Western Digital Corp (WDC) — Q1 2016 Earnings Call Transcript

Thank you. This conference call contains forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties, and other factors, many of which Western Digital is unable to predict or control that may cause Western Digital’s actual results, performance, or plans to differ materially from those expressed or implied by such forward-looking statements. The call does not constitute an offer to purchase or the solicitation of an offer to sell any securities or a solicitation of any vote or approval in connection with the pending merger with SanDisk. Western Digital will file a Form S-4 registration statement that includes a proxy statement of SanDisk and Western Digital and a prospectus of Western Digital regarding the merger. Western Digital and SanDisk will email the definitive joint proxy statement prospectus to their respective stockholders. Investors and shareholders should read the joint proxy statement prospectus carefully when it becomes available because it contains important information about the merger. In addition, Western Digital, SanDisk, and the respective Directors, Executive Officers, and certain other members of management and employees may be soliciting proxies from their respective stockholders in favor of the proposed transaction. You can find information about Western Digital directors and executive officers in Western Digital’s most recent proxy statement and about SanDisk directors and executive officers in SanDisk’s most recent proxy statement. You may also obtain a copy of these documents through the SEC's website or the Western Digital and SanDisk websites. Further references will be made during this call for non-GAAP financial measures; reconciliations of the differences between the historical non-GAAP measures we provide during this call for the comparable GAAP financial measures are included in the quarterly fact sheet posted in the Investor Relations section of our website. The non-GAAP forward-looking guidance we provide during this call includes amortization of intangibles, integration and acquisition-related costs. Because we currently cannot fully quantify future amounts for these excluded items, we are unable to provide guidance for or reconciliation to the most directly comparable GAAP financial measures. The impact of these exclusive items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures. We ask that participants limit their comments to a single question and one follow-up question today. I also want to note that copies and remarks from today’s call will be available on the Investor section of Western Digital’s website following the conclusion of this call. And with that I turn the call over to Western Digital’s Chief Executive Officer, Steve Milligan.

Good afternoon and thank you for joining us. With me today are Mike Cordano, our President and Chief Operating Officer, and Olivier Leonetti, our Chief Financial Officer. After my opening remarks, Olivier will provide additional commentary on our September quarter performance and our outlook for the December quarter. This is an important time for Western Digital. We have announced several transformational developments over the last few weeks, including the planned investment in our company by Unisplendour, the decision by MOFCOM, and planned acquisition of SanDisk, coupled with our continued strong execution in the business. I am very excited about the company’s future and our ability to create long-term value for our customers, shareholders, and employees. We are proceeding with our integration into a single company, as outlined in the MOFCOM decision, and we are submitting our applications for the regulatory reviews associated with the SanDisk acquisition and Unisplendour investment. We look forward to keeping you informed of our progress. Turning to the September quarter, industry demand for hard drives was moderately higher than expected, driven primarily by strength in demand for 2.5-inch devices for game consoles and notebook PCs. We reported revenues of $3.4 billion, non-GAAP gross margin of 28.9%, and diluted earnings per share of $1.56. Our storage shipments for the September quarter grew to 64 exabytes from 56 exabytes in the June quarter. These results reflect continued strong product and technology positioning, coupled with solid execution. Our enterprise SSD revenue grew significantly to $233 million, reflecting the continued success of our SaaS SSD products in an increasingly competitive environment. Additionally, we continue to ramp our new UltraStar PCIe NVMe offering. Revenue from our video surveillance hard drives also continued its rapid growth, as customers embraced our expanding lineup of these multipurpose or purpose-built solutions. We continue to see positive market reaction to the value proposition of our new active archive system. We anticipate this new systems business will generate meaningful revenue next fiscal year. We saw good demand for our enterprise hard drives, especially our high-capacity helium drives, with more than 1 million units shipped in the quarter. We are volume shipping our 8 terabyte helium drive and will be ramping our 10 terabyte helium drive in the year ahead. Overall, demand in the high-capacity space was somewhat softer than anticipated. This was due to absorption of previously deployed storage assets purchased earlier in the calendar year by some of our large customers. Notwithstanding cyclicality within a given period, growth in the capacity enterprise sector will continue with a 35% CAGR and exabytes anticipated on an annualized basis through 2020. This is underpinned by the ongoing growth and data bank created and stored. Looking to the PC market, we are continuing to see some signs of stabilization in demand, driven by innovation, refresh cycles, and normalization of PC inventories. We believe we have the opportunity to improve our financial performance due to the integration synergies associated with the recent MOFCOM decision, coupled with our continued favorable mix of business. Longer term, the acquisition of SanDisk and the investment by Unisplendour will help transform our company into a storage technology leader with a broader set of products, deeper technology base, and an expanded addressable market. Olivier will now provide a summary of our September quarter performance and our outlook.

Thank you, Steve. Our revenue for the September quarter was $3.4 billion. We shipped a total of 51.7 million hard disk drives at an average selling price of $60. Our non-GAAP gross margin was 28.9%, and operating expenses totaled $567 million. Tax expense for the September quarter was $31 million or 8% of non-GAAP pre-tax income. On a non-GAAP basis, net income was $366 million or $1.56 per share. In the September quarter, we generated $545 million in cash from operations, and our free cash flow totaled $394 million. Our CapEx totaled $151 million or 4% of revenue. We repurchased 700,000 shares for $60 million. We also declared a dividend in the amount of $0.50 per share. We closed the quarter with total cash and cash equivalents of $5.1 billion, of which approximately $600 million was held in the US. I will now provide our guidance for the December quarter. We expect revenue to be in the range of $3.3 billion to $3.4 billion. On a non-GAAP basis, we expect gross margin percentage to be slightly up from the September quarter. Operating expenses of approximately $585 million, and accordingly, we estimate non-GAAP earnings per share between $1.50 and $1.60. Operator, we are now ready to open the call for questions.

I have a question and a follow-up. Just to start with, could you talk about the benefit the MOFCOM approval has on your cash and rationality as you move forward, and how do you think the timing of those benefits would flow and would be in sync with your P&L? And does MOFCOM help you get within the target of your cash conversion cycle of four to eight days?

I’ll take that, and then Olivier can add a little bit of color. If you look at the benefits that we expect from the revised MOFCOM ruling, the first thing is that we expect to realize $400 million of annual operating expense savings. We have also commented that we’ll have material cost synergies. We have not quantified what 'material' means in terms of cost synergies. Generally speaking, the $400 million of operating expense savings would be roughly equivalent to cash savings as our OpEx. The cost savings that we would realize, which have not been quantified, would be a mixture of cash and depreciation, that sort of thing. So it would be kind of a mixture.

Let me add two comments. First of all, most of the cash will be generated offshore. We commented that 90% of the benefit would be generated outside the US. And from a cash conversion cycle, we believe we’re going to have some improvements, but I wouldn’t bank on many days.

I can comment on that because there’s a little bit of perspective. The four to eight days we announced, I think it was back in September of 2002 or ’03. Shortly after the acquisition, the composition of our business has changed dramatically since then, particularly with a lower percentage from a PC business, which tended to have a higher cash conversion, to more of an enterprise mix, which has a slower cash conversion. So we’re going to need to reset at some point what that cash conversion cycle from a business perspective should be for our company.

Got it, that’s really helpful. Just as a follow-up, could you talk about the gross margin dynamics in the September quarter? It was up 60 basis points, so it looks like mix may be a part of it, but was there anything else especially from a pricing perspective that sort of impeded your gross margins?

All of it was actually mix: higher mix of gaming and higher mix of notebook and branded products.

One question and one follow-up as well. Olivier, I think you had made a comment that your operating expense in the current quarter is expected to be 585. I just want to clarify that, and if that’s true, just curious what the upper driver here in this current quarter is. And again, going back to Amit’s question, when can we start to actually see that OpEx come down as it relates to that MOFCOM? Is that over the next two or three quarters, or is it further out? I think last week you had suggested that you should be through a lot of that by the time you get to that SanDisk closure.

So different guidance for OpEx is a bit higher than our run rate due to incentive compensation. Following the December quarter, we would expect run rate OpEx to be in the range of $575 million, give or take.

The run rate OpEx free MOFCOM synergies is $570 million.

575 give or take before MOFCOM synergies. Now in terms of MOFCOM synergies as indicated, we will expect them to materialize between the next 12 and 24 months, and we would provide you an update on a regular basis.

The short answer is yes, Aaron. What we haven’t done, which - let’s keep in mind that prior to the revised ruling from MOFCOM, we were precluded from doing any integration planning. We have begun detailed integration planning and all of that, and so we are not prepared at this point to indicate specifically a phasing or the timing of those OpEx synergies, other than to indicate they’ll take place over the course of the next 12 to 24 months. But clearly we’re going to be looking at how we can bring those in as much as possible from a financial perspective while minimizing the impact to our business.

And then as a follow-up, I’m just curious about the capacity shipment trends. You talked a little bit about it: it looks like you were down about 2% year-over-year in terms of total capacity shipped. Can you help us bridge what that capacity ship looks like between the PC business relative to your enterprise business and what’s that status like?

I am not sure I follow that question, Aaron.

I guess relative to the 35% compound annual growth rate that you referenced on the enterprise side going forward, I’m just curious of how that growth looks like over the past few quarters within the total capacity ship number that you report.

I got it. So Mike’s going to take that question.

Hi Aaron, so I think the way to think about it, we still think the calendar year is tracking to the 35% number, maybe slightly higher. We saw a little bit of front-loading in the calendar year of that, and so that’s being absorbed in the comments that Steve made earlier as we get into the second half. So I think that trend we’re confident in that, and that’s specifically around the capacity enterprise segment.

A couple of questions. First on the capacity enterprise side, obviously that spans more than cloud service providers. Can you just talk about the capacity enterprise cloud service provider part of your exabyte shipments, and how you would expect to trend over the next 6 to 12 months as you move, especially to 10 terabyte?

So Rich, I’ll take that question. As you know, we try to stay away from talking about specific either customers or types of customers. Obviously, cloud service providers are a meaningful part of the exabytes shipped on our part. But the absorption that I alluded to in my prepared remarks was a mixture of both traditional enterprise customers, if you want to call it that, as well as cloud service providers.

Okay, interesting. And then post-SanDisk now, is there anything that you were contemplating on the Hitachi integration that now needs to be altered because of the SanDisk integration? Are there facilities that perhaps now you need to keep, or does it change what could have happened in any way?

Well, I think the first thing to keep in mind, Rich, is that given the complementary nature of the SanDisk and Western Digital transaction, it’s a different kind of an integration in that regard. That’s an important thing to contemplate. Simplistically, the answer to your question is, no it doesn’t really alter anything. There are some additional things that we’ll have to think about that add a bit more complexity, for example, systems integrations and things like that. So we’ll have to look at not only the pre-existing WD and HGST systems but also what platform SanDisk is on and how do we manage that process. But other than a few items like that, we intend to more or less proceed full steam in terms of the integration on the WD/HGST side.

Steve, on your comments about absorption on the capacity side, can you help us think through either how much do you think incremental demand has migrated into the first half versus second half for the calendar year because of those purchases? Alternatively, how much of the absorption do you think we are through, and what innings are we in that? And I have a follow-up.

Well, let me comment on it this way. One of the things that we talked about in our last earnings call, and also I believe our largest competitor also commented on it, is typically the, I’ll call it the mix of exabytes that gets shipped. You have about 40% that typically gets shipped in the first half of the year and 60% in the back half of the year. And if you look back, that’s calendar year, right, not our fiscal year. That percentage has held pretty consistent over a number of years. This year, roughly speaking, we are looking at something that’s more like 45% and 55%. So that will help kind of dimension a bit. And we would expect that absorption of capacity or exabytes shipped, that absorption will continue through the balance of this calendar year and begin to, if you want to call it abate as we begin next calendar year.

And then on the Nearline side, clearly you took some share over there. Can you talk about what happened with the pricing on a like-for-like basis for the 4 and 6 terabyte and did that influence margins? Thanks.

Well, the short answer is that, that’s not something that we call that as a particular driver of our margin performance. Olivier commented on the decline that we saw on our gross margin was driven entirely by mix, and that being a stronger mix of lower margin products, namely drives for gaming consoles as well as 2.5 drives that go in notebooks, which have consistently been below the corporate average. That’s what impacted our margin, and whether or not other things impacted, we are not calling anything else specifically.

I just wanted to ask about the regional trends, particularly Europe but maybe also the US. The European year-over-year growth deteriorated quite a bit in the quarter to minus 15%, from minus 8 last quarter; so I wondered if you guys could give us a little color on what’s going on there. Is that just consumer demand deteriorating or are there other things happening? And then same for the North American region, down 6% after being up 16.5%. Is that just data center or cloud-oriented stuff, or can you give us a little bit of color on those regional trends? Thanks.

I don’t know if there’s anything particularly to call out other than Europe has been weak from a broader macroeconomic perspective. It’s always difficult to draw conclusions from our geographic data because so much of our product is manufactured in Asia or is passed on to customers that manufacture in Asia, so it doesn’t really speak to the end market. But we have seen some, as you know, the macroeconomic situation in Europe has kind of impacted some of our more retail-oriented businesses, but I am not sure I would call out anything specific beyond that.

And the European drives, I guess, are more Europe linked. Is that correct? Whereas elsewhere you get more, especially in Asia, it leaks out into other regions or is that the wrong way to see things?

Well, probably in Europe you’re right, because there isn’t a lot of manufacturing done in Europe, right. North American, you get a little bit of a mix because there is some manufacturing our systems that may go elsewhere and certainly in Asia. But Europe’s a little bit more of a true number. But Europe’s been from a broader perspective weak for a while.

Yeah, you’re not the only ones.

Can you hear me okay?

Sure.

Just one question, just switching gears. Could you talk about your solid-state drive business a little bit? I think you mentioned a little bit of capacity issues or rather competitive issues are increasing during the quarter and then relative to average capacities and some of the trends you mention in the enterprise. How do those relate to what’s going on in SSDs, utility, and to the rest of the calendar year? And that’s all I had, thanks.

We’ve enjoyed, through strong product execution, a pretty strong market position in our enterprise SSD business. It’s a very competitive market as I mentioned in my comments and quite simply, not for any one particular issue or another other than just increased competition, and we gave back a little bit of our share in this past quarter.

And just in terms of average capacities or how the business trends through the rest of the year?

Overall, or enterprise SSD specifically?

Just enterprise SSDs.

That’s nothing surprising. We continue to see, as product generation gets announced, we continue to see an upward trend in average capacity shipment.

So my question is just regarding seasonality. I believe on the June quarter call you guys talked about seasonality being abnormal because of just the depressed nature of client demand primarily. But just wanted to update your thoughts, ideally sort of effects MOFCOM just the seasonality of earnings in this fiscal after having a couple more quarters or at least another quarter under your belt.

I don’t know if I’d call it. If you look at seasonality, if you look at the client’s business, client plus gaming, which really drove most of the increase in TAM from calendar Q2 to calendar Q3, the seasonal uptick in that regard was pretty consistent with what we normally see. It’s normally up anywhere from 6%, 7%, 8%, something in that range, and that’s kind of what we saw in those segments of the market. The other thing that’s happened is that, while we used to see further increases in volumes in calendar Q4, that’s kind of dissipated or gone away as our customers generally build earlier in the year, and then they will put those on boats or longer transport things to save transportation costs. So the seasonality from calendar Q3 to Q4, which has been going on for a while, is much more muted, hence our view of a flattish TAM going into calendar Q4.

I guess sort of still wondering here, you are obviously massively under-shipping and market demand, and I think units are down 30% on the client side. I am just wondering if there is hope at all here to see more recovery to closer to end market demand.

Well, we’ll have to see. We’ve said this before, although we’ve seen some signs of stabilization in the PC market, I would not necessarily characterize us as being particularly bullish on that segment. And we have seen, there was inventory drawdown through the whole kind of supply chain that’s impacted our business a little bit in terms of where we may be at a sync a bit in terms of what you’re seeing from an overall PC unit perspective. Additionally, we continue to see penetration of client SSDs in those systems, consistent with our expectations though by the way, but that further disconnects us from the overall unit numbers that you might see from a PC perspective.

Hi guys, this is Keith here. Sorry if there’s any background noise. But my question I want to focus back on SanDisk still because I didn’t have the opportunity to ask a question. More specifically, I am still struggling to see how the SanDisk deal is creating shareholder value. One of the ten multiple companies is buying a 30 multiple company. Steve, the question I want to pose to you, if I could, I want to understand what your fundamental assumption is about the SanDisk acquisition as you look out over the next two to three years, and how do you reach that conclusion particularly with some thoughts surrounding what I think about is the retail business or the replacement and card, and then I have a follow-up also related to SanDisk.

The short answer to your question, Keith, is do we expect the SanDisk business to grow over time? The answer to that is yes. We see growth opportunities in helping to expand our broader footprint in terms of the enterprise SSD area, where we think that not only is that an area that’s outpacing overall market growth, but also a higher value opportunity for us. We also think that there are growth opportunities in terms of client SSDs as well, certainly as it relates to our base business, and additionally, we believe there is growth opportunity in terms of embedded solutions, things like tablets, cellphones, etc. Yes, related to the removables or the retail segment, that’s a great business but it’s not a growing business. So we fully understand and acknowledge that.

Okay. And maybe if I could ask my follow-up then on the cost side. During the conference call last week, I think you articulated broader synergies, call it $500 million. And if I look at the cost structure of SanDisk alone, I would have thought there would have been more on OpEx, but maybe I didn’t understand the characterization because you’re combining. Maybe I didn’t understand the characterization of the $500 million opportunity, but I would have thought the companies, there’d be frankly more opportunities to reduce costs over the next couple of years beyond $500 million. But if you could just flush that out a little bit and then I’ll cease the floor.

Sure. So a couple of comments on that. So when we talked about $500 million of synergies related to the SanDisk acquisition, we were specifically talking about that was within 18 months of the close of the transaction. We did not indicate that that was the total synergies. In other words, we think that there are additional opportunities. We have not quantified those or publicly talked about those at this point. The additional thing is that regarding that $500 million of synergies, the lion's share of that is related to the advantage that we would get by being vertically integrated as it relates principally to our enterprise SSD business. There are some OpEx synergies, but we have not quantified that breakout specifically.

Steve, I think you said you thought of the TAM and the fourth calendar quarter would be roughly flat. I was hoping you could provide some detail on the different markets you mentioned that the PC market appears to be stabilizing. Can you give us some sort of directional commentary on the different end markets for HDDs?

Yeah, I’ll give a little bit of color on that. So we would expect, and these are pretty small changes though, by the way. We would expect that we’ll see some softening in terms of gaming demand as well as in notebook demand, offset by a little bit better enterprise demand. Again, these are subtle changes that drive some of our margin improvement because we’ll get a little bit - when things play out the way we expect, we’ll get a little bit of the mix benefit as a consequence of that.

And then I think you also mentioned in your commentary that the active archive system is expected to drive meaningful revenue next year. Can you help us understand what type of TAM you think that product has and what the revenue opportunity for that product is? Thank you.

So as we define that, the active archive TAM we see that is a multi-billion dollar total addressable market for that solution. There’s both the currently defined version of that as well as we think a new green field opportunities to create market with that solution given its value propositions. So I would look at it as a multi-billion dollar market, growing at a fairly fast clip.

Steve, question on the SanDisk acquisition. Running a dry business is quite different than running a leading-edge memory technology business. So maybe could you talk about the plan to retain SanDisk's R&D team and any execution risk in the integration you see?

So Monika, SanDisk has got some great people. We look forward to welcoming them to the team, and we certainly intend to retain the talent that exists there, and certainly that talent that relates to those parts of the business that we don’t necessarily have the same experience, and that’s certainly the semiconductor business. So we look forward to bringing them onboard.

Do you see any execution risk in the integration?

Well there is execution risk in everything to be perfect, and the thing that I always focus the most on and investors will ask me often what do you worry about? I want to make sure that we, every day as a company, dot i's and cross t's, and that’s what we do better than any company on the planet, and that’s what we intend to do as we look to not only execute the WD/HGST integration but also as it relates to future integration of SanDisk. So absolutely, are there risks, and we are going to manage that carefully, and I’m going to keep our teams intensely focused on that.

And then given that Unis is entrusting a 15% stake in WD, do you think it could add any regulatory risk for getting approval for the SanDisk acquisition?

Well, we are proceeding with our application; in fact our application regarding this process is in and has been expected. We were very careful as to how we structured that transaction and Unis' representation on our Board. We feel pretty good about that, and we’re proceeding with regulatory review at this point, and we’ll keep you posted as things progress.

I hope I do think your lead is in the 8 terabyte capacity drive space. How would you expect that to change, if at all, as the industry moves to 10 terabytes?

Well, it’s difficult to mention how far ahead we are because we don’t have perfect visibility into where our competition is. But let me make this comment: our 10 terabyte drive, which we haven’t announced exactly when that will be available, is a PMR-based solution. And depending upon how you encounter our third or fourth generation helium drive, there have been a lot of learnings along the way, and we have developed. So when you’ve got a three or four generation lead on your competition, that’s a fairly material lead. Now that being said, we fully respect our competition and we are not going to rest on our laurels; we are going to keep marching forward.

And then a question on inventory. You commented on PC channel inventory coming down. Obviously, we can see your balance sheet inventory that came down, but where do you think the industry is in terms of both channel inventory, which has historically been quite low in recent quarters, and also OEM inventory at their manufacturing hubs?

The inventory is still within our range in the lower end of the range nevertheless.

And do you have any visibility into the OEM inventory at their hubs?

We think that those are within comfortable ranges, but we don’t have any specific visibility as to any issues.

Going back to your commentary regarding some share shift in the SSD, how do you see this evolving into next year? And I have a follow-up.

That’s a difficult question to answer, how do we see share evolving into next year. I mean, obviously, what we’re going to continue to do is execute on our product plan and continue to delight our customers, and share will turn out where it will turn out, and so we are going to try to earn our business every day.

Let me rephrase it as a follow-up. Do you see new technologies like 3D NAND becoming a catalyst looking to next year, or your competitors just get into margin and selling at a lower price? And as a follow-up to that, do you see a change in your driver, especially SanDisk selling more of a hybrid product as a way to scale a rather niche segment of the market?

So let me comment on that. I think we see 3D as the next generation underlying media. We have plans to address products that are built on that in the future. So that will be part of our competitive profile and there are both, of course, economic benefits of that, but there are also product performance benefits in that architecture. So I think we’ll see the market go through a transition, and we have our own internal plans to undertake that.

So is your competition just basically sitting at depressed prices? Is that what the competition has done?

We see continued competition around that market as it progresses, and nothing is sort of outside of our general expectations.

Got it. And quickly on a hybrid drive, is your strategy changing here especially with SanDisk added to your portfolio?

At this point, we don’t have any specific changes we’d articulate.

Thanks, guys, for taking the question. Two if I could. The first is, with regards to TAM, TAM and exabytes go down this TAM stabilized, and you guys are expected to remain inside sort of any particular range.

In terms of overall exabyte growth for the market, we are predicting a 15% growth as a CAGR, and particularly as it comes, capacity enterprise, we commented on that earlier; we see a 35% growth in CAGR.

That’s very useful. And then anything on the TAM range?

Longer term, we would expect that TAM to be flat to maybe down low single digits.

And then just as a follow-up, I guess our work really completes summers pointing to PC, SSD pricing, including some OEM grade stuff becoming a little bit more aggressive than it typically had been and more recently had that. Just interesting in getting your view on if you’ve seen this yet, if it’s impacted unit placement in any way and if you expect it to potentially have an impact going forward.

You’re referring to PC/OEM pricing?

Yeah, on the SSD side.

I would just comment that I don’t think we’ve seen anything notable from our perspective.

Steve, I’m just wondering just back to SanDisk if you can explain the big question we get is whether this is a defensive strategy or an offensive strategy. In other words, is buying SanDisk your absolute best strategy for you to take on given your decline in industry, or is it more an offensive strategy in the fact that you believe exabyte growth is going to continue to grow and HDDs and solid-state drives will coexist for an extended period of time, and therefore you are best suited to serve a customer that’s also consolidating?

Yeah, so one comment, and not to take offense to the way the question is phrased, but I don’t know if I necessarily like characterizing that as either offensive or defensive. This is a strategy that we’ve thought about quite a bit. We think it is going to be good for our shareholders, good for our customers, and it’s going to allow our company and our business to grow. So if you want to characterize that as offensive, then feel free to do so.

Okay, that’s fair. And then as you look at just the disk drive business Steve, as we look out at a TAM that kind of follows a flat to low single digit, given the mix and complexity of enterprise drives as well as bigger capacity branded drives being shipped, we’ve made great progress on non-PC revenue as a mix of our business, and actually over the last four years its modestly grown. Three or four years from now, do you believe that is the lion’s share of the percentage of revenue?

Yes. Now what percentage we’ll have to see, and we certainly haven’t called anything out publicly. But clearly the mix of our business in the traditional hard drive space is improving. And as it improves and as the PC related part becomes a frankly smaller and smaller part of our business, sooner or later there’s going to be an inflection point. It will begin to show improvement in revenues and in terms of the overall hard drive market, as well as a better margin posture as it relates to that underlying business. So the hard drive business remains a great business; it’s just a mix of shifting in a favorable way.

I think several investors may be missing that. I appreciate you answering that. Thanks, Steve.

First question is on the strategy of the company in China going forward. Post all that you’ve announced, should we expect any changes in how WD plans to do business or any other types of partnerships you may look to form, especially given that Unis has made another investment in collaboration with US technology?

Yeah, nothing to talk about at this point. Obviously we are going to continue to evaluate and think through our go-to-market strategy in China. China as a market, first up it’s a huge market, it’s a growing market, it’s evolving market. As you see some of the hyper-scale guys there grow or telecom companies, we’re going to have to look at ways that we evolve our go-to-market capabilities in that market, but nothing specifically to talk about now.

Question on the gross margin. Certainly when some of the preliminaries all started to come out from HDD companies with more of margins, there’s a lot of concern in the market that there was an increase in pricing pressure. I know you commented that the decline at the WD was due to mix. I was actually wondering if you could just talk about pricing trends within some of the segments and translate on a quarter-to-quarter basis whether you are seeing some pricing increases on some of the categories as well as you talked about in the past being selling products especially Helium products on a cost basis. So any color you could provide on pricing within segments would be helpful.

So relative to what we saw, again our margin decline on a quarter-on-quarter basis was purely driven and mix related. I don’t think there’s anything unusual from our perspective to call out on the pricing front.

Just a moderate question: days inventory that has been elevated for three quarters on a year-over-year basis. Are we expecting that to continue to be the case?

Yes, we are managing our cash flow tightly and we would expect the flow not to have been achieved. So we think we can improve further on this metric.

And then this has been addressed to a certain extent, but I’d like to try to tease it out a little bit more. The $500 million of synergies with SanDisk, from my understanding, there are three main buckets - I am sorry, not OpEx synergies, overall synergies. There are three main buckets. If there’s anything else I’m missing please let me know, but can you rank order what you believe each of these are going to be in terms of magnitude?

Well, the first thing is just to clarify we haven’t called any of that out in terms of what you’re talking about. I am not going to comment specifically on that. What we have said is that the lion's share of that $500 million will be the benefit that we will get by being vertically integrated in our SSD business or existing SSD business. There will be some OpEx synergies, but we have not quantified that. And by the way, the other thing is that we’ve indicated that the $500 million will be 18 months after the close of the transaction, which basically means that there will be further synergies beyond that 18 month period that we have to quantify publicly.

I want to go off on the same topic. So the $500 million in synergies it seems like you’re describing, Steve, as these are benefits from owning the raw materials in-house. So is that really a synergy, I guess, or is that just kind of recapturing the profit that SanDisk would have brought on otherwise? My question is: when you add one plus one does it equal two plus $500 million, right? If you could just clarify that one more time, I think it would help.

Well, it’s exclusive of the benefits that we’ll get from the existing SanDisk business. So it’s additive to whatever you might happen to estimate that the existing SanDisk business would be able to generate. So it’s additive.

And then just to be crystal clear, this includes no OpEx at all, no elimination of public company expenses, that sort of thing; it’s a very conservative number.

I don’t know if I used the word conservative, but it does include an estimate of some OpEx synergies. But we haven’t quantified specifically what the OpEx versus the vertical integration benefits are; we haven’t quantified that difference. But we’ve also indicated that we would expect that number to increase over time beyond that 18-month period.

So thank you again for joining us today. In closing, I want to thank all of our employees and suppliers for their commitment and outstanding execution, and our customers for their continued business. Thank you so much.