10-QPeriod: Q2 FY2011

WESTERN DIGITAL CORP Quarterly Report for Q2 Ended Dec 31, 2010

Filed January 28, 2011For Securities:WDC

Summary

Western Digital Corp. (WDC) reported its financial results for the second quarter of fiscal year 2011, ending December 30, 2010. The company demonstrated resilience in a competitive market, with net revenue of $2.475 billion, a slight decrease of 5% from the prior year's quarter but an increase of 1% for the six-month period, totaling $4.871 billion. While unit shipments for hard drives saw a 5% increase year-over-year to 52.2 million units in the quarter, a decline in average selling price (ASP) from $52 to $47 contributed to the revenue decrease. Profitability was impacted by a significant drop in gross margin to 19.2% from 26.2% in the prior year, primarily due to competitive pricing. Operating income also saw a substantial decrease. Despite these pressures, WDC maintained a strong liquidity position, ending the quarter with $3.1 billion in cash and cash equivalents, and generated $505 million in operating cash flow during the quarter. The company continues to invest in research and development, with R&D expenses increasing to support new product development.

Key Highlights

  • 1Net revenue for the quarter was $2.475 billion, a 5% decrease year-over-year, while revenue for the six-month period increased 1% to $4.871 billion.
  • 2Hard drive unit shipments increased by 5% to 52.2 million units in the quarter.
  • 3Gross margin significantly decreased to 19.2% from 26.2% in the prior year's quarter due to a competitive pricing environment.
  • 4Operating income declined to $240 million, reflecting the pressure on gross margins.
  • 5The company ended the quarter with a robust cash and cash equivalents balance of $3.1 billion.
  • 6Operating cash flow for the quarter was strong at $505 million.
  • 7Research and Development (R&D) expenses increased to support new product development.

Frequently Asked Questions

The primary reason for the significant decrease in gross margin from 26.2% in the prior-year period to 19.2% in the current quarter was a highly competitive pricing environment within the hard drive industry, which led to a lower average selling price (ASP) for the company's products.

Western Digital ended the quarter with a strong liquidity position, holding $3.1 billion in cash and cash equivalents. The company also generated $505 million in cash flow from operations during the quarter, indicating healthy cash generation. Management believes these resources are sufficient to meet foreseeable working capital and capital expenditure needs.

Western Digital expects net revenue in the upcoming March quarter to be down from the December quarter, consistent with normal industry seasonality and inventory adjustments within PC manufacturers' supply chains.

The company is involved in several legal proceedings, including intellectual property litigation and employment-related class action lawsuits. While the company intends to defend itself vigorously, the outcomes are uncertain and could potentially result in material financial impact, although the exact amounts are not always reasonably estimable at this stage.