Western Digital Earnings Call INSIGHTS: A Flat OpEx Perspective, Internal/External Mix
A Flat OpEx Perspective
Aaron Rakers – Stifel Nicolaus: Congratulations on the solid execution. First question, as we think about the $10 number that you announced (indiscernible) around out there and you talk about the lack of synergies due to the MOFCOM regulatory requirements. Relative to your $550 million OpEx guide that you’ve laid out, can you help us understand what that $10 number reflects as far as how we should think about the OpEx without any synergies in model? Put another way, is $550 million the high watermark or is that how we should model kind of quarterly OpEx to get to that $10 number?
A Closer Look: Western Digital Corporation Earnings Cheat Sheet>>
Wolfgang U. Nickl – SVP and CFO: Yeah. Aaron, let me give you a bit more context and summarize what we said. The base assumption is market that’s growing approximately 5% from a unit volume perspective. We anticipate our share to be roughly flat in the fiscal year. From an OpEx perspective, like John and I mentioned, we do not expect synergies when compared with the current level of OpEx might be up or down, a little bit, but in average, you should assume what we guided for in Q1. As it relates to the tax rate, I think the 8.5% that we gave you for Q1 is probably a good proxy for the year as well. We’re planning to change our approach to share repurchases where we did more opportunistic share repurchases in the past. We are now switching over to more systematic share repurchase and when you compute all these numbers together, you’re coming to a gross margin that’s roughly around 30% give or take. So, those are the major assumption. So, from an OpEx perspective you should assume the OpEx to be roughly flat with what we guided for.
Aaron Rakers – Stifel Nicolaus: And then as a follow-up, if my math is correct, it looks like you guys were average blended capacity per drive of roughly 150 gigabytes. Can you talk about that relative to where that compares to the overall industry? Are you back to normal or is there a little bit more to come as far as returning back to normal industry average capacity per drive perspective?
John F. Coyne – CEO: Well the number was actually 681.
Aaron Rakers – Stifel Nicolaus: Sorry, my math is wrong.
John F. Coyne – CEO: Okay and that is pretty much back to industry mix.
Richard Kugele – Needham & Company: In terms of just understanding then your ability to produce using your own heads, John are you where you want to be internally or do you think it will be a couple more quarters? You said you’ve brought the Malaysian facility online, but is it back to where you want in terms of an internal versus external mix?
Stephen D. Milligan – President: Rich, I’ll take that. This is Steve. We’ve obviously got different postures if you want to call that depending upon which subsidiary you are talking about. HGST has followed a model of whether it be 80%, 90% internal, 10%, 20% external purchases. WD has got kind of a similar model. Obviously that became overweighted in terms of the recovery from the flood and as John and Wolfgang alluded to, we’ve still got a variety of different things that we need to do as an organization to get to pre-flood kind of levels from a cost perspective and certainly returning to that kind of blend will be something that we’ll be looking to do as we progress here to the future.
Richard Kugele – Needham & Company: Just Wolfgang, in terms of the Toshiba comment about the drag on gross margins, can you just elaborate a little bit more on how that works? Are you not allowed to get a margin like a contract manufacturer would on the drives or why would there be a drag per se?
Wolfgang U. Nickl – SVP and CFO: You’re right Rich, there is for a certain period of time certainly this quarter, a little bit was included in last quarter as well and then probably the December and March quarter as well. As we transition the 3.5-inch equipment over to Toshiba, we are building drives for them on a contract manufacturer margin basis and that is dilutive on as I said in the quarter we just ended at about 50 basis points.
Richard Kugele – Needham & Company: But the units are included in your total unit number or no?
Wolfgang U. Nickl – SVP and CFO: No.
Stephen D. Milligan – President: No, because we don’t want to double count them with Toshiba, right, as they ship them through.
Richard Kugele – Needham & Company: Then just lastly, relative to all the noise that was kind of going on in the channel, you said – or going on in the sell side about the channel. You said that your shipments were actually linear to the quarter. Can you just talk about what you saw in the channel and was there really 30% plus week-on-week inventory changes? Can you just talk about what was really going on in the channel in June?
Stephen D. Milligan – President: Yeah, we don’t recognize any of those numbers and in fact our channel inventories continue to be below four-week level.