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Article by DailyStocks_admin    (09-15-08 03:14 AM)

The Daily Magic Formula Stock for 09/14/2008 is Western Digital Corp. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 50-75%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

We design, develop, manufacture and sell hard drives. A hard drive is a device that uses one or more rotating magnetic disks (“media”) to store and allow fast access to data. Hard drives are key components of computers, including desktop and notebook computers (“PCs”), data storage subsystems and many consumer electronic (“CE”) devices.

We sell our products worldwide to original equipment manufacturers (“OEMs”) and original design manufacturers (“ODMs”) for use in computer systems, subsystems or CE devices, and to distributors, resellers and retailers. Our hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Additionally, our hard drives are used in CE applications such as digital video recorders (“DVRs”), and satellite and cable set-top boxes (“STBs”). We also sell our hard drives as stand-alone storage products and integrate them into external casings, embedding application software and presenting them as WD ® -branded external storage appliances for purposes such as personal data backup and portable or expanded storage of digital music, photographs, video and other data.

Hard drives provide non-volatile data storage, which means that the data remains present when power is no longer applied to the device. Our hard drives currently include 3.5-inch and 2.5-inch form factor drives, having capacities ranging from 40 gigabytes (“GB”) to 1 terabyte (“TB”), nominal rotation speeds of 5,400, 7,200 and 10,000 revolutions per minute (“RPM”), and offer interfaces including both Enhanced Integrated Drive Electronics (“EIDE”) and Serial Advanced Technology Attachment (“SATA”). We also embed our hard drives into WD ® -branded external storage appliances that utilize interfaces such as USB 2.0, external SATA, FireWire tm and Ethernet network connections. In addition, we recently announced a family of hard drives specifically designed to consume substantially less power than standard drives, utilizing our Green Power tm technology.

We manufacture hard drives and head stack assemblies (“HSAs”) in Malaysia and Thailand. We also design and manufacture most of our required magnetic heads in California and head gimbal assemblies (“HGAs”) in Thailand and we design in California and manufacture in Malaysia most of our required media and substrates. For geographical financial data, see Part II, Item 8, Note 6 in the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K.

On September 5, 2007, we completed our acquisition (the “Acquisition”) of Komag, Incorporated (“Komag”) through a cash tender offer by State M Corporation (“State M”), our indirect wholly-owned subsidiary, for all outstanding shares of Komag’s common stock, which was followed by a merger of State M and Komag (the “Merger”) whereby Komag became an indirect wholly-owned subsidiary and changed its name to WD Media, Inc. The Acquisition has strengthened our production efficiencies and improved our access to and control of technology and competitive position in the worldwide hard drive industry, while enhancing our hard drive manufacturing process by integrating media. The aggregate purchase price for Komag was approximately $1 billion, consisting of cash paid for outstanding shares, transaction fees, severance and other employee-related equity payments.

Business Strategy

Our business strategy is to provide a broad selection of reliable, high quality hard drives at a low total cost of ownership and with high efficiency and speed. We believe this strategy helps accomplish the following:


• distinguishes us in the dynamic and competitive hard drive industry;

• provides great value to our customers; and

• allows us to better achieve consistent financial performance, including strong returns on invested capital.

We have designed our business strategy to accommodate significant unit and revenue growth with relatively small increases in operating expenses and to consistently achieve high asset utilization.

Industry

We design, develop and manufacture hard drives for the desktop and mobile PC, enterprise, CE and branded product retail markets. We believe that growth in the sales of hard drives has continued to outpace the growth in the sales of all PCs as there were approximately 88% more hard drives sold in the market than PCs in calendar 2007, based on industry data. We believe the following factors continue to drive this accelerating growth of hard drive sales in addition to PC applications:


• consumer use of hard drives for the playing, retention, and creation of digital content for personal use in the rapidly growing CE market;

• growth of the external hard drive or branded products market, permitting the easy storage, portability and backup of digital data such as music, photographs, or video;

• increased use of multiple hard drives in PCs for data backup and expanded storage capacity; and

• increased use of multiple cost-optimized high performance hard drives in data-intensive applications such as Internet search engines and in hard drive intensive hosts for handheld computing devices.

Additionally, we believe that the demand for 2.5-inch hard drives has grown from approximately 16% of the overall hard drive market in calendar 2003 to 34% of the overall hard drive market in calendar 2007, driven principally by the fast-growing market for notebook computers.

These factors and our product expansion strategy have gradually increased our percentage of revenue derived from non-desktop sources. In 2008, 56% of our revenue was from non-desktop sources compared to 43% in 2007.

For an additional discussion of risks relating to the hard drive industry, please see Item 1A of this Annual Report on Form 10-K.

Desktop PC Market

The desktop PC market consists of the overall hard drive market for desktop computers. Individuals use desktop computers in homes, businesses and multi-user networks. Desktop computers use software applications for word processing, spreadsheet, desktop publishing, database management, multimedia, entertainment and for other needs. Hard drives store desktop computer operating system and application software, as well as the data used by the applications.

We believe that the demand for hard drives in the desktop PC market has grown in part due to:


• the overall growth of desktop computer sales;

• the increasing needs of businesses and individuals for increased storage capacity on their desktop computers;

• the continuing development of software applications to manage multimedia content; and

• the increasing use of broadband Internet, including content downloaded from the Internet onto desktop computer hard drives.

We believe several other factors affect the rate of desktop computer unit growth, including maturing desktop PC markets in North America and Western Europe, an increase in first-time buyers of desktop computers in Asia, Eastern Europe and Latin America, and the lengthening of desktop computer replacement cycles.

Mobile PC Market

The mobile PC market consists primarily of notebook computers. Individuals use notebook computers both in and away from homes and businesses. Like desktop computers, notebook computers use software applications for various needs and hard drives store notebook operating system and application software, and the data used by the applications.

We believe that the demand for hard drives in the mobile PC market has grown in part due to:


• the overall growth of notebook sales, including increased transition from desktop computers to notebook computers;

• the increased mobility of the workforce;

• the increasing needs of businesses and individuals for increased storage capacity on their notebook computers;

• the continuing development of software applications to manage multimedia content; and

• the increasing use of broadband Internet, including content downloaded from the Internet onto notebook hard drives.

We expect the mobile PC market to continue to grow faster than the desktop or enterprise markets in the next three years. As the mobile PC market continues to evolve to a higher volume market, we believe customers are placing increased emphasis on attributes such as quality, availability, reliability, execution, flexibility, and the competitive cost structures of their hard drive suppliers. These are the same attributes that have been emphasized for many years by customers in the high-volume desktop PC market.

Enterprise Market

The enterprise market for hard drives includes workstations, servers, network attached storage, storage area networks, other computing systems or subsystems, and video surveillance. Historically, hard drives for this market have utilized several interfaces, including the Small Computer Systems Interface (“SCSI”) and Fibre Channel Arbitrated Loop (“FCAL”). Beginning in 2003, these traditional enterprise interfaces have been supplemented or have been replaced in certain storage applications by hard drives featuring the SATA interface technology, which is supported by industry standards, as well as by Serial Attached SCSI (“SAS”). SATA hard drives typically cost customers less than SCSI hard drives while offering higher capacities and maintaining similar reliability, scalability and performance.

We believe that enterprise uses of SATA hard drives will continue to increase. During the past few years, a new disk-based back-up application has emerged with high-capacity SATA hard drives augmenting SCSI hard drives, tape and optical media. This new application, popularly referred to as “near-line” storage, has created a growth market because hard drives back up or access data more quickly than tape or optical solutions, and quickly retrieve critical back-up or near-line data. The availability of SATA hard drive solutions, which are more cost effective than SCSI hard drives, promotes the increasing use of high-capacity hard drives in near-line storage applications. The low price per capacity of SATA drives has stimulated new applications such as video surveillance, video editing/broadcasting and medical imaging. These applications represent segments of a growing market for high capacity storage in non-computing imaging and multimedia professions.

Enterprise-class SATA drives are becoming commonplace for IT infrastructure applications such as databases, scientific computing, web content, web caching, web search engines and electronic mail. These applications have become an important market for high-capacity SATA hard drives. We believe that this market will consume a growing portion of the highest capacity hard drives in the next three years.

SAS is the next generation SCSI technology and is expected to replace SCSI drives over the next few years. SATA technology is compatible with SAS technology, enabling customers the flexibility of incorporating SATA hard drives in SAS storage systems. We believe the market transition from SCSI to SAS will add to the growth of the enterprise-class SATA market, which currently is estimated to be approximately 40% of the enterprise hard drive market.

High-performance applications such as blade servers are increasingly using 2.5-inch form factor hard drives, supplanting traditional 3.5-inch drives. Smaller form factors enable more drives per physical space for increased performance, higher capacity per square foot and lower power consumption. This trend demonstrates the fragmentation of the enterprise hard drive market and the need for application-specific enterprise-class hard drives.

Consumer Electronics Market

The use of hard drives in CE products has been a major growth area in recent years. Currently, the three largest segments of this market are:


• video content in applications such as DVRs;

• audio and video content in applications such as consumer handheld devices, including MP3 players; and

• hard drives in game consoles.

Since 1999, DVRs have been available for use in home entertainment systems and they offer enhanced capabilities such as pausing live television, simplifying the process of recording and cataloging recorded television programs and quickly forwarding or returning to any section of a recorded television program. Additionally, digital video disk (“DVD”) recorders increasingly incorporate hard drives to allow for DVR functionality and faster recording of content onto removable DVDs. The market for these products favors larger capacity hard drives and continues to grow in Japan, North America and Europe. Additionally, the rest of Asia Pacific shows strong interest in this market. We believe growth in this market will continue to build demand for higher capacity hard drives.

The proliferation in the CE market of more sophisticated mobile devices including cell phones and MP3 players is driving the delivery of diverse content from hard drive intensive hosts. We believe this is one of the factors influencing increased sales of enterprise-class SATA drives. We also believe that multimedia handheld devices such as video cameras and high-resolution still cameras are enabling consumer production of expansive digital content that requires increasing amounts of small form-factor hard drive storage, as well as high-capacity desktop-class hard drives for editing, manipulation and long-term storage of such content.

Hard drives with 1.8-inch or 1.0-inch form factors primarily address the consumer handheld device and portable external storage markets. The majority of hard drives used in portable media players that play both digital audio and video content are 1.8-inch form factors. Currently, we believe the markets for these handheld devices are better served by flash memory as opposed to rotating magnetic storage.

External Hard Drive Market

Most new PC systems include high-speed external interfaces, such as USB 2.0, external SATA, FireWire tm or Ethernet network connections, that permit users to supplement the storage space of their PC systems or home and small office networks with the use of external hard drives. Users store additional programs or multimedia content, and back up internal hard drives with external hard drives, as well as mobile external hard drives for mobility convenience. Although external hard drives are a small part of the overall hard drive market, we believe that sales of external hard drives will continue to grow. External storage can often be the easiest, quickest or only way of adding additional storage capacity to either a desktop or notebook computer. We believe there is an increasing consumer awareness of the need and value of securely storing personal digital content through backup applications and devices. In addition, there is opportunity for external storage as a way of expanding storage capacity in CE devices such as DVRs.

Other Market Opportunities

We regularly review opportunities to apply our knowledge of data storage technology to markets that we do not currently serve. Based on significant investments we made over the last five years, we believe we have the technology building blocks to increase our overall market penetration and be a full-line hard drive supplier. Consistent with our measured and deliberate approach to new market entries in the recent past, our approach to additional new markets will be based on a careful assessment of the risks, rewards, requirements and profit potential of such actions.

Products

We offer a broad line of hard drives designed for various markets. We market our hard drives under brand names including WD Caviar, WD Raptor, WD VelociRaptor, WD Scorpio, WD Elements, My Passport, My Book, My DVR Expander and GreenPower. These hard drives service the desktop, mobile, enterprise, CE and branded products markets, and can be found in products including desktop computers, notebook computers, enterprise storage, workstations, video surveillance equipment, networking products, DVRs, STBs and external storage appliances.

Desktop Hard Drive Products

The hard drives we design for the desktop PC market currently consist of 3.5-inch form factor products with capacities ranging from 40 GB to 1 TB. These products utilize either the EIDE or SATA interfaces, providing high performance while retaining ease of use and overall low cost of connection. The type of EIDE interface currently used in our hard drives is ATA/100, which signifies a burst data transfer rate of 100 megabytes per second, which is the maximum specified data transition that can be sustained under ideal conditions. The SATA interface available in the majority of our hard drives enable burst transfer rates of up to 300 megabytes per second.

Mobile Hard Drive Products

Our hard drives used in mobile products typically include 2.5-inch form factor drives for notebook computers. Although the desktop PC market still accounts for a majority of hard drive sales, unit shipments of hard drives for notebook computers represent a growing share of the total. We entered the 2.5-inch mobile market in September 2004. We are now shipping our fifth generation of the WD Scorpio ® product family, offering up to 320 GB of capacity. Our product expansion, including a recently announced high-performance hard drive spinning at 7,200 RPM, has enabled us to provide customers with a full-line of 2.5-inch mobile drives and helped us enhance our market position in this fast-growing market.

Enterprise Hard Drive Products

We offer multiple product lines to address enterprise market needs, including:


• the WD VelociRaptor tm , which is a 300 GB 10,000 RPM 2.5-inch enterprise-class drive with the SATA interface for enterprise applications requiring high performance and high reliability;

• the WD ® RE family of drives, with capacities ranging from 160 GB to 1 TB. The WD ® RE family serves the SATA market and has enhanced reliability features and ratings when contrasted to our desktop products; and

• low-power versions of the WD ® RE family of drives featuring WD’s GreenPower tm technology, which reduces power consumption as much as 40 percent compared with standard hard drives. Lower power consumption reduces total cost of ownership for our customers by cutting energy costs and lowering operating temperatures, which contributes to longer reliability.

Both WD VelociRaptor tm and WD ® RE drives may be used in, but are not limited to, applications such as databases, e-commerce and super computing in life science, oil and gas and similar industries, business records management, e-mail, file serving, web serving, near-line storage, medical records, engineering data management, video broadcasting and video security. The WD VelociRaptor tm also has been popular for use in the high-end desktop PC market for applications including gaming and advanced CAD/CAM (“computer aided design/computer-aided manufacturing”) systems.

Consumer Electronics Products

We offer a line of hard drives under the WD ® AV brand that are designed for use in products such as DVRs, STBs, karaoke systems, multi-function printers, and gaming systems. WD ® AV drives deliver the characteristics CE manufacturers seek most, which are quiet operation, low operating temperature, low power consumption specifications, high reliability and optimized streaming capabilities. We also offer low-power WD ® AV drive models that feature WD’s GreenPower tm technology. Lower power consumption in our WD ® AV drives results in cooler operation, which enhances long-term reliability. Our GreenPower tm technology also quiets drive operation, which is an important attribute for our consumer electronics customers.

Branded Products

We sell a broad line of WD ® -branded hard drive-based storage appliances, which are internal drives embedded into PC peripheral-style enclosures that have USB 2.0, external SATA, FireWire tm and Ethernet network connections and include software that assists customers with back up, remote access and management of digital content. We sell these branded storage appliances, as well as related adapters and accessories, through retail store fronts, online stores and distributors. These include:


• the 3.5-inch hard drive-based My Book ® family of storage appliances, which are designed to reside on desktops as PC peripherals, as well as be connected to networks, and simplify storage for mainstream consumers, and offer from 160 GB to 2 TB of capacity;

• The 3.5-inch My DVR Expander tm series of external SATA(“eSATA”) and USB 2.0 storage appliances, which adds recording time to STBs with DVR capability;

• the 2.5-inch hard drive-based My Passport ® Portable series of USB 2.0 and FireWire storage devices, which, weighing less than one-half of a pound, offer from 120 GB to 320 GB of portable storage capacity; and

• 3.5-inch and 2.5-inch internal hard drives packaged with PC installation kits under the WD brand for retail store sales.

Research and Development

We devote substantial resources to development of new products and improvement of existing products. We focus our engineering efforts on coordinating our product design and manufacturing processes to bring our products to market in a cost-effective and timely manner. Research and development expenses totaled $464 million (excluding $49 million of in-process research and development acquired in the acquisition of Komag), $306 million and $297 million in 2008, 2007 and 2006, respectively.

For an additional discussion of risks related to our development of new products, see Item 1A of this Annual Report on Form 10-K.

Technology and Product Development

Hard drives record, store and retrieve digital data. Performance attributes of hard drives, such as their ability to access and transmit data and storage capacity, are currently better than removable or floppy disks, optical hard drives and tapes, and they are more cost effective than semiconductor technology. The primary measures of hard drive performance include:


• “Acoustics” — which is the sound power emitted during hard drive operation, commonly expressed in decibels, and perceived loudness due to sound pressure, commonly expressed in sones.

• “Data transfer rate” — which is the sustained rate of data transfer to and from the disk, commonly expressed in megabits per second. One megabit equals one million bits.

• “Seek time” — which is the time needed to position the heads over a selected track on the disk surface, commonly expressed in milliseconds.

• “Spindle rotation speed” — which is the nominal rotation speed of the disks inside the hard drive, commonly expressed in RPM or latency. Spindle rotation speeds commonly stated as 5,400, 7,200 and 10,000 RPM are sometimes approximations.

• “Storage capacity” — which is the amount of data that can be stored on the hard drive, commonly expressed in GB or TB. As defined in the hard drive industry, one GB equals one billion bytes and one TB equals one trillion bytes. A byte is a digital character, typically comprised of eight bits. A bit is a binary digit, the smallest unit of information in a digital system.

• “Power Consumption” — which is the amount of electricity required to operate the drive, measured in watts.

All of our hard drive products employ similar technology. The main components of the hard drive are a Head-Disk-Assembly (“HDA”) and a Printed Circuit Board Assembly (“PCBA”). The HDA includes heads, media (“disks”), head positioning mechanism (“actuator”) and spindle motor. A rigid base and top cover contain these components in a contamination-controlled environment. The PCBA includes both standard and custom integrated circuits, an interface connector to the host computer and a power connector.

HDA: One or more disks positioned around a motor-driven spindle hub that rotates the disks comprise the disk-pack assembly. The disk is made up of a smooth substrate on which thin layers of magnetic materials are deposited. The HSA is comprised of a magnetic positioner, a pivot-arm module, on which the individual heads are mounted. Each disk has a head suspended directly above it, which can read data from or write data to the spinning disk.

PCBA: The integrated circuits on the printed circuit board typically include a drive interface and a controller. The drive interface receives instructions from the host computer, while the controller directs the flow of data to or from the disks and controls the heads. The location of data on each disk is logically maintained in concentric tracks divided into sectors. The host computer sends instructions to the controller to read data from or write data to the disks, based on logical track and sector locations. Guided by instructions from the controller, the HSA pivots in an arc, across the disk until it reaches the selected track of a disk, where the data is recorded or retrieved.

Industry standard interfaces allow the hard drive to communicate with the computer. Currently, the primary interfaces for PCs are EIDE and SATA, and the primary interfaces for enterprise systems are SCSI, SATA, SAS and FCAL. As computer performance continues to improve, the hard drive will need to deliver information faster. We believe this will continue to drive the PC industry transition to higher speed interfaces, such as SATA and SAS, to facilitate the higher data transfer rates. We currently offer the SATA interface on our WD Caviar ® , WD Scorpio ® , WD ® RE, WD VelociRaptor tm and WD ® AV hard drive families; and EIDE on WD Caviar ® , WD Scorpio ® and WD ® AV families.

The number of disks and each disk’s areal density, which is a measure of the amount of data that can be stored on the recording surface of the disk, determines storage capacity of the hard drive. The higher the areal density, the more information can be stored on a single platter. Achieving a given drive capacity requires fewer disks and heads as the areal density increases, potentially reducing product costs over time through reduced component requirements. Beginning in June 2007, we began shipping 3.5-inch hard drives with 188 GB per platter areal density and 2.5-inch hard drives with 125 GB per platter areal density. In July 2007, we introduced the WD Caviar ® GreenPower tm 3.5-inch hard drive which has 250 GB per platter areal density. In October 2007, we introduced WD Scorpio ® 2.5-inch drives that employ 160 GB per platter technology. In January 2008, we began shipping a 3.5-inch hard drive platform with 320 GB per platter areal density and in June 2008, we began shipping our WD Caviar ® family of drives at 333 GB per platter areal density. In April 2008, we began shipping WD VelociRaptor tm hard drives, 2.5-inch 300 GB drives employing the highest shipping areal density in the industry at 290 gigabits per square inch.

Head technology is one of the key components affecting areal density. Historically, there have been rapid technological changes resulting in several generations of head technology in a relatively short time. However, in recent years the time has lengthened between changes in generations of head technology. The hard drive industry has essentially transitioned from the use of longitudinal magnetic recording (“LMR”) head technology for the head writer function to perpendicular magnetic recording (“PMR”) technology, which allows for significantly higher storage capacities. In addition, the industry has made the transition to tunnel-junction magneto resistive (“TMR”) technology for the head reader function. We have completed the transition to PMR and TMR in our 2.5-inch products and in the majority of our 3.5-inch products.

With the transition to PMR, media plays a much more important role in achieving higher areal density. PMR demands a much tighter interaction and matching between head and media designs. The acquisition of Komag has enabled us to be vertically integrated in the two most important technology components of hard drives (heads and media), and has enabled us to achieve a more optimum design and utilization of these components.

We invest considerable resources in research and development, manufacturing infrastructure and capital equipment of head and media components, in order to secure our competitive position and cost structure.

The WD ® product line generally leverages a common platform for various products within product families with different capacities to serve differing market needs. This platform strategy results in commonality of components across different products within product families and, in some cases, across product families, which reduces exposure to changes in demand, facilitates inventory management and allows us to achieve lower costs through purchasing economies. This platform strategy also enables our customers to leverage their qualification efforts onto successive product models.

Fiscal 2008 represented the sixth consecutive year of substantial growth in our research and development and capital spending to support our significant broadening of our product and technology portfolios. Over that six-year period, we have grown our investment spending 173% from $170 million in fiscal 2002 to $464 million in fiscal 2008. As a result of this investment activity, we continue to expand our business beyond the desktop PC market into newer markets or markets in which we have not previously participated. Such investments have allowed us to execute against our strategic objective of revenue diversification to address the growth of new applications for hard drives and fast-growing new market opportunities.

We are currently expanding our existing head wafer fabrication facilities in Fremont, California to accommodate our anticipated growth. The expansion will involve a process change to utilize 8-inch wafers from 6-inch wafers and will cost an estimated $280 million in the fiscal 2009 to 2010 timeframe. This will be in addition to our ongoing capital expenditures for hard drive and head assembly, and our anticipated capital expenditures for media development and manufacturing following our planned acquisition of Komag.

CEO BACKGROUND

Mr. Coyne, 58, has been a director since October 2006. He joined us in 1983 and has served in various executive capacities. From November 2002 until June 2005, Mr. Coyne served as Senior Vice President, Worldwide Operations, from June 2005 until September 2005, he served as Executive Vice President, Worldwide Operations and from November 2005 until June 2006, he served as Executive Vice President and Chief Operations Officer. Effective June 2006, he was named President and Chief Operating Officer. In January 2007, he became President and Chief Executive Officer. Mr. Coyne is a director of Jacobs Engineering Group Inc.

Mr. Leyden, 56, re-joined us in May 2007 as Executive Vice President, Finance, and was promoted to Executive Vice President and Chief Financial Officer in September 2007. From December 2001 to May 2007, Mr. Leyden served in senior finance capacities at Sage Software Inc. and Sage Software of California, subsidiaries of Sage Group PLC, a U.K. public company that supplies accounting and business management software to small and medium-sized businesses, including as Senior Vice President, Finance and Chief Financial Officer from May 2004 to May 2007, and as Vice President, Finance and Chief Financial Officer from December 2001 to May 2004. Mr. Leyden previously served in various worldwide finance, manufacturing and information technology capacities with us from 1983 to December 2000.

Mr. Bukaty, 51, joined us in 1999 as Vice President, Corporate Law. He was appointed to Vice President, General Counsel and Secretary in March 2002, and to Senior Vice President in January 2004, and assumed his current position as Senior Vice President, Administration, General Counsel and Secretary in October 2004.

Dr. Moghadam, 64, joined us in October 2000 as Vice President, Engineering and site manager of our San Jose facility. He served as Senior Vice President, Research and Development from November 2004 to November 2005 and was appointed Senior Vice President and Chief Technology Officer in November 2005.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Company

We design, develop, manufacture and sell hard drives. A hard drive is a device that uses one or more rotating magnetic disks (“media”) to store and allow fast access to data. Hard drives are key components of computers, including desktop and notebook computers (“PCs”), data storage subsystems and many consumer electronic (“CE”) devices.

We sell our products worldwide to original equipment manufacturers (“OEMs”) and original design manufacturers (“ODMs”) for use in computer systems, subsystems or CE devices, and to distributors, resellers and retailers. Our hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Additionally, our hard drives are used in CE applications such as digital video recorders (“DVRs”), and satellite and cable set-top boxes (“STBs”). We also sell our hard drives as stand-alone storage products and integrate them into external casings, embedding application software and presenting them as our own WD ® -branded external storage appliances for purposes such as personal data backup and portable or expanded storage of music, photographs, video and other digital data.

Hard drives provide non-volatile data storage, which means that the data remains present when power is no longer applied to the device. Our hard drives currently include 3.5-inch and 2.5-inch form factor drives, having capacities ranging from 40 gigabytes (“GB”) to 1 terabyte (“TB”), nominal rotation speeds of 5,400, 7,200 and 10,000 revolutions per minute (“RPM”), and offer interfaces including both Enhanced Integrated Drive Electronics (“EIDE”) and Serial Advanced Technology Attachment (“SATA”). We also embed our hard drives into WD-branded external storage appliances that utilize interfaces such as USB 2.0, external SATA (“eSATA”), FireWire tm and Ethernet network connections. In addition, we recently announced a family of hard drives specifically designed to consume substantially less power than standard drives.

We manufacture hard drives and head stack assemblies (“HSAs”) in Malaysia and Thailand. We also design and manufacture most of our required magnetic heads in California and head gimbal assemblies (“HGAs”) in Thailand, and we design in California and manufacture in Malaysia most of our required media and substrates.

On September 5, 2007, we completed our acquisition (the “Acquisition”) of Komag, Incorporated (“Komag”) through a cash tender offer by State M Corporation (“State M”), our indirect wholly-owned subsidiary, for all outstanding shares of Komag’s common stock, which was followed by a merger of State M and Komag (the “Merger”) whereby Komag became an indirect wholly-owned subsidiary and changed its name to WD Media, Inc. The Acquisition has strengthened our production efficiencies and improved our access to and control of technology and competitive position in the worldwide hard drive industry, while enhancing our hard drive manufacturing process by integrating media. The aggregate purchase price for Komag was approximately $1 billion, consisting of cash paid for outstanding shares, transaction fees, severance and other employee-related equity payments.

Results of Operations

In accordance with U.S. generally accepted accounting principles, operating results for Komag prior to the date of the Acquisition (September 5, 2007), including the first two months of fiscal 2008 and the fiscal years 2007 and 2006, are not included in our operating results and are therefore not discussed. Accordingly, 2008 revenues and expenses reflect the addition of results from our media operations since the date of the Acquisition while the 2007 and 2006 results do not include operating results for Komag prior to the date of the Acquisition. This affects our discussion of changes in our revenues and expenses comparing these periods. In connection with the Acquisition, we incurred charges for in-process research and development and transition costs, which impacted our earnings in 2008.

Fiscal 2008 Overview

In 2008, our net revenue increased by 48% to $8.1 billion on shipments of 133 million units as compared to $5.5 billion and 97 million units, respectively, in 2007. In 2008, 56% of our hard drive revenue was derived from non-desktop sources including CE products, enterprise applications, notebook computers and retail sales as compared to 43% in 2007. Gross margin percentage increased to 21.5% from 16.5% in 2007 and operating income increased by $591 million to $1.0 billion. As a percentage of net revenue, operating income was 12.4% in 2008 compared to 7.6% in 2007. Net income in 2008 was $867 million, or $3.84 per diluted share, compared to $564 million, or $2.50 per diluted share in 2007. We successfully completed our acquisition of Komag, and have completed the integration of the media operation, which is generating technology and cost contributions to the overall business.

Summary Comparison of 2008, 2007 and 2006

Fiscal Year 2008 Compared to Fiscal Year 2007

Net Revenue. Net revenue was $8.1 billion for 2008, an increase of 48% from 2007. Total unit shipments increased to 133 million as compared to 97 million for the prior year. This unit increase resulted from an increase in higher overall demand for hard drives and our continuing diversification into non-desktop markets, including mobile, consumer electronics, enterprise and branded products. For example, we shipped 37 million 2.5 inch drives to the mobile and branded markets in 2008 as compared to 12 million units in 2007. Additionally, we shipped 15 million units to the DVR market in 2008 as compared to 10 million units in 2007. ASPs increased to $59 due to an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions. Changes in revenue by geography generally reflect normal fluctuations in market demand and competitive dynamics as well as an increase in mobile drives sold to Asia. Changes in revenue by channel are a result of increases in sales of mobile hard drives to OEMs and an increase in sales of branded products due to the growing worldwide acceptance of our My Passport ® and My Book ® external digital storage appliances.

Gross Margin. Gross margin for 2008 was $1.7 billion, an increase of $839 million, or 93% over the prior year. Gross margin percentage increased to 21.5% in 2008 from 16.5% in 2007. The factors contributing to this increase were an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions. Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher mix of products based on newer, more cost-effective technologies and the contribution of media operations.

Operating Expenses. Total operating expenses, consisting of research and development (“R&D”) and selling, general and administrative (“SG&A”), decreased to 8.5% of net revenue in 2008 compared to 8.9% in 2007. R&D expense was $464 million in 2008, an increase of $158 million, or 52% over the prior year. This increase in R&D expense includes $75 million relating to the acquired media operations, $52 million related to product development to support new programs and $31 million in incentive and equity compensation. As a percentage of net revenue, R&D expense remained consistent at 5.7% in 2008 compared to 5.6% in 2007. SG&A expense was $220 million in 2008, an increase of $41 million, or 23%, as compared to 2007. This increase in SG&A expense includes $28 million for the expansion of sales and marketing to support new products and $13 million in higher incentive and equity compensation. As a percentage of net revenue, SG&A expense decreased to 2.7% in 2008 from 3.3% in 2007 primarily due to an increase in net revenue in 2008 compared to 2007.

During 2008, we recorded a $49 million charge to operating expense related to an in-process research and development project acquired from Komag involving technology for higher recording densities on advanced perpendicular recording media. As these advanced products were not ready for commercial production and had no alternative future use, the fair value of the development effort did not qualify for capitalization and was immediately expensed. For additional information regarding acquired in-process research and development, see Part II, Item 8, Note 11 in the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K.

Interest and Other Income (Expense). Net interest and other expense was $25 million in 2008 compared to net interest and other income of $28 million in 2007. This decrease is a result of higher debt balances and realized and recognized losses on investments of $13 million.

Income Tax Expense (Benefit). Income tax expense was $114 million in 2008 compared to an income tax benefit of $121 million in 2007. Tax provision as a percentage of income before taxes was 12% in 2008 compared to tax benefit as a percentage of income of 27% for 2007. Differences between the effective tax rates and the U.S. Federal statutory rate are primarily due to tax holidays and incentive programs and the current year generation of income tax credits. We have tax holidays in Malaysia and Thailand that expire at various times through 2022. In 2008, income tax expense also includes net charges of $75 million for taxes related to the license of certain intellectual property to a foreign subsidiary. In 2007, the tax provision was impacted by a favorable adjustment to the company’s valuation allowance for deferred tax assets of $126 million. In the fourth quarter of 2007, we reversed the remaining valuation allowance for our deferred tax assets based upon a determination that it was more likely than not that our deferred tax assets will be realized. The realization of the deferred tax assets is primarily dependent on our ability to generate sufficient earnings in certain jurisdictions in future years. The amount of deferred tax assets considered realizable may increase or decrease in subsequent periods based on fluctuating industry or company conditions.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), as of June 30, 2007. As a result of the implementation of FIN 48, we recognized no adjustment in the net liability for unrecognized tax benefits. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was $58 million, all of which would affect our effective tax rate if realized. During the year ended June 27, 2008, we recognized a $17 million increase in the liability for unrecognized tax benefits and recorded $32 million of liabilities for unrecognized tax benefits related to Komag. As of June 27, 2008, we had approximately $107 million of unrecognized tax benefits which included the $32 million of gross unrecognized tax benefits related to Komag.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Third Quarter Overview

Following is a summary of our financial performance for the third quarter of 2008.
• Consolidated net revenue totaled $2.1 billion, including $89 million from sales of media and substrates.

• Revenue from sales of hard drives was $2.0 billion, an increase of 43% over the prior-year period.

• Fifty-four percent of our hard drive revenue was derived from non-desktop markets, including notebook computers, CE products, enterprise applications and WD branded product sales, as compared to 47% in the prior-year period.

• Hard drive unit shipments increased by 41% over the prior-year period to 34.5 million.

• Gross margin increased to 22.6%, compared to 15.8% for the prior-year period.

• Operating income was $298 million, an increase of 159% over the prior-year period.

• We generated $431 million in cash flow from operations in the third quarter of 2008, and we finished the quarter with $949 million in cash, cash equivalents and short-term investments.

We expect revenue and gross margin for the June quarter to be lower than the seasonally stronger March quarter. Additionally, competitive market dynamics that began in March are expected to result in competitive pricing at the high end of historical norms in the June quarter. Operating expenses are anticipated to remain consistent as we continue to invest in new products and technology.
Results of Operations
In accordance with U.S. generally accepted accounting principles, operating results for Komag prior to the date of the Acquisition (September 5, 2007), including the three and nine months ended March 30, 2007, are not included in our operating results and are therefore not discussed. Accordingly, the three and nine months ended March 28, 2008 revenues and expenses reflect the addition of results from our media operations since the date of the Acquisition while the three and nine months ended March 30, 2007 results do not include operating results for Komag prior to the date of the Acquisition. This will affect our discussion of changes in our revenues and expenses comparing these periods. In connection with the Acquisition, we incurred charges for in-process research and development and transition costs, which impacted our earnings for the nine months ended March 28, 2008.
Net Revenue

For the quarter ended March 28, 2008, net revenue was $2.1 billion, an increase of 50% over the quarter ended March 30, 2007. This includes $89 million from sales of media and substrates relating to the acquired media operations. Total hard drive shipments increased to 34.5 million for the third quarter of 2008 as compared to 24.5 million for the third quarter of 2007. For the nine months ended March 28, 2008, net revenue was $6.1 billion, an increase of 48% over the nine months ended March 30, 2007. This includes $249 million from sales of media and substrates relating to the acquired media operations. Total hard drive shipments increased to 98.1 million for the nine months ended March 28, 2008, as compared to 71.7 million for the nine months ended March 30, 2007. These unit and revenue increases resulted from higher overall demand for hard drives with higher capacities and our continuing diversification into non-desktop markets. For example, we shipped 10.2 million 2.5-inch mobile drives in the third quarter of 2008 as compared to 3.7 million units in the third quarter of 2007. We shipped 3.1 million units to the DVR market in the third quarter of 2008 as compared to 2.6 million units in the third quarter of 2007. For the nine month period, we shipped 24.9 million units of 2.5-inch mobile drives compared to 8.5 million the year before, and we shipped 10.9 million units to the DVR market compared to 7.7 million the year before. In addition, revenue from branded products increased to $330 million, or 16% of hard drive revenues for the three months ended March 28, 2008, as compared to $266 million for the prior year’s comparable period, or 19% of hard drive revenues. For

the nine months ended March 28, 2008, revenue from branded products increased to $1.0 billion, or 17% of hard drive revenue, as compared to $642 million for the prior-year period, or 16% of hard drive revenues. This increase is attributable to additional branded units shipped as a result of the growing worldwide acceptance of our My Book ® and WD Passport ® external digital storage appliances. Revenue from all non-desktop PC markets comprised 54% of hard drive revenue for the quarter ended March 28, 2008 as compared to 47% for the year-ago quarter. For the nine months ended March 28, 2008, revenue from all non-desktop markets comprised 54% of hard drive revenue as compared to 42% for the prior-year period.
Average hard drive selling prices (“ASPs”) for the third quarter of 2008 were approximately $1 higher than the prior-year quarter due to an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions.
Changes in revenue by geography and by channel generally reflect normal fluctuations in market demand and competitive dynamics, as well as an increase in mobile drives sold to Asia. For the three and nine months ended March 28, 2008, we had no customers that represented 10%, or more, of our revenue.
Gross Margin

For the three months ended March 28, 2008, gross margin as a percentage of sales increased 680 basis points from the prior-year quarter. For the nine-month period, gross margin percentage increased 470 basis points from the prior year. These results reflect an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions. Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher mix of products based on newer, more cost-effective technologies and the combination of media operations.
Operating Expenses

Research and development (“R&D”) expense was $123 million for the three months ended March 28, 2008, an increase of $48 million over the prior-year period. This increase includes $22 million relating to the acquired media operations and $7 million in higher incentive and equity compensation, with the remaining increase primarily due to incremental product development spending to support new programs. For the nine months ended March 28, 2008, R&D expense was $336 million, an increase of $109 million over the prior-year period. This nine month increase includes $51 million relating to the acquired media operations and $28 million in higher incentive and equity compensation, with the remaining increase primarily due to incremental product development spending to support new programs.
Selling, general and administrative (“SG&A”) expense was $56 million for the three months ended March 28, 2008, an increase of $24 million over the prior-year period. The current-year period includes $2 million in higher incentive and equity compensation, $3 million for the expansion of sales and marketing to support new products related to broadening of our product portfolio and $2 million for the acquired media operations. The prior-year period included a $13 million recovery related to a receivable previously deemed uncollectible. For the nine months ended March 28, 2008, SG&A expense was $164 million, an increase of $32 million over the prior-year period. This increase includes $16 million in higher incentive and equity compensation, $12 million for the expansion of sales and marketing to support new products and $4 million for the acquired media operations. The prior-year period included $5 million related to the independent stock option investigation.
During the nine months ended March 28, 2008, we recorded a $49 million charge to operating expense related to an in-process research and development project acquired from Komag involving technology for higher recording densities on advanced perpendicular recording media. As these advanced products were not ready for commercial production and had no alternative future use, the fair value of the development effort did not qualify for capitalization and was immediately expensed.
Other Income (Expense)
Interest income decreased $2 million for the three months ended March 28, 2008 as compared to the prior-year period. This decrease resulted primarily from a decrease in the rates of return on our investments due to a decrease in interest rates compared to the prior year. For the nine months ended March 28, 2008, interest income remained consistent at $23 million as compared to the prior-year period. Interest and other expense for the three and nine months ended March 28, 2008 increased $13 million and $41 million, respectively, from the prior-year periods. This was a result of higher debt balances and realized and unrealized losses on short-term investments of $3 million for the three months ended March 28, 2008 and $12 million for the nine months ended March 28, 2008. (See Liquidity and Capital Resources-Investing Activities.)
Income Tax Provision
The Company’s income tax provision for the three months ended March 28, 2008 was $10 million compared to $1 million for the three months ended March 30, 2007. For the nine-month period ended March 28, 2008, the provision for income tax was $90 million compared to $4 million for the same period during 2007. The nine-month period tax provision included the tax related to two discrete events: 1) approximately $54 million in U.S. tax on the up-front royalty payment related to the inter-company license of certain intellectual property rights to a foreign subsidiary; and 2) a net increase to the reserve for uncertain tax positions of $6 million. Differences between the effective tax rate and the U.S. Federal statutory rate are primarily due to tax holidays in Malaysia and Thailand that expire at various times ranging from 2011 to 2022 and the current year generation of income tax credits.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (“FIN 48”), as of June 30, 2007. As a result of the implementation of FIN 48, we recognized no adjustment in the net liability for unrecognized tax benefits. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was $58 million, all of which would affect our effective tax rate if realized. During the quarter ended September 28, 2007, we recognized a $6 million increase in the liability for unrecognized tax benefits. There was no material change to the liability during the quarter ended March 28, 2008. As of March 28, 2008, we had approximately $78 million of unrecognized tax benefits which included $14 million of gross unrecognized tax benefits related to Komag.

CONF CALL

Bob Blair

Thank you. I want to mention that we will be making forward-looking statements in our comments and in response to your questions concerning: our financial and operational performance; our business model, cost structure and customer satisfaction; demand, growth, pricing and inventory in the hard drive industry; our expectations for the September quarter; our growth opportunities, new product designs and our execution capabilities; our expectations regarding our WD VelociRaptor products and GreenPower technology; our investments in technology, capacity and infrastructure; our aspirations to serve every mass storage market segment; the efficiencies of our in-house hard drive controller design and development and how it will enhance the efficiencies of our development process with our existing SOC supply partners; the cost benefits of the integration of our media operations; our effective tax rate; repurchases of our stock; our cash conversion cycle; and our financial outlook for the September quarter and the second-half of calendar year 2008.

These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our 10-Q filed with the SEC on May 6, 2008, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 10-K we furnished to the SEC today.

We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments that we make today are still valid.

I also want to note that copies of remarks by WD executive John Coyne and Tim Leyden from today’s call will be available on the investor section of Western Digital’s website immediately following the conclusion of this call.

I’d now like to turn the call over to John Coyne, Chief Executive Officer of Western Digital.

John F. Coyne

Thanks, Bob. Good afternoon and thank you for joining CFO Tim Leyden and myself today. Following my remarks, Tim will review our financial performance in fiscal year 2008 and our fourth quarter, and provide our outlook for the September quarter.

Fiscal ‘08 was an outstanding year for WD, capped off with a solid fourth quarter financial performance reported earlier today. For the year, we grew revenue 48% and earnings 54%, delivering on our primary goal of profitable growth.

We generated $1.5 billion in cash from operations during the year. We also successfully concluded our $1 billion acquisition of Komag and have completed the integration of the new media operation and are already generating solid technology and cost contributions to the overall business.

Our fiscal ‘08 performance provides further evidence of disciplined operational and financial performance and the continued scalability and execution excellence of the

WD team.

Customer satisfaction with WD’s broad product line, high quality and reliability, service excellence, and overall value proposition continues to drive our business growth. We are very pleased with the continued, consistent performance of the efficient business model that we have built and refined over the last several years.

While maintaining focus in the high-volume desktop segment, we have made major strides in diversifying the business by establishing our footprint in newer, faster-growth markets such as the 2.5-inch notebook drives, branded products, consumer electronics, and SATA drives for the enterprise.

As a result of this activity in higher-growth areas, we saw our hard-drive revenues from non-desktop markets expand to 56% of revenue in fiscal ‘08, compared with 43% in fiscal ‘07 and 29% in fiscal ’06, and we exit the year with 63% of Q4 revenues derived from non-desktop, higher-growth applications.

It is worth noting that in the June quarter, WD was less reliant on the desktop business as a share of revenue and units than either Seagate or Samsung.

Now, let me briefly address industry conditions as we ended the June quarter and enter the new fiscal year. My remarks are confined to the markets served by WD for 3.5-inch and 2.5-inch SATA and PATA hard drives.

Despite concerns with macroeconomic conditions, June quarter industry demand was strong relative to seasonal patterns and expectations, coming in flat with the March quarter and increasing 19% year-over-year. 3.5-inch demand in the quarter was down 4% sequentially and up 6% year-over-year, in line with expectation. 2.5-inch demand was stronger than expected, up 7% sequentially and up a very healthy 45% year-over-year.

Strong year-on-year sales growth in Asia for the quarter reflected our success in the 2.5-inch notebook market, offsetting muted demand in the U.S. and Western Europe.

Industry shipments of 21.5 million units in the last week of the quarter represented 18% of total shipments in the quarter, an increase of half-a-week compared to the 14% shipped in the same week last year. This increase was likely due to the fact that certain hard drive companies ended their quarter on June 30th, a Monday this year but a Saturday last year, adding extra days of shipment opportunity.

Industry inventories for manufacturers and distribution exiting the June quarter were down sequentially and compare favorably with the same time last year, up only 10% over last year while supporting a market which grew 19% year-over-year. This represents a reduction of one full week of supply on a year-over-year basis.

Manufacturers’ inventory reduced by some 4 million units sequentially and is at a little over one week of supply. Distribution inventory was also down some 700,000 units sequentially and is in the middle of the normal four- to six-week range.

Pricing in the distribution channel, which accounts for some 20% of the total hard drive revenue stream, is driven more than any other industry segment by short-term supply/demand dynamics. The desktop market is uniquely weighted towards distribution, with a roughly 50-50 split between distribution and OEM customers.

Distribution pricing was especially tough last quarter because of a competitor’s large inventory overhang exiting March, which led to the industry’s highest quarterly price erosion in the desktop distribution channel since 2001, at 16%.

While the inventory overhang was largely eliminated by June quarter-end and current inventory levels are in good shape, this price erosion had a spillover impact on OEM September quarter price negotiations, as well as creating a depressed distribution pricing floor entering the new quarter.

We navigated through these conditions reasonably well, helped by our lesser dependence on desktop business. We also leveraged our responsive manufacturing capability to adjust product and segment mix. We expect that the conditions created in the June quarter will have some residual impact on the industry and our business through the current quarter.

I would now like to describe the recent results of our multi-year diversification effort on a market-by-market basis and tell you why we think we are well-positioned to continue our profitable growth in the year ahead, primarily based on compelling products that are currently shipping.

Continued execution of our demonstrated product design and deployment capability is also important in driving the continued potential of the WD profitable growth story in future years. Looking at our individual markets, we tripled our 2.5-inch drive shipments year-over-year to 36.6 million units, demonstrating technology and product leadership throughout the year. Even with this success, we have yet to ship meaningful volume to three of the world's top 10 notebook OEMs, leaving significant growth opportunities in our mainstream 5400 RPM product line.

In June we began shipping our new line of WD Scorpio Black 7200 RPM 2.5-inch SATA hard drives in capacities up to 320 gigabytes for high performance notebook markets. This important product expansion offers our customers another opportunity to embrace the WD value proposition of quality, reliability and availability in the notebook segment.

We grew revenue in our branded products business by 60% year-over-year to $1.4 billion and we continue to add new products and product features to the line-up, to strengthen our leadership position and expand our available market.

In the June quarter, we completed the rollout of the popular My Passport Essential series with a refreshed design in multiple colors, and over the last several months we began shipping many new and next-generation branded products, including the My Passport Elite fully-featured portable USB hard drive in capacities of 320 and 250 gigabytes; the Mac-formatted My Passport Studio portable hard drive for Apple Mac users, targeting a discerning, fast-growing sub-segment of the branded business; the newest model of our 3.5-inch My Book series, the Mirror Edition dual drive storage system, which automatically stores content not once but twice to maximize safety and security of users’ valuable content; and a USB version of the WD My DVR Expander, significantly expanding the recording capacity of Dish Network HD DVRs.

In Enterprise SATA, a fast-growing segment of enterprise storage, we continued to innovate with the introduction of our 3.5-inch SATA GreenPower drive series and the WD VelociRaptor drive family, the industry’s first 300-gigabyte 10,000 RPM 2.5-inch drive.

Over the last few years, the fastest growing segment in the mainstream enterprise market is 2.5-inch SAS drives for blade servers and storage. This market is now approaching 4 million units per quarter, with annual growth in excess of 40%. We expect the WD VelociRaptor 2.5-inch SATA products to establish a niche for SATA in this market, just as the 3.5-inch WD RE offerings did in the large form factor space, following their introduction in 2004.

The introduction of our power-saving technology to our WD AV hard drives for the CE space, combined with improved costs and our demonstrated field quality performance, have been the catalysts in helping us resume growth in this important segment, leading to enhanced value for our customers and improved contribution to WD’s business.

To underpin our medium to longer term growth, we continue to work and invest to constantly roll out new platforms, capacities and features to timely meet the needs of our existing served market segments. We are also investing in the underlying technology to facilitate entry into our currently un-served market sectors of mainstream enterprise, gaming, and automotive.

We continue to aspire to serve every segment of the mass storage market and will do so as these segments offer adequate return on the investments required to serve them properly. As is traditional with WD, we will announce all new products only when they are available and shipping in volume.

Now I’d like to turn to the longer-term future. The global hard drive industry continues to present great opportunity for those with an appropriate business model. Storage demand and applications for hard drives continue to proliferate in both computing and consumer markets, as both workplace and lifestyle changes continue to generate increasing volumes of content to be stored securely, conveniently and cost effectively on hard drives.

The HDD market in fiscal ‘08 generated revenues in excess of $35 billion, with 540 million hard drives shipped, while forecasted demand for fiscal ‘09 exceeds 620 million units. On a unit basis, the overall hard drive market is looking at a five-year CAGR of approximately 13%, while those markets served by WD are forecast to grow in excess of 16% annually.

We continue to see the strongest growth potential in the notebook PC and Branded Product segments, areas of continued focus for WD. We are encouraged by these opportunities for profitable growth, both for the near-term and as we head into the seasonally strong second-half of the calendar year, and as we address the longer-term prospects represented in these industry forecasts.

I’d like to highlight some of the important actions we’ve taken during fiscal ‘08 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.

We added to our design and development capability with significant expansion of our technical workforce in Lake Forest and San Jose and in Asia, and the addition of a new design center in Longmont, Colorado.

In June, in a further strategic step to accelerate our technology development and deployment, we acquired the hard drive controller IP rights, design tools, and design team from ST Microelectronics. This in-house HDC capability will enhance the efficiencies of our development process with our existing SOC supply partners.

Our previously announced plan to upgrade and expand our Fremont wafer facility is on track and we have already produced first wafers from our new 8-inch pilot line, ahead of schedule. As indicated earlier, the integration of media operations has greatly enhanced our technology capability and overall cost structure.

Tim will now review our financial performance and outlook. Tim.

Tim Leyden

Thank you, John. Our fiscal 2008 and June quarter results demonstrate continued strong execution by the WD team. During the year, we improved and refined the basic WD business model in which we profitably satisfy our customers’ demands by efficiently providing a broad range of quality products at competitive costs.

In the seasonally softer June quarter, our results reflect our capability to thrive in a very competitive pricing environment. The growing segment and geographical diversification of our business provided us with the basis to generate strong results, despite the impact of the excess inventory which was carried into the quarter by our competition. This diversification resulted in continued strong revenue growth, operational results that delivered 630 basis points of gross margin improvement over the same quarter last year, and earnings that exceeded expectations.

For our full fiscal year 2008, total revenue was $8.1 billion, hard drive shipments were 133 million units, and hard-drive ASP was $59. The corresponding numbers in fiscal ‘07 were $5.5 billion, 96.5 million units and $57, respectively.

Gross margin in ‘08 was 21.5% versus 16.5% in ‘07.

Operating income for ‘08 was $1 billion versus $415 million in ’07, and net income for ‘08 was $867 million versus $564 million in ‘07.

Fiscal ‘08 EPS was $3.84 versus $2.50 in ‘07.

Net income in ‘08 included the impact of $75 million of tax charges related to the license of intellectual property to subsidiaries, and $49 million of acquired in-process R&D expenses, whereas ‘07’s net income included a favorable tax adjustment of $126 million related to the valuation of our deferred tax assets.

Turning to the fourth quarter results, revenue was $2 billion, up 46% from the prior year, and hard drive shipments totaled 35.2 million units, up 41% from the prior year period.

Average hard drive selling price was approximately $56 per unit, down $3 from the March quarter but up $1 from the year-ago quarter. Our Q4 ASP reflects our response to the pricing environment created by the stress of the excess inventory liquidation push mentioned earlier, as well as expected seasonal pricing factors.

The percentage of our hard drive revenue generated by non-desktop applications was 63% in the June quarter, 54% in the March quarter, and 46% in the year-ago quarter.

We shipped 11.7 million 2.5-inch mobile drives in the June quarter, as compared to 10.2 million in the March quarter and 3.8 million in the year-ago quarter. These increases were driven by continued strength in notebook PCs, coupled with increased customer preference for WD product offerings as we also benefited from the recent refresh of our WD My Passport range of portable storage solutions for people on the move.

In consumer electronics, we shipped 4.1 million 3.5-inch drives for use in digital video recorders in the June quarter, 3.1 million in the March quarter, and 2.7 million in the year-ago quarter. The refined WD value proposition in this space is resonating with a broad set of discerning customers.

Sales of our enterprise products were in line with our expectations. On the desktop side, we increased the percentage of our business going to OEMs. Hard drive channel revenue was 57% OEM, 24% distribution, and 19% branded products in the June quarter, compared with 50%, 34%, and 16% in the March quarter; and 47%, 36%, and 17% in the year-ago quarter respectively. There were two customers, Dell and HP, that each comprised more than 10% of total revenue.

The Q4 geographic split of our hard drive revenue was 29% Americas, 25% Europe, and 46% Asia, as compared to 28%, 31%, and 41% in the March quarter; and 40%, 26%, and 34% in the year-ago quarter.

Our gross margin percentage for the quarter was 21.3% versus 22.6% in the March quarter, and 15% in the year-ago quarter. The decrease in gross margin versus Q3 came primarily from the competitive 3.5-inch desktop channel pricing. We largely offset the normal seasonal pricing trends with a richer product mix, a changing segment mix, a higher OEM mix, increased volume and improved cost.

We have completed our media integration and are on track to meet our previously stated plans of full cost benefit by the December quarter.

Operating expenses totaled $184 million, or 9.2% of revenue, up slightly from the March quarter as a result of increased R&D spending. As compared to the prior year, operating expenses are up as a result of the Media acquisition, higher incentive compensation associated with stronger financial performance, and increased investments in new programs to support technological advancements and our broadening product portfolio.

Operating income was $241 million, or 12.1% of revenue. Interest and other non-operating expenses were approximately $4 million. This includes about $2 million of unrealized losses on our previously disclosed investments in auction-rate securities. These investments totaled $28 million at the end of the quarter.

Tax expense for the June quarter was $24 million and includes a $15 million incremental tax charge related to the license of intellectual property to subsidiaries. For fiscal 2009, we expect our book effective tax rate to range between 7% and 10% as we take into account our expected continuing profitability and the global mix of taxation by geographic location.

Our cash tax rate for fiscal ‘08 was approximately 1%, and fiscal 2009’s cash tax rate is expected to be between 1% and 2%.

Our net income totaled $213 million, or $0.94 per share.

Turning to the balance sheet, our cash and cash equivalents at the end of the quarter totaled $1.1 billion as compared to $917 million at the end of March. These amounts exclude the $28 million in auction-rate securities that were reclassified as long-term investments during the June quarter, as their immediate liquidity continues to be constrained by the market.

During fiscal ‘08, we generated $1.5 billion in cash flow from operations. Cash generated from operations during the June quarter totaled $318 million.

Capital additions for fiscal ‘08 totaled $615 million and included approximately $120 million for our 8-inch wafer-fab conversion. Depreciation and amortization expense for fiscal ‘08 totaled $413 million.

Capital expenditures for the June quarter were $146 million and our non-cash charges for depreciation and amortization expense totaled $113 million.

We expect fiscal 2009 capital expenditures to be about $800 million, including about $150 million for our 8-inch wafer fab conversion.

Depreciation and amortization for fiscal 2009 is expected to be about $475 million.

We did not repurchase any shares of common stock during the June quarter. Since May 2004, we have repurchased 16.6 million shares at a total cost of $248 million, for an average price of about $15 per share. A total of $502 million remains under our existing stock repurchase authorization.

Going forward, we will weigh opportunities to repurchase our stock against other investment opportunities and prepayments of our outstanding debt as we take our typical opportunistic approach to share repurchases.

As of the end of June, we had 46 days of receivables outstanding, 27 days of inventory, or 14 turns, and 69 days of payables. This resulted in a cash conversion cycle of four days. Going forward, we will continue to weigh working capital investments against opportunities for growth and opportunities to reduce shipping costs.

During Q4, we increased our ocean shipments of certain products to help offset price increases from higher fuel costs. Air freight continues to be a key element in our ability to satisfy changes in customer demand for our hard drives.

Before I address Q1 earnings guidance, I want to point out that WD will have a 14-week quarter in this fiscal year and we will include that extra week in our fourth fiscal quarter that will end on July 3, 2009.

Now I will discuss our expectations for the first quarter of our fiscal year 2009 but first let me outline the market situation as we see it. Compared with established historical demand, it is important to note that last year’s September quarter was extraordinary. However, based on the demand patterns that we have seen thus far in this quarter, we expect a return to the more seasonally normal Q1 demand patterns of 8% to 14% sequential unit growth in the markets we serve. In addition, all the HDD companies are now in a position to provide most required capacities across the entire 2.5-inch and 3.5-inch product lines.

As John indicated in his remarks, the higher-than-expected distribution price erosion in Q408 established the starting point for Q109 and also affected OEM pricing negotiations for this quarter. Taking these factors into account, we expect current quarter revenue growth for WD in a range of between 3% and 8%. Consequently, we are forecasting total revenues for the current quarter to be $2.05 billion and $2.15 billion.

We are modeling gross margin at approximately 19.3%. Operating expenses are projected to be approximately $190 million. Our net interest expense is projected to be about $4 million, assuming no further investment losses. We anticipate our tax rate to be 8% of pretax income, and our share count to be approximately flat with the June quarter.

Accordingly, we estimate earnings per share of between $0.81 and $0.89 for the September quarter

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