10-QPeriod: Q1 FY2006

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 30, 2005

Filed November 9, 2005For Securities:WDC

Summary

Western Digital Corporation (WDC) reported strong revenue growth in its fiscal first quarter of 2006, with net revenue reaching $1.01 billion, a 23% increase year-over-year. This growth was driven by a significant increase in unit shipments and a rise in average selling prices due to higher storage capacities. The company also saw a substantial improvement in gross margin, which increased to 17.7% from 13.7% in the prior year, attributed to manufacturing efficiencies, quality improvements, a balanced sales channel mix, and a less aggressive pricing environment. Operating income also saw a significant jump to $68 million, more than doubling from the previous year, reflecting improved operational performance and revenue growth. The company is strategically expanding its reach beyond the traditional desktop PC market, with non-desktop sources like consumer electronics, enterprise, and mobile computing contributing 25% of revenue, up from 20% in the prior year. WDC ended the quarter with a solid cash position and anticipates continued seasonal demand trends for the remainder of the fiscal year.

Key Highlights

  • 1Net revenue increased by 23% to $1.01 billion for the quarter ended September 30, 2005, compared to $824 million in the prior year.
  • 2Gross margin improved significantly to 17.7% from 13.7% year-over-year, driven by manufacturing efficiencies and higher quality.
  • 3Operating income more than doubled to $68 million from $31 million in the prior year's quarter.
  • 4Non-desktop PC revenue sources (CE, enterprise, mobile) accounted for 25% of total revenue, up from 20% in the prior year, indicating successful diversification.
  • 5Total unit shipments increased to 17.1 million, up from 14.2 million in the prior year's comparable period.
  • 6The company ended the quarter with $581 million in cash, cash equivalents, and short-term investments.
  • 7A one-time settlement payment of $24 million was made to Papst Licensing to resolve a patent infringement lawsuit.

Frequently Asked Questions

Revenue growth was primarily driven by a 23% increase in net revenue to $1.01 billion, fueled by a 19% increase in total unit shipments (17.1 million units) and a $1 per unit increase in average selling prices (ASPs), largely due to higher storage capacities being sold.

The adoption of SFAS 123-R, which requires expensing of stock-based compensation, resulted in a reduction of income before income taxes by $4.7 million and net income by $4.6 million for the quarter ended September 30, 2005. It also increased operating expenses, particularly R&D and SG&A, by approximately $7 million in total compared to the prior year.

Western Digital anticipates traditional December quarter seasonal demand trends for the hard disk drive industry and expects revenue to be between $1.025 billion and $1.075 billion. They also expect modest seasonal price declines to be offset by operational efficiencies, leading to a gross margin percentage similar to the current quarter.

The company is focusing on manufacturing efficiencies, quality improvements, a balanced sales channel mix, and a less aggressive pricing environment to improve gross margins. They are also diversifying revenue streams by increasing sales into non-desktop PC markets like consumer electronics and mobile computing.