Western Digital Corp. – Company View

A statement by John F. Coyne, President and Chief Executive Officer of Western Digital is given below. The statement has been taken from the company’s 2007 annual report.

Fiscal 2007 was another strong year for Western Digital, demonstrating the flexibility and consistency of our efficient business model. Customer satisfaction with WD’s broad product line, superior quality and reliability, service excellence and a solid overall value proposition continue to drive our business growth.

The fiscal 2007 performance provides further evidence of steady financial results and continued excellence in execution by the WD team:

  • Revenue in fiscal 2007 was $5.5 billion, an increase of 26 percent from last year.
  • Earnings per share of $2.50 compared with $1.76 per share in fiscal 2006, a 42 percent increase.
  • We generated over $600 million in cash from operations during fiscal 2007, a 68 percent improvement over 2006, and ended the year with $907 million of cash and short-term investments, an increase of 30 percent over the prior fiscal year.
  • Fiscal 2007 represented our fifth consecutive year of substantial growth in our research and development and capital spending to support a significant deepening and acceleration of our technology capability and a broadening of our product portfolio. Over the five-year period, we have grown our investment spending 270 percent, from $170 million in fiscal 2002 to $630 million in fiscal 2007.
  • While maintaining our focus in the high-volume desktop market, we have made major strides in growing our footprint in non-traditional markets such as 2.5-inch notebook drives, branded products, consumer electronics (CE) and Serial ATA (SATA) drives for the enterprise space.
  • We more than doubled our 2.5-inch drive shipments, year-over-year, to 12.3 million units.
  • Revenue from Branded Products grew by over 180 percent year-over-year to more than $870 million as we established an industry-leading position in a market segment that surged to prominence as consumers began taking seriously the need to backup and remotely access their valuable digital content.
  • In Enterprise SATA, the fastest growing segment of enterprise storage, we led the industry in introducing 3.5-inch SATA solutions in 2003. Our share in this segment is now similar to our position in the desktop and CE markets.
  • As a result of this activity in newer markets, we have seen our revenue from non-desktop PC drives expand to 43 percent of revenue in fiscal 2007, compared with 29 percent in fiscal 2006 and we exit the year with almost 50 percent of revenues derived from non-desktop applications.

Reflecting the continued return on our technology investments, we introduced and shipped an impressive array of new products in fiscal 2007; many of them based on new technology platforms:

  • We began our fiscal year by launching two major product platform transitions: 160 GB-per-platter 3.5-inch drives and 80 GB-per-platter 2.5-inch drives. Both transitions have been important to our business and the basis of multiple high-quality, highly reliable products. The 2.5-inch platform was our first to implement perpendicular magnetic recording (PMR); the next generation of hard drive technology that will continue propelling storage capacities for years into the future.
  • These platforms resulted in 160 GB WD Scorpio® drives for notebooks, 160 GB WD Passport® portable USB drives; more efficient 500 GB WD Caviar® desktop drives; as well as the My BookTM family of dual-drive storage devices offering one terabyte (TB) of capacity for consumers’ photos, music and video content.
  • Later in the year, WD introduced two innovative Branded Products storage appliances. The first was a simple My Book appliance that featured the newest, highest performance interface for external devices: external SATA (eSATA). The My Book Premium ES EditionTM external hard drive helps consumers increase performance and avoid technology obsolescence.
  • In February 2007, we launched what is now the flagship of our growing family of Branded Products: the My Book World EditionTM external storage system. This unique product enables consumers to access the data stored on it from anywhere in the world. It connects to a home network, and through a secure connection over the Internet, consumers can create, open, play and edit files as if those files were residing on their computer— even if they are physically thousands of miles away from their My Book World Edition external storage system. In July 2007, we acquired the assets of Senvid Corporation, maker of the innovative MioNet® software that enables the unique remote access and sharing capabilities of our My Book World Edition products.
  • With the growing market for digital video recording (DVR) applications— both consumer and commercial—WD introduced a new product brand: WD AVTM. The company for years has sold special-order hard drives with special feature sets designed specifically for use in DVRs. The market and customer base for these products have grown to a level that they are best served with a specialized product and through our broad distribution network. Recently, we introduced three new technology platforms:
  • 125 GB-per-platter 2.5-inch series of products, resulting in a WD Scorpio hard drive with 250 GB capacity;
  • High-performance 3.5-inch platform, offering up to 750 GB; and,
  • The first line of 3.5-inch drives designed primarily to reduce power consumption and help protect our environment: GreenPowerTM hard drives.

We believe the new WD Scorpio drive is the first 2.5-inch 250 GB notebook drive to hit the market in volume. It’s our fourth generation 2.5-inch and second generation utilizing PMR, and incorporates proprietary WD head technologies, as well as significant feature innovation. One of the first applications for our new WD Scorpio hard drive is in Branded Products, where WD Scorpio has been quickly integrated into the fourounce, quarter-terabyte WD Passport portable drive.

Our first 3.5-inch WD Caviar drives that implement PMR produce up to 750 GB and have a unique combination of WD features that reduce power, operate at low temperatures and offer high shock and vibration tolerance. Off the same platform are the WD RE2TM drives, which offer enterprise customers three-quarters of a terabyte for high-duty cycle applications such as servers and capacity-intensive network storage. Our Branded Products team leveraged the new capacity with a family of cavernous dual-drive 1.5 TB My Book products.

Newly introduced to Branded Products’ lineup was the My DVR ExpanderTM external DVR storage, which solves a growing consumer need for massive capacity to manage high-definition TV entertainment. This plug and play device adds as many as 60 hours of high-definition recording or up to 300 hours of standard-definition TV programming to widely installed cable set-top box DVRs.

This is a great time to be involved in the global hard drive industry. Applications for hard drives continue to proliferate in both computing and consumer markets as both workplace and lifestyle changes continue to generate massive volumes of content to be stored securely, conveniently and cost effectively on hard drives.

  • The hard drive market in 2006 generated revenues in excess of $30 billion with 435 million hard drives shipped; forecasted demand for 2007 exceeds 500 million units.
  • On a unit basis, the hard drive market is looking at a five-year CAGR of approximately 13 percent.
  • The strongest growth segments are expected to be Enterprise SATA, forecasted for nearly 40 percent growth, 3.5-inch CE at more than 30 percent, 2.5-inch notebook and 2.5-inch CE each above 20 percent.
  • Branded Products, a category which has surged to industry prominence in the last year, is forecasted to grow at a rate of 25 percent over the next five years as consumers and increasingly mobile workers continue to seek intuitive, well-designed external storage appliances to securely store and access their digital content.

At WD, we are very excited about these numerous opportunities for growth, both for the near term, and as we address the longer-term prospects represented in these industry forecasts.

We have taken important steps to ensure our continued success in addressing these outstanding market opportunities.

  • We have made and continue to make investments in the technologies and infrastructure that will enhance our ability to compete as a full-line industry leader, with the product portfolio required to capitalize on these growth trends and the capacity and cost structure to do so efficiently and profitably.
  • Our previously announced plan to upgrade and expand our Fremont, California wafer facility is underway. Our first 8-inch pilot line is expected to be in production by the end of calendar 2008.
  • Our recent acquisition of Komag Incorporated, a leading media supplier, is a very important strategic step that we believe will deliver significant advantages and synergies over the long term as we vertically integrate media into our operations.

Shortly after the end of fiscal 2007, we announced another significant WD initiative: The industry’s first line of 3.5-inch drives designed primarily to reduce power consumption and help protect the environment—WD’s GreenPower hard drives.

Our one-terabyte drive introduces this new product category. Many of our customers have been asking for low-power drive technology. The GreenPower drives have been designed specifically to reduce power consumption far below other 3.5-inch drives on the market today—as much as 40 percent less than one terabyte drives available from competitors. WD Branded Products now includes My Book appliances incorporating this technology that can store 2 TB of music, photos, video and other content.

Subsequent applications for WD’s GreenPower drive technology will emerge in CE and the enterprise. Large enterprise data centers employing GreenPower drive technology will save hundreds of thousands of dollars annually in electricity costs and will reduce carbon emissions by thousands of metric tons. We are very excited about the opportunities our customers will have to reduce energy costs and minimize their impact on the environment.

Our business strategy to efficiently produce reliable, high-quality hard drives for a growing, worldwide market continues. This approach distinguishes us in a competitive industry. It also provides value to our customers and allows us to achieve consistent financial performance.

With this proven approach, we aim to hold and build our leadership position in traditional markets and grow our presence in newer markets.

We are excited by the continuing, outstanding opportunities for growth in storage demand and are confident that the WD team values of Passion, Action, Productivity, Perseverance, Innovation, and Integrity will continue to drive profitable growth for the company and create value for all our stakeholders as we address those opportunities in the years ahead.