Western
Digital Q4
| Western
Digital Q4
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| (FOOL
CONFERENCE
CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh) Western Digital Corporation BUFFALO,N.Y., July 25, 1996/FOOLWIRE/---Western Digital Corporation today reported Q4 1996 EPS of $0.71 on sales of $821 million, up from EPS of $0.42 on sales of $728 million in Q3 1996 and $0.52 on sales of $585 million in Q4 1995. A decrease in WDC's tax rate from 13 to 10% accounted for $0.07 in surprise EPS. The change in tax rate accounted for 44% of the margin by which earnings beat estimates. Without adjusting for that change, EPS beat estimates by 32%. Excluding the unforeseen change in the tax rate[unforeseen from the standpoint of analysts that formulate estimates], the company beat estimates by 16%.
EPS for the full 1996 fiscal year was $2.01, as compared to $2.47 in 1995. Backing out a one-time gain associated with the sale of WDC's multimedia group in Q2 FY 1996, core EPS for FY 1996 was $1.69. "Revenue for fiscal 1996 totaled a record $2.87 billion, a 34 percent increase from $2.13 billion in fiscal 1995. Disk drive revenue in fiscal 1996 expanded 44 percent to $2.80 billion and unit shipments grew 50 percent on a record 15.3 million drives from disk drive revenue of $1.94 billion and from 10.2 million units in fiscal 1995....The Company shipped a record 4.6 million disk drives in the fourth quarter, a 59 percent increase from 2.9 million units in the year ago quarter and an 18 percent increase from the Q3 shipments of 3.9 million."
In a very tough market environment, Western Digital delivered an eleventh-straight quarter of profitability. The company also has two units coming online in Q1 and Q2--their portable and enterprise storage lines. To understand what is happening with WDC's business, the company referred to comments made by Intel earlier this month. The demand for higher performance systems is fundamentally healthy. The company believes that PC growth through the end of 1996 will reach the high-end of analysts' forecasts of 20% The aftermarket should grow 40%, according to IDC's forecast. WDC continues to execute on timely introduction of new products, performance EIDE drives for the desktop segment, and on capturing the industry's "strongest OEM customer set. Western Digital has a major OEM customer roster featuring Gateway, IBM, Dell, Hewlett-Packard, Fujitsu, and Compaq and we serve the extended aftermarket with one of the most effective distribution retail strategies in the industry today." The company noted that there are _some_ strong PC companies in the market today and that they serve each one of these strong competitors.
The company is making outstanding progress with the launch of its enterprise storage business, for which there will be an kickoff event the week of July 29, 1996 at their Rochester, MN R&D facility. "Demand in this sector, for a source which can provide reliable high volumes, continues unabated." The company is also on target to ship into the OEM channel its first 3" drives by the end of July (these drives are primarily used in portable computers). Two major OEMs have orders committed. Almost one month into the traditionally slow summer season, the company is seeing better demand for its desktop drives from all channels. European demand has also awakened earlier than usual. Booking are ten percentage points stronger entering Q1 1997 than seen at the entrance to Q4 1996. Today's bookings for Q1 are 25% higher than for the comparable period of last year. These booking represent a 50% higher number of units, as well. The company cannot pinpoint whether this is due to general PC industry strength or market share gains due to competitors' missteps.
Financials
This is the first quarter that fully reflects 100% disk drive operations, with the company now being totally divested of its microcomputer products business unit. Growth for the company was well in excess for the disk drive industry at-large. Revenues for the quarter, by channel, were 72% OEM and 28% re-seller. This reflects a nine point increase for the OEM mix over Q3. Geographically, N. America accounted for 55% of Q4 revenues vs. 52% in Q3; Europe, 28% vs. 33%; and Asia, 17% vs. 15%. The top 10 customers represented 53% of revenues compared with 42% in Q3. IBM and Gateway accounted for 11% of revenues apiece in Q4. Gross profit was 12.7%, up 40 basis points (4/10 of 1% point) from 12.3% gross margin reported in Q3. Operating expenses and R&D totalled less than 10% of revenue for the first time ever. WDC believes that it has the most competitive operating expense structure in the industry. R&D was down for the quarter and core SG&A expenses were about flat. Net interest expense was positive and tax rate ended at 10%. For the coming year, tax rate will be in the 15% range.
Cash balance was $219 million, up $29 million from the March quarter. Cash flow from operations totalled $45 million, $32 million was generated from the sale of the I/O business to Adaptec, capital expenditures were $42 million, and $18.4 million was used to purchase 901,000 shares. In 1996, WDC has purchased 8.5 million of its shares for about $143 million; there are still ~2.5 million shares left in the buyback authorization. A/R was up 15% from the March quarter and DSO (days sales outstanding) decreased to 45 from 49 in Q3. Inventories decreased $3 million from Q3, ending at $143 million. $77 was in finished goods. Inventory turned 20 times, up three times from Q3.
Q & A
Product mix: 34% below 1 GB; 56% above 1GB; 10% above 2.1 GB, in unit volume. Pricing for Q4 was normal with no negative problems. The company has built conservatism into their forecasts but is actually seeing stronger demand in this normally slower period. They are on allocation (surprisingly so) with many of their products. High-end products will begin to ship in the September timeframe with volume scheduled for the October period. Demand is currently stronger for the high end than the low; this is where the company is seeing allocation constraints.
5 1/4" is not ramping as quickly as the industry thought, but if this is an appropriate form factor for the consumer desktop, then WDC will have it. The 3.1" GB is in early production in Singapore and is on schedule to ship volume in the quarter and in the current month. 3" is transitioning to Singapore as well.
Gross margin was expected to be flat or down in the last quarter, which didn't turn out to be the case. WDC is going after long-lead time silicon [which would drop average cost per silicon component]. If the company can accomplish that, the gross margin may be flat in the coming quarter. Going forward, high-end will not affect total gross margin in Q1 and Q2.
Europe slowed down earlier than expected this year, but "as we moved through the last week of June into the first week of July, it was like somebody flipped a switch in Europe, so we're seeing some not only strong orders coming out of Europe, but our indicator, the weekly sell-through, has been stronger in the month of July...than June." The company attributes this to a stronger German economy at the end of calendar Q2. The company is trying to fit demand upside into the quarter, having planned for slower output.
On components, supply for heads and media is pretty good. Getting some of the higher capacity heads and media may be tougher, as may be the case for high-end silicon components. Planar and MR are both in design. Planar might be a bridge, but MR is coming on-line. The sweet-spot for drives lies between 1.2 and 1.6 GB [where pricing and volume mix create the best revenues and unit gross margins]. Going forward, this will fall between 2-2.5 GB. Windows NT should drive some of this demand.
The company will be shooting to bring in-house media production up to 40-50% although this will be difficult, as demand is growing more quickly than they can bring new equipment on-line and since there is ample supply in the market. They expect that they can achieve 43% by Q3.
Pricing from the OEM channel is more reliable than with the distribution channel and as a consequence, the higher OEM volume at this time of the year was better for cash flow and pricing preservation by design. By definition, the enterprise storage segment which they have entered will show more value added re-seller volume, but this is not scheduled to have a great impact on revenues until FY 1998.
Head supply is a matter of working with a number of suppliers who are on different points of the technology curve, depending on the types of heads they produce, whether those are MR or close proximity heads. They are confident that they can assure supply as it is needed. WDC sources heads from Read-Rite, SAE, AMC, and one other. They may add another supplier for MR.
The financial model going forward are 8-9% on SG & A expense going forward and this past quarter's SG & A expense increase from Q3 was due to a one-time relocation.
Most of the company's products are on allocation and the first month of Q1 1997 has been one of the strongest first months of any quarter.
Inventory breakdown contains $66 million in raw materials and work in process and finished goods of $77 million. Three extra days sales account for the increase in finished goods. OEMs demand that drive suppliers have just-in-time inventory on hand. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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