Western Digital Corporation (WDC) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon and thank you for standing by. Welcome to Western Digital’s Financial Results for the First Quarter Fiscal Year 2016. 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.

Thank you. This conference call contains forward-looking statements within the meaning of the meaning of the federal securities law. 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 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 SECs website or the Western Digital and SanDisk’s 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 relating 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 in to 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 drivers also continued its rapid growth, as customers embraced our expanding lineup of these multipurpose or purpose build 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 a 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 in to 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.

Ladies and gentlemen, we will now begin the question-and-answer session of today’s call. [Operator Instructions]. Our first question comes from Amit Daryanani with RBC Capital Markets. Your line is now open.

I have a question and a follow-up, just to start with, could you just talk about the benefit the MOFCOM approval have on your cash and rationability as you forward, and how do you think the timing of those benefits of 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 a color, and this is Steve. If you look at benefits that we expect from the revised MOFCOM ruling is that, first thing is that we expect to realize $400 million of annual operating expense savings and then we’ve 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’d be kind of a mixture.

Yeah let me add two comments; first of all most of the cash will be generated offshore. We commented on that 90% of the benefit would be generated outside 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 that I think it was back in September of 2002 or ’03. It will help, sorry at this track of time, but you know shortly after the acquisition the composition of our business has changed dramatically since then particularly 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 gross margin dynamic in the September quarter was up 60 basis points so you planned, mix looks like 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.

Our next question comes from Aaron Rakers with Stifel. Your line is now open.

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 on what’s the upper driver here in this current quarter, and again kind of 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 give or take before.

570.

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 would provide you an update on regular basis.

The run rate OpEx free MOFCOM synergies is 570 million.

But just to be fair, you are looking to drive that OpEx down and that’s not going to happen. Should some of that start to happen before we even get to the 12 months, is what I am asking.

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, and so 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 impact to our business. Okay.

And then as a follow-up I’m just curious on the capacity shipment trends. You talked a little bit about, 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 [stranded] like.

I am not sure I follow that question Aaron.

I guess relative to the 35% compound annual growth rate that you reference on the enterprise side going forward, 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 may be 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 in to the second half. So I think that trend we’re confident in that, and that’s specifically around the capacity enterprise segment.

Our next question comes from Rich Kugele from Needham. Your line is now open.

A couple of questions, first on the capacity enterprise side, obviously that spans more than cloud service providers. Can you just talk about to the capacity enterprise cloud service provider part of your exabyte shipments, and how you would expect to trend over the next 6 to 12 month 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 exabytes shipped on our part. But the absorption that I eluded 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 like 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 complimentary 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 is SanDisk on and how do we kind of manage that process. But other than a few items like that, we intend to more or less perceive full steam in terms of the integration on the WD/HGST side.

Our next question comes from Wamsi Mohan with Bank of America. Your line is open.

Steve on your comments about absorption on the capacity side, can you help us think through either how much do you think incremental demand half core, half migrated in to the first half versus second half for the calendar year because of those purchases or alternatively how much of the absorption do you think we are through and what innings are we in 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 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, and that’s calendar year, right, not our fiscal year. And that percentages held kind of 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 that absorption of capacity or exabyte 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. As you had some customers migrate to the 8 terabyte drivers, 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. I mean 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 the gaming console as well as 2.5 drives that go in notebooks, consistently have been below the corporate average. That’s what impacted our margin, and whether or not other thing impacted, we are not calling anything else specifically.

Our next question comes from Rod Hall with JP Morgan. Your line is open.

I just wanted to ask about the regional trends particularly Europe but may be also the US. The European year-over-year growth deteriorating 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 there are other things happening. And then same for the North American region, down 6% after being up 16.5. Is that just datacenter 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 call it 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 and the macroeconomic situation in Europe has kind of impacted some of our more retail oriented business, 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 in to 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 are 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.

Our next question comes from Steven Fox with Cross Research. Your line is open.

Can you hear me okay?

Sure.

But not that great. 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 etcetera a pretty strong market position in an enterprise SSD business. It’s a very competitive market as I eluded to in my comments and quite simply, not for anyone particular issue or another other than just increased competition and we gave back a little bit of our share on 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.

Our next question comes from James Kisner with Jeffries. Your line is open.

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 get update your thoughts, I’d like you to comment 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 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 kind of range, and that’s kind of what we saw in those segments of the market. The other things that’s happened is that, while we used to see further increase 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 kind of things to save transportation cost. 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 in to 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 draw down 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. And then 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.

Our next question comes from Keith Bachman with BMO Capital Markets. Your line is open.

Hi guys this is Keith here, sorry if there’s any background noise. But my question I want to focus back on the 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. And Steve the question I want to pose to you if I could, I want to understand what your fundamental assumption is about the SanDisk (inaudible) 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 overtime? The answer to that is yes. And we see growth opportunities won and helping to expand our broader footprint in terms of the enterprise SSD area where we think that not normally is that an area that’s outpacing overall market growth but also a higher value opportunity to us. We also think that there’s growth opportunities in terms of client SSDs as well, certainly as it relates to our base business, and additionally we think that there is growth opportunity in terms of embedded solution [investor] things, so you’ve got tablets, cellphones etcetera (inaudible). 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 may be 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 did 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 do think that those 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 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. And there are some OpEx synergies but we have not quantified that breakout specifically.

Our next question comes from Sherri Scribner with Deutsche Bank. Your line is open.

Steve I think you said you thought of the TAM and the fourth calendar quarter would be roughly flat. I was hoping if 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 market 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 drives 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, what’s the revenue opportunity for that product. 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 sort of 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 and growing at a fairly fast clip.

Our next question comes from Monika Garg with Pacific Crest Securities. Your line is open.

Steve question on 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 (inaudible) 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 then 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 everyday 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 trend integration but also as it relates to future integration of SanDisk. And so absolutely are there risks and we are going to manage that carefully and I am going to keep our teams intensely focused on that.

And then given that Unis is entrusting 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 [macifious] process that is in and has been expected. We were very careful as to how we structured that transaction and Unis’s representation on our Board, and 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.

Our next question comes from Kathryn Huberty with Morgan Stanley. Your line is open.

I hope I do think your lead is in the 8 terabyte capacity drive space and then 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 in to 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, its PMR based solution. And that’s depending upon how you encounter our third or fourth generation helium drive. There have been a lot of learnings along the way, and that we have developed and so when you got a three or four generation lead on your competition that’s fairly material lead. Now that being said, we fully respect our competition and we are not going to rest on our laurels, and 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 their manufacturing hubs.

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

And do you have any visibility in to 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.

Our next question comes from Mehdi Hosseini. Your line is open.

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

That’s a difficult question to answer, how do we see share evolving in to 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 to become a catalyst looking to next year or your competitors just get in to 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 benefit 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 in which to undertake that.

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

We see continued competition around that market as it progresses, 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 inked with the part of your portfolio.

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

Our next question comes from Ananda Baruah with Brean Capital. Your line is open.

Thanks guys for taking the question, two if I could, the first is, with regards to TAM, TAM and exabyte go down this TAM stabilized and you guys are expected to remain inside sort of any particular range, and then in that context, what is sort of the overall exabyte growth market for (inaudible) you guys are looking for over the next handful of years and then I have a follow-up, thanks.

In terms of another overall exabyte growth for the market, we are predicting a 15% growth as a CAGR and particularly as it comes, capacity enterprise 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 may be down low single digits.

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

You’re referring to PC/OEM pricing?

Yeah on the SSD side, yeah PC related.

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

Our next question comes from Christian Schwab with Craig- Hallum Capital. Your line is open.

Steve I’m just wondering just back to SanDisk if you can explain the big question we get is whether this is defensive strategy or an offensive strategy. In other word, is buying SanDisk your absolute best strategy for you to take on given your decline in industry or is 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 co-exist 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 whether the question is phrased, but I don’t know if I necessarily like the characterizing that is 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 is my follow-up question, 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 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 inflexion 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, right in a favorable way.

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

Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

First question is on the strategy of the company in China going forward and 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 be lucky to form especially given that (inaudible) has other - as we make 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, its evolving market. As you see some of the hyper scale guys there grow or telecom companies’ etcetera, etcetera, 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 trend within some of the segments can you translate on a quarter-to-quarter basis (inaudible) some pricing increases on some of the categories and also you talked about in the past being sell products especially Helium products on a [CCO] 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. And I don’t think there’s anything unusual from our perspective to call out on the pricing front.

Our last question comes from Nehal Chokshi with Maxim Group. Your line is open.

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 tease it out a little bit more. The $500 million of OpEx synergies with SanDisk, from my understanding there is three main bucket - I am sorry not OpEx synergies overall synergies. There are three main buckets from where this is going to come from PC express sales overlap, branded distribution, and interphase engineering. And 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 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. And there will be some OpEx synergies but we have not quantified that. And by the way the other thing is that we’ve indicated 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 months period that we have to quantify publicly.

We have one more question from Joe Wittine with Longbow Research. Your line is open.

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 material 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. I guess 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 its additive to whatever you might happen to estimate that the existing SanDisk business would be able to generate. So its additive.

And then just 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. We haven’t quantified that difference. But we’ve also indicated that we would expect that number to increase overtime beyond that 18 month period.

At this time, we no longer have questions on queue.

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.

Thank you, sir. So that concludes today’s conference call. Thank you all for participating, you may now disconnect.