Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Davis Consultants Asia

Western Digital Corp. (WDC)

F3Q07 Earnings Call

April 26, 2007 5:00 pm ET

Executives

Bob Blair - VP IR

John Coyne - President and CEO

Steve Milligan - SVP and CFO

Analysts

Aaron Rakers - A.G. Edwards

David Bailey - Goldman Sachs

Vivian Atkinson - Citigroup

Harry Blount - Lehman Brothers

Christian Schwab - Craig-Hallum Capital Group

Mark Miller - Brean Murray

Sherri Schribner - Deutsche Bank Securities

Jesse Tortora - Prudential

Harry Blount - Lehman Brothers

Presentation

Operator

Good afternoon and thank you for standing by. Welcome to Western Digital's Third Quarter Financial Result for Fiscal Year 2007. Presently all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

Now I will turn the call over to Mr. Bob Blair. Thank you, you may begin.

Bob Blair

Thank you. As we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding supply and demand conditions in hard drive industry, our beliefs regarding growth opportunities for hard drives, our continued outstanding returns on investment and our ability to be a market leader in the data storage industry. Also our business and market expansion strategies, our plans to continue investing in future technologies and product platforms to broaden and grow our product portfolio, effects of seasonality in capital expenditure, plans for fiscal 2007. And our current financial outlook for revenue, gross margin, operating expenses, earnings per share, and other key metrics.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Including those listed in our Form 10-Q filed with the SEC on February 7, 2007, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today.

We undertake no obligation to update our forward-looking statements, to reflect new information or events and you should not assume latter in the quarter that the comments we make today are still valid.

I will now turn the call over to President and Chief Executive Officer, John Coyne. John?

TRANSCRIPT SPONSOR

Davis Consultants Asia

Davis Consultants Asia is a multi- disciplined consulting practice focused on business development and advisory services in the data storage industry.
Established in 1994, and headquartered in Kuala Lumpur, Malaysia, Davis Consultants leverages many years of experience and extensive contacts throughout the industry to provide a wide range of services. These include Asia location development, joint venture development, technical & business due-diligence assessments, and buy-side investment research services tailored to our client’s specific needs.
Our mission is to provide efficient, accurate, and timely information and advisories in the data storage industry.
Davis Consultants Asia publishes the Data Storage News Summary® , a news aggregation service, which is distributed by email on a complimentary basis twice per week.

To sponsor a Seeking Alpha transcript click here.

John Coyne

Thanks Bob. Good afternoon everyone. Joining me today is Steve Milligan, Chief Financial Officer. After my remarks and Steve's financial report and outlook, we'll be happy to answer your questions.

Before a discussion of our financial performance, I want to cover our additional news today of a transition in Chief Financial Officers at WD, a change that will take place over the next several months. Tim Leyden, who worked at WD from 1983 to 2000, is returning to the company on May 7, as Executive Vice President Finance. Tim, will become CFO on September 1st, succeeding Steve Milligan. In the transition period, Tim will report to Steve.

I want to acknowledge Steve's outstanding performance and contributions over the last three years as CFO and as leader of our strong financial organization. On behalf of the WD team and our Board of Directors, I wish Steve all the best in his future endeavors; thank him for an outstanding job and for his assistance during the upcoming transition.

Tim Leyden and I started our careers at Western Digital together in 1983, opening a board manufacturing facility in our native Ireland. Subsequently we were part of the acquisition and transition team when WD entered the hard drive business in the late 1980's with operations in Singapore.

In his subsequent years at WD, Tim held a variety of increasingly responsible positions in finance, operations and IT. I am very pleased to welcome Tim back to WD as a long time trusted advisor. His deep knowledge and experience in the storage controller, semiconductor and hard drive businesses will be invaluable as we address the multiple opportunities available to WD in this great industry.

Now, let me move on to the current business report. In light of the seasonal dynamics in the March quarter, I think it is important for all of us to take a step back and consider the strong long-term fundamentals of this business. Applications for hard drives continue to expand in multiple growth markets with an increasingly diversified customer base.

Digital content requiring storage and retrieval is expanding in both the commercial and consumer segments. The value proposition of hard drives continues to provide compelling advantages for traditional computing applications, as well as for growing high volume consumer applications. CE requires significant storage of personal digital content either to serve the surging growth of handheld devices or to securely store video, photos and the audio content in reliable home based appliances.

Our industry's newest technologies are being deployed and embraced by customers. There are now fewer players in the industry, but it continues to be competitive. So it's up to each of us, to develop unique product strategies, cost structures and business models that allow us to compete effectively.

In summary, the hard drive industry continues to offer compelling growth opportunities and strong potential for continued outstanding returns on investment. Having said that, we are in the midst of the industry's traditional low season of the March and June quarters. In the last quarter, we faced seasonally slower demand and competitive pricing, with both coming in at the challenging end of normal trends. Against this background, I am pleased to report, WD financial performance which reflects our consistent execution to a business model that allows us to manage through the wide range of market conditions.

WD's high velocity model enables us to adjust quickly within a quarter, as market challenges and opportunities emerge. This was the case in March, as we saw a changing demand in pricing patterns, and made adjustments to produce solid financial results. We delivered net income and revenue at the high end of guidance and generated strong cash flow. Our gross margin was lower than forecasted, but within our long stated business model range of 15% to 20%. We continue to compete for business on the basis of the quality, reliability, and availability of our products and on our ability to respond quickly and flexibly to customer's needs.

We are gratified that our customers continue to embrace this WD value proposition as reflected in the sustained growth of our business. I want to acknowledge the passion, productivity and perseverance demonstrated by WD employees in producing our Q3 results. And the loyalty and dedication of our supply partners in working with WD to fulfill our demanding requirements and those of our customers.

There were several noteworthy highlights and developments in the quarter. Overall, we continue to diversify into the industry's faster growing markets with 47% of revenue coming from these newer markets; A 5 point increase quarter-over-quarter and of 18 point increase year-over-year.

The desktop market was at the lower end of seasonal demand trends. We nevertheless executed strongly in this space with shipments up year-over-year. In notebook we continue to expand our customer base and increased our penetration at existing accounts, shipping 3.7 million drives.

In branded products, we demonstrated continued momentum based on our strong product lineup, expanding global footprint and increasing consumer awareness of the need and value of securely transporting and storing personal digital content.

We began shipments of the one terabyte My Book World Edition. Part of the family of shared storage appliances that allows for secured remote access and sharing of content. In consumer electronics we launched a new family of WD AV branded hard drives, featuring new technologies that increase reliability and offer cooler and quieter operation with lower power consumption.

Our CE unit shipments were down slightly in the March quarter reflecting the normal seasonality of the consumer based segment of the DVR market. In enterprise we continue to grow shipments of our unique 10,000 RPM WD Raptor Drives and the 7,200 RPM WD RE Drives for near-line storage applications.

These achievements and initiatives reflect a healthy return on our significant on going investments in people, technologies, products and the infrastructure to grow our business. Steve Milligan will now cover the Q3 financials and the outlook for the June quarter

Steve Milligan

Thanks John. WD’s flexible business model and strong execution enabled the company to deliver solid financial results. Revenue for the third fiscal quarter was 1.4 billion and unit shipments totaled $24.5 million, increasing by 25% and 30% respectively from the prior year.

Average selling prices were approximately $58 per unit, flat with the December quarter. We shipped 3.7 million 2.5 inch mobile drives in the March quarter as compared to 2.7 million in the December quarter and 1.4 million in the year-ago quarter. Our growth in this important high-volume market demonstrates a broadening acceptance of our products with notebook PC OEMs.

Turning to consumer electronics, we shipped approximately 2.6 million units for use in digital video recorders in the March quarter, versus 2.7 million in the December quarter, and 1.7 million in the year-ago quarter. Revenue by channel was 47% OEM, 34% distribution, and 19% branded products versus 46% OEM, 37% distribution, and 17% branded products for the December quarter. No customer represented greater than 10% of our revenue for the quarter.

The Q3 geographic split of our business was 36% Americas, 29% Europe, and 35% Asia as compared to 38% Americas, 32% Europe, and 30% Asia in the December quarter. Our gross margin percentage for the quarter was 15.8% versus 17.9% in the December quarter, reflecting a particularly competitive pricing environment in the notebook, desktop and consumer electronics segments. Operating expenses totaled $107 million, which is net of $13 million recovery related to a receivable, previously deemed uncollectible. Operating income was $115 million or 8.2% of revenue. Net interest income and other income totaled approximately $7 million. Income tax expense was $1.3 million for the March quarter. For the full year, we currently expect our tax rate to approximate 2%. Net income totaled $121 million or $0.53 per share.

Turning to the balance sheet, our cash and short-term investments at the end of the quarter totaled $875 million, an increase of $45 million from the December quarter. Cash generated from operations during the quarter totaled $164 million. Capital expenditures for the quarter were $70 million. Non-cash charges for depreciation and amortization expense totaled $55 million.

Capital additions for fiscal 2007 are currently expected to approximate $400 million as we continue to invest in advanced head technologies, new product platforms, and capacity for our broadening and growing product portfolio. Depreciation and amortization expense for fiscal 2007 is expected to approximate $210 million.

We repurchased 1.5 million shares of stock during the March quarter for approximately $29 million. Since May 2004, we have repurchased 11.7 million shares at a total cost of $143 million. A total of $107 million remains under our existing stock repurchase authorization. Additionally during the quarter we pay-off the balance of our existing bank debt totaling $19 million.

Our cash conversion cycle for the quarter was zero days, consisting a 46 days of receivables, 19 days of inventories or 19.6 turns and 65 days of payables outstanding.

That was a look back at our third quarter, now I will move on to our expectations for the fourth quarter of 2007. We expect demand for the June quarter to be seasonally soft. Accordingly we estimate revenue for the June quarter to be between $1.3 billion and $1.35 billion. Gross margin percentage for the June quarter is anticipated to be roughly 15% given typical seasonal factors.

Operating expenses are projected to be approximately $124 million, interest income should exceed tax expense by about $4 million and our share count is expected to remain roughly flat. Accordingly we estimate earnings per share up between $0.34 and $0.38 for the June quarter.

I will now turn the call back over to John for questions.

John Coyne

Thank you, Steve. Operator we're now ready for questions.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. We will now begin the question and answer portion of today's call. (Operator Instructions) Aaron Rakers, your line is open please state your company name.

Aaron Rakers - A.G. Edwards

Yeah, Aaron Rakers, A.G. Edwards, thank you very much. I guess the first question is on the inventory. The weeks of inventory in the distribution channel on the desktop and then also if I could ask the follow up on that. What does the gross margin trend look like on the notebook business now? I guess looking at 15.7% I guess would be helpful to understand where the difference came from versus your prior expectation of roughly 17%?

Steve Milligan

Sure, Aaron relative to weeks of inventory in the distribution channel most often the industry are under six weeks at the end of quarter, so pretty good shape there. Regarding notebook margins, they were flat quarter-on-quarter relative to how that impacted our expectations coming into the quarter. On a margin percentage standpoint its pretty consistent I think from the volume perspective we did better than what we expected coming into, we had our original guidance. So, from a mix perspectives it impacted our margin negatively in that sense.

Aaron Rakers - A.G. Edwards

And I guess if you could also provide an update with regard to where we are with PMR level of shipments right now as well as an update on your 160 gigabytes-per-platter a ramp?

John Coyne

Yes, this is John. We don’t normally break out detail such as that which we consider competitively proprietary. Technology transitions are part of this industry on an ongoing basis, one of the many levers that we pull to manage the business. We are doing well on our progress both in our PMR transition, which is in our 2.5 inch space today, and our transition to 160 gig-per platter. I am pleased with the progress that the teams are making on both of those transitions.

We continue to manage that in a controlled way to ensure that we have the right products to offer to our customers in terms of reliability, capacity points, functionality, to address all of the market opportunities. And we are managing that in the context of our overall business model and you will see the results of that in the result we just cleared and the forward-looking guidance that we have given you for the current quarter.

Aaron Rakers - A.G. Edwards

Okay. And then a final question for me then I will see the floor. Looking at your operating expense, quite impressive in the quarter, most notably on the SG&A side. Maybe you can help us understand, towards the later part of the quarter, what really you were able to do to bring down that SG&A cost quite materially.

Steve Milligan

Sure, Aaron, one of the things that we have talked about in the past is that a fair amount of the compensation that we have is variable or at risk in one of the things that we do that intentionally, because we know that there can be volatility in the gross margin line item in this business. And so, we have six month incentive compensation programs and so for the back half of the year, given our margins pressures that we are seeing in the gross margin area, basically have a lower variable compensation component in that, just from a performance perspective.

Aaron Rakers - A.G. Edwards

Thank you very much.

Operator

David Bailey, you may ask your question and please state you company name.

David Bailey - Goldman Sachs

Sure, great thank you, Goldman Sachs. Can you talk a little bit about the drivers behind branded being up again in the March quarter, and what you think your weakened inventory are in retail right now versus the channel?

John Coyne

Certainly I can kind of address the drivers. I mean what we are seeing is a significant realization in the consumer base that the emotional content, if I call it that, photographs, music, videos, lots of personal content that needs to be securely stored, we are also seeing significant demand in the transport of typically of commercial information in a secure way, and so both of those are the drivers for significant demand in the branded products arena. We have also two other element influencing our success in that area, one is the excellent product line that we've developed and the second is the breadth of our foot print in distribution channels on a global basis. Steve will address the inventory question.

Steve Milligan

Yes, David on the weeks of inventory and the retail, when I talk about weeks of inventory in total that includes retail. Typically we don't disclose the retail components separately, but that business usually has a little bit more inventory in the channel just given the nature of the beast. But that business is usual and I can say that actually what I think is the very important data point is that, in the fiscal third quarter we actually sold out more inventory than we sold in the retail channel.

David Bailey - Goldman Sachs

And then also on go-forward pricing expectations relative to normal declines, could you give us a general idea across each of the product lines?

Steve Milligan

I am sorry. Can you repeat that David?

David Bailey - Goldman Sachs

Yeah, the go-forward pricing expectations for the June quarter versus normal decline?

Steve Milligan

We are expecting seasonal price declines in the June quarter. So nothing outside of the normal boundaries of what we would see in the June quarter.

David Bailey - Goldman Sachs

So in summary, is a little bit better than this quarter?

Steve Milligan

Possibly, I think we will have to see. It's early days obviously still in the quarter. But I think you are probably accurate in terms of just from a pure assumption perspective.

David Bailey - Goldman Sachs

Okay, great thank you.

Steve Milligan

Because March as you know is a little bit at the worse end of typical pricing.

David Bailey - Goldman Sachs

Okay, thank you

Operator

Thank you. Harry Brown, your line is open please state your company name.

Harry Blount - Lehman Brothers

Hi, Lehman Brothers. Couple of things, one is, Steve, I want to clarify something you said on the variable comps. Was there actually a reversal then in the variable comp?

Steve Milligan

No.

Harry Blount - Lehman Brothers

Okay, so no reversal from the accruals from the prior quarters?

Steve Milligan

We have six months programs. So, the accruals that we made for the first half of the year were paid out.

Harry Blount - Lehman Brothers

Got it.

Steve Milligan

And then we have new programs starting in the second half of the year.

Harry Blount - Lehman Brothers

Got it, okay.

Steve Milligan

What it is, is just that the level of accrual was lower because our performance from a margin perspective was different. But there's no reversal or anything like that.

Harry Blount - Lehman Brothers

Okay. How significant was that?

Steve Milligan

Well, you can see how much we were off from our guidance. Our original guidance was a 126 million, if you normalize for the ESIS, it was a 120 and so the majority of that is kind of, in that area. But there are some other puts and takes, but that’s a majority of it.

Harry Blount - Lehman Brothers

Got it. And then the announcement that Alps and TKD are planning to merge operations. How do you guys expected that to impact you, assuming if that goes through

John Coyne

Well, as you know Harry, we have a model which is a dual source model, internal and merchant market. With the majority of our head supply being satisfied from our internal resources. We intend to continue that model. We have very good relationships with both SAE/TDK and Alps. We are working with both of them to ensure that we have a seamless transition here, as TDK pick up the Alps head related assets. So our business model remains the same and very cordial relations with SAE and we together, I believe, we clearly understand what's required to be competitive in this space.

Harry Blount - Lehman Brothers

Got it. And then lastly, I believe you guys mentioned that you had no 10% customers in the quarter. I was wondering, that seems to imply just based on rough math that that was down meaningfully sequentially. Can you maybe shed a little bit more light on was that a situation where you lost share within the account or was there some other factors that played a role here.

John Coyne

I am not sure that that’s necessary the math, Harry. The other way of having no greater than 10% customer is to increase business with others.

Harry Blount - Lehman Brothers

Okay, but could you may be clarify it?

Steve Milligan

I think Harry it's just a matter of that particular customer having a weaker quarter, which has obviously been fairly well documented

Harry Blount - Lehman Brothers

Got it, thank you.

John Coyne

It had nothing to do with our allocation or position with that particular customer.

Harry Blount - Lehman Brothers

Got it, okay thanks.

Operator

Paul Mansky your line is open please state your company name.

Vivian Atkinson - Citigroup

[Vivian Atkinson], corresponding for Paul. I just had a couple of questions. In regards to pricing was any segment or some of other in terms of the desktop versus notebooks versus CE in the quarter?

John Coyne

Steve in his remarks indicated that we saw a very competitive activity in the desktop and notebooks and in CE. That's the DVR segment of CE that we service. And the one that has been for sometime and continues to be extremely competitive is the 2.5-inch notebook space where we have six suppliers and the customer base is using that to their advantage right now.

Vivian Atkinson - Citigroup

Then in terms of mix on desktop did you see any shift more towards the mature products or higher capacity or how was your mix in the quarter?

John Coyne

As I look at the mix relative to the overall industry mix, we are pretty representative in terms of our share of capacity points.

Steve Milligan

Yeah, and the mix up for the quarter was in line with seasonal norms for our fiscal Q3.

Vivian Atkinson - Citigroup

Okay, then it's my last one. In terms your branded business, it seems like Seagate's making a pretty strong push for its free agent drives, last moth or so. Have you seen any increasing pricing pressure from a market shelf standpoint, or maybe have you any backup impact in that?

John Coyne

I think that the branded products arena like all elements of the drive business tends to be competitive. We would know that a significant amount of our gains over the last year have been more at the expense of the smaller regional players in this space rather than the large branded companies.

Vivian Atkinson - Citigroup

Okay, great, thanks.

Operator

Christian Schwab, your line is open. Please state your company name.

Christian Schwab - Craig-Hallum Capital Group

Craig. Guys, did you say when the 160-gigabytes single platter drive is coming?

John Coyne

It's already shipping in volume.

Christian Schwab - Craig-Hallum Capital Group

Shipping in volume, so that becomes a more material part of your mix. How does that positively impact gross margins, should we be thinking about when we get into the second half of the year and we actually have volume and seasonality on our side and our ability to also mix up capacities also on our side. And then can you help us gauge, should pricing just follow typical seasonal declines on a like-for-like basis for the next three quarters, where we could excel in gross margins, John?

John Coyne

Yeah I think the thing to bear in mind about aerial density progression, which PMR is just one manifestation of that continues progression and aerial density that we have been in this industry for many, many years. And it's a fundamental element that really each progression in aerial density enables a new capacity point that we have never been able to reach before. And that opens up new applications for high capacity storage. The other attribute of aerial density progression is that we are able to deliver significantly more capacity lets say on our single disk machine than we were previously able to deliver, and as that technology matures we deliver that incremental capacity at the same price point that was previously on that single disk platform. That kind of value proposition for storage customers is what's created this $30.4 billion plus unit business with all of the myriad applications that are emerging for hard drive storage. So typically we attempt to stay within our margin model range while providing that value to the customer base to grow the market opportunity.

So, then relative to seasonality, we certainly expect the second half of the year to be seasonally strong and we would expect to see the same kind of patrons looking forward as we've seen in the past relative to margins versus seasonality.

Christian Schwab - Craig-Hallum Capital Group

Let me try one more time. If we are going to take out $5 platter and some $4 heads and some buck suspension, we're going to stabilize in costs. So I would assume that your gross margin should improve as your desktop volume becomes disproportionately shipped to at 160 versus 80 even with the huge pricing concessions you've been getting out of your component base for them supplying to you mature products. So I guess, I am trying, I don't need you to give me an exact number. I guess directionally are we wrong to assume that growth margins in fact should not improve in the second of half of the year based on demand mix-up and your ability to take components out of the majority of your drives you are going to ship?

John Coyne

I think it's reasonable to expect that we plan to run the business, like we've been running it for many years. And typically you see a seasonal up tick in the back half of the year. And aerial density progress is always with us and as we execute these transitions, we typically get advantage overtime on the comp side and we typically grow the market by sharing some of that with our customer base in terms of value. So, there is no silver bullet that’s going to change the characteristics of the industry. We are not going to stand still in terms of leaping all of that benefit into the gross margin model at the expense of continued progress. So, we are happy with our model in the 15 to 20 point range and we will manage within that range to continue to grow the business.

Christian Schwab - Craig-Hallum Capital Group

One last question if I may, what was your mix, what percentage of your 3.5 inch drives did you ship based on the 160 gigabyte single platter solution and where would you expect that to exit the year. Can you give us any color there?

John Coyne

We don’t typically give that kind of granularity. We consider that highly proprietary compensative information.

Christian Schwab - Craig-Hallum Capital Group

Thank you.

Operator

Thank you. Mark Miller you may ask your question. Please state your company name.

Mark Miller - Brean Murray

It's Brean Murray. I am just trying to understand. Seagate reported there was weakness in the multi-platter 3.5 inch product segment this quarter or in the March quarter. And I'm just wondering, you said it was seasonal, does that mean weakness, or things were better for you than Seagate you feel?

Steve Milligan

Mark just to clarify that, when I was talking about seasonal, I might not have said it correctly. But we're expecting seasonal price declines in fiscal Q4, fiscal Q3 was at the high end of seasonal price declines.

Mark Miller - Brean Murray

Okay, I guess the question --

John Coyne

What we are saying Mark is the same thing that Seagate said. We don’t have a different view on that.

Mark Miller - Brean Murray

Okay, thank you. So, my opinion for most of you guys, I guess the two questions on everybody's mind is, the decline we are seeing in the coming June quarter, anything more that season, is there somebody bigger happening here like a fundamental fall of in demand or are we entering an extended regime of high priced competition?

Steve Milligan

Let me try and tackle that. I think relative to the seasonal demand comment where we did say that Q3 was up the challenging end of seasonal demand. I think there are perhaps two factors that played into that, one was the AMD-Intel price cuts that were well signaled for the April period which had a somewhat chilling effect in late March. And the other is that if you cast your mind back to 2004, 2005 December quarters; in both of those quarters the industry was media constrained. And so there was to some extent a pent up demand overflow into the March quarter in 2005, 2006. In the 2006 December quarter there was no constraints relative to media availability or any other component of significance. So, I think perhaps a little bit of pent up overflow in the last two years is also an influence on the seasonal shape of this March quarter.

Mark Miller - Brean Murray

And finally just any comments you could provide, I am pleased about the same purchases externally in the March quarter or the June quarter and the mix. Any changes from normal, are you still within your normal percentage of purchases? Are your buying more of a higher end heads in the June quarter than you have traditionally?

Steve Milligan

Now, we are pretty tracking over the last several quarters within our model which is we have indicated to you as 70% to 80% internal. That's pretty consistent through the last couple of quarters and [I have put] into Q4.

Mark Miller - Brean Murray

And there is no mix change roughly?

Steve Milligan

Not significant.

Mark Miller - Brean Murray

Thank you.

John Coyne

Well, in our world market share is a result. I think that the mobile performance was driven by two major elements. One was an increase in the number of customers that we are serving and the other was increased orders from several of the customers that we had previously been serving. And our view of that is that the value proposition WD offers in terms of quality and reliability and availability is what's earning us that business.

Mark Miller - Brean Murray

You did gain from market share then?

John Coyne

I don't think there was significant changes in market share in the desktop's space period.

Mark Miller - Brean Murray

Okay and may be if we can go to a new topic in DVR's. Seagate mentioned they saw some weaker than expected demand due to programs running of etcetera in the March quarter and certainly in June coming up on a standard change for some of the cable and satellite providers. Do you think that going into June that this could be a headwind or is that an opportunity for your business?

Steve Milligan

Well, I think, as we commented, we did $2.6 million in the March quarter versus $2.7 million in the prior quarter, which is pretty much in the seasonal pattern. So no surprises there for us. The cable change which affects the U.S. market only, is causing a little bit of time shifted demand, which is positive. And then it is a business that's characterized by project based bills. So, it tends to be a little bit choppy around about a fairly predictable year-over-year type growth pattern but within quarters it can be a little unpredictable.

Mark Miller - Brean Murray

Okay and maybe on the enterprise side, obviously, you guys like to announce products only when you are shipping, but that's an exciting area for you guys to ramp on the small base. Do you have any updates on maybe not specific wins, but maybe some momentum that you might have in that area?

John Coyne

No specific product announcements. We are continuing to make good progress in this area. I think the near-line storage, into which we chip our rate addition products is a fast growing area and we have been very successful in that space. We are also pleased with sales of our 10-K RPM SATA product, the WD Raptor line, which tends to be incorporated in high end workstations and servers. So, yeah, we are pretty pleased with our progress so far in that marketplace.

Mark Miller - Brean Murray

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Sherri Schribner, your line is open. Please state your company name.

Sherri Schribner - Deutsche Bank Securities

Hi, thank you, it's Deutsche Bank. I just wanted to probe the gross margin numbers quarter a little bit. I think you said, your mobile margins were about flat with the last quarter and it sounds like that mix was a negative drive on your gross margins. So, if I put that together, it looks like your desktops margins were down a little more than two percentage points Q-over-Q. Can you give us some sense of where you are seeing the impact to margins? Is it from higher costs of components? Is it a mix issue? Is it aggressive pricing? Can you help us there with the gross margin number?

Steve Milligan

Sure, Sherri. The primary impact on our gross margins quarter-on-quarter and versus our guidance was that price declines were steeper than what we expected.

Sherri Schribner - Deutsche Bank Securities

Okay.

Steve Milligan

That was the big driver.

Sherri Schribner - Deutsche Bank Securities

So you are not seeing any impact from higher component costs as your, you maybe doing more perpendicular or anything like that?

Steve Milligan

No, if you look at our cost declines compared to history and that sort of thing and what are reasonable cost declines really we saw our cost declines in line with what we would normally expect and in line with that. But we just, we as an industry from a competitive standpoint gave away too much in price and it impacted our margins.

Sherri Schribner - Deutsche Bank Securities

Okay great. And then the $13 million benefit I am assuming that's in SG&A. Is that right?

Steve Milligan

That's correct.

Sherri Schribner - Deutsche Bank Securities

Okay and then in terms of the slowdown in March, was that something you saw on the OEM side or is that something you saw in (inaudible).

John Coyne

I think we saw it in both and we reacted to it and managed our bill plan and our OpEx structure.

Sherri Schribner - Deutsche Bank Securities

Okay alright. Thank you very much.

Operator

Thank you, Jesse Tortora. You may ask your question. Please state your company name.

Jesse Tortora - Prudential

Yes, this is Jesse from Prudential. DSOs were up 4 days sequentially and 8, year-on-year. Can you give us any reason for that and any more detail on that?

Steve Milligan

Sure, relative to the year-on-year statement, there are few things that are going on there. We had some changes in payment terms with some customers that have driven that. The other thing is that the retail business is a little bit slower paying. So as that increased as a percentage of our business it's been a drag on our DSO's.

And the last thing which also impacted things on quarter-on-quarter basis is that and this is a relative statement linearity was a little bit worst than we normally had seen, so we saw a little bit more towards the back end half of the quarter than what we would typically do in a March quarter. That were the drivers for our DSO.

Jesse Tortora - Prudential

Okay, and can you provide us with some more detail around the receivable recovery and where it actually show's up on the P&L?

Steve Milligan

The benefit of that recovery is in SG&A.

Jesse Tortora - Prudential

Okay, and can you give us anymore detail on what that was actually?

Bob Blair

Well we had a customer that had some posting with run out of funding. We set a reserve for it, given that they were essentially caught out of money last quarter. They received funding in this past quarter and paid us for that, our receivable balance and we were able to recover that. That what we thought might be a bad debt.

Jesse Tortora - Prudential

Okay.

Steve Milligan

We did not disclose and are not intending to disclose the customer.

Jesse Tortora - Prudential

Okay. And finally if you're channel inventories and the industries were less than six weeks, Seagate today less than five. Do we infer that the other two desktop players were somewhat higher in the six weeks model, to make the math work?

Steve Milligan

Probably you want to suggest here that we all calculate, at least there are only public companies left in the drive industry, but we calculated on different basis. We use a four week trailing average to calculate weeks of inventory and Seagate uses 13 weeks. So, you get into it, it’s a bit of an apples-and-oranges comparison.

Jesse Tortora - Prudential

Got you, okay. Thanks guys.

Operator

Thank you and our last question comes from Harry Blount, your line is open. Please state your company name.

Harry Blount - Lehman Brothers

Hi, Lehman Brothers. Just a quick clarification, I think you guys have in the past disclosed percentage revenue from top ten customers, do you have that data point, I don't see it in the metric page.

Steve Milligan

I indicate in my remarks Harry that we did not have a greater than 10% customer.

Harry Blount - Lehman Brothers

No, but you hadn’t you guys normally disclose something--

Steve Milligan

Sorry, I miss-interpreted the question. I don’t know, I don’t have that answer Harry.

John Coyne

On the metrics page.

Harry Blount - Lehman Brothers

Yeah, I don't see it there, okay.

Steve Milligan

Yeah, no we didn’t provide that.

Harry Blount - Lehman Brothers

Okay, thanks.

Operator

I would now like to the turn the call over to Mr. John Coyne.

John Coyne

Okay, I would like to thank all of you for joining us today. We are very excited about the growth opportunities in the data storage industry and about WD's ability to participate in this market as one of the leaders in the years ahead. We look forward to updating you on our progress. Thank you.

Operator

Thank you. This does conclude the conference call. You may disconnect at this time.

TRANSCRIPT SPONSOR

Davis Consultants Asia

Davis Consultants Asia is a multi- disciplined consulting practice focused on business development and advisory services in the data storage industry.

Established in 1994, and headquartered in Kuala Lumpur, Malaysia, Davis Consultants leverages many years of experience and extensive contacts throughout the industry to provide a wide range of services. These include Asia location development, joint venture development, technical & business due-diligence assessments, and buy-side investment research services tailored to our client’s specific needs.

Our mission is to provide efficient, accurate, and timely information and advisories in the data storage industry.

Davis Consultants Asia publishes the Data Storage News Summary® , a news aggregation service, which is distributed by email on a complimentary basis twice per week.

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Western Digital F3Q07 (Qtr End 3/30/07) Earnings Call Transcript
This Transcript
All Transcripts