Western Digital: Poised for Profits With Enhanced Operating Cost Focus

Includes: STX, WDC
by: Cindy Reed

On August 18, 2010, Western Digital (NYSE:WDC) announced the promotion of Tim Leyden from chief financial officer to chief operating officer. The impact of this internal transition did not receive much recognition from the analyst and investment community; but I feel it is a critical indicator for positive results from WDC as it moves toward closing the 1st quarter of 2011.

First, this move directly addresses a major "cost control" problem that Standard & Poor's analyst Jim Yin recently highlighted in their downgrade on August 4,

We project that gross margins will decline to 19% in FY 11, from 24% in FY 10. We expect gross margins to trend toward their historical high teens average, as some competitors try to reduce their excess hard disk drive inventory. We believe the company's restructuring initiatives in FY 10 will help lower its cost structure. We forecast operating margins will narrow to 10.4% in FY 11, from 15.5% in FY 10.

This projection of 5% cost increase/operating margin decrease by Mr. Yin was in no way even hinted at by either CEO Coyne or CFF Leyden in the 4th Quarter 2010 Conference call (see transcript here); but yet it has significantly impacted WDC's stock value. What did challenge WDC's 4th Quarter performance was the stagnation of channel orders from the European market as the European companies essentially stalled their daily business flow because Euro purchasing value decreased significantly because of Greece; and logically WDC's OEM customers chose to destock existing inventory levels instead of making current period purchases.

Placing Leyden at the helm of the WDC operational arena, shows CEO John Coyne's commitment to maintain strong focus of maximizing shareholder value by controlling costs and enhancing margins. As Coyne stated in the last earnings conference call, by continually driving down "average cost per gigabyte leading to attractive price points ... at the same time, we have gradually expanded gross margins while growing revenues."


In his new position and armed with his financial expertise Leyden, as the prior chief financial officer, has more power to understand and impact the production costs of WDC's daily operations than any other person. Leyden has been with WDC for more than 20 years, so he definitely has more than adequate internal understanding of the entire operations and product production arena.

In the last year WDC has surpassed Seagate's (NASDAQ:STX) market leadership position. I have been monitoring WDC since the July 4th Quarter report. This move by WDC, along with their $2.7 billion in cash (up $1 billion from YOY 2009), consistent quality products (I love my WDC Passport and Internal Drives ... they don't crash), and committment to cost controls and industry leadership have lead me to write up my opinion today for optimal entry and accumulation of WDC stock.

Disclosure: Moving into a long position