices must meet to participate in the Energy Star program, Fanara said. Once a product meets the specification guidelines, manufacturers can voluntarily submit the product information to the EPA and the product will be added to a data storage equipment Energy Star-compliant list.

Schulz said the specification's applicability to storage users' real-world needs will be the key to its success. "The program's metrics have to be of benefit for the IT organization," Schulz said. "Otherwise, it's just an interesting exercise."

Schulz believes the initial green storage specification should focus on the amount of energy a storage device uses while working, as opposed to the device's energy use while idle.

"With the focus on efficiency optimization, boosting productivity and business economic sustainability, the issue then becomes how efficient the device is while doing work," he said.

Framework for testing and performance
Fanara said he expects the EPA to issue a framework document within 60 days, prepared by the EPA Energy Star technical staff in cooperation with the U.S. Department of Energy. Energy Star staff will also gather input from data storage devices users, buyers and component suppliers. The framework will identify initial testing procedures, and the performance and features organizations typically look for when buying data storage.

The framework will be released to the industry for comments and feedback on identifying barriers to energy efficiencies and standardized product information.

Battling to make data centers green
Fanara said the green storage specification is part of the EPA's concentration on increasing data center energy efficiency.

He said the agency has "identified data centers as an important growing source of energy consumption, especially given its unique position as a critical component of our country's computing backbone."

The Energy Star program is developing a data center and office building benchmarking program that will rate a building's energy efficiency from one to 100. So far, the agency has benchmarked close to 100,000 office buildings nationwide, Fanara said.

To help storage managers identify and evaluate data center energy-efficiency opportunities, the U.S. Department of Energy offers the Data Center Energy Profiler (DC Pro) software tool suite, which includes two free software tools for data center managers. The DC Pro Profiling Tool diagnoses how energy is used in a data center, and provides ways to save energy and money. The DC Pro Assessment Tools conduct a more accurate assessment of data center energy-efficiency opportunities for each major data center system.