Tuesday, January 24, 2012

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

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

(in US$ millions) 2Q11
 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."

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