10-QPeriod: Q1 FY2008

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 28, 2007

Filed November 6, 2007For Securities:WDC

Summary

Western Digital Corporation (WDC) reported strong growth in its first quarter of fiscal year 2008, with net revenue increasing by 40% year-over-year to $1.8 billion. This growth was driven by a significant increase in unit shipments (up 29%) and a shift towards higher-capacity drives and non-desktop markets, which now account for 53% of hard drive revenue, up from 35% in the prior year. The company's strategic acquisition of Komag, a media manufacturer, was completed in September 2007 for $995 million, adding $40 million in revenue from media operations in the quarter and enhancing WDC's vertical integration and production efficiencies. Despite increased operating expenses, partly due to the inclusion of media operations and continued investment in R&D, gross margin improved to 18.3% from 17.3% in the prior year, indicating favorable supply/demand conditions and an improved product mix. The company also generated a robust $219 million in cash flow from operations and ended the quarter with $851 million in cash, cash equivalents, and short-term investments. Management expects continued seasonal strength in demand for the upcoming quarter.

Key Highlights

  • 1Net revenue surged 40% to $1.8 billion in Q1 FY2008 compared to Q1 FY2007.
  • 2Unit shipments increased by 29% to 29.4 million units year-over-year.
  • 3Non-desktop market revenue (notebooks, CE, enterprise, branded products) comprised 53% of total hard drive revenue, a significant increase from 35% in the prior year.
  • 4Completed the acquisition of Komag for $995 million on September 5, 2007, adding media operations and contributing $40 million in revenue.
  • 5Gross margin improved to 18.3% from 17.3% due to improved market conditions and product mix.
  • 6Generated $219 million in cash flow from operations, ending the quarter with $851 million in cash and investments.
  • 7Average Selling Price (ASP) per HDD unit increased by 5% to $59.

Frequently Asked Questions

Revenue growth was primarily driven by a 40% increase in net revenue to $1.8 billion, fueled by a 29% rise in unit shipments and a strategic shift towards higher-capacity drives and non-desktop markets. The acquisition of Komag also contributed revenue from media operations.

The acquisition of Komag, completed on September 5, 2007, for $995 million, strengthened WDC's vertical integration by adding media manufacturing capabilities. Komag's operations contributed $40 million in net revenue during the quarter and are expected to drive cost and operational efficiencies.

Western Digital anticipates a seasonally strong demand for the upcoming quarter (December quarter). The company expects gross margin to increase due to typical seasonal factors, while operating expenses are projected to rise due to the full inclusion of media operations and ongoing investments in new products and technology.

There has been a significant shift towards non-desktop markets. Revenue from these segments, including notebook computers, consumer electronics, enterprise applications, and branded product sales, accounted for 53% of hard drive revenue in the first quarter of fiscal year 2008, compared to 35% in the same quarter of the prior year.