Special Note

Statements in these posted remarks that relate to future results and events, and other forward-looking statements in these remarks, are based on Western Digital Corporation’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. These risk factors include:

• uncertainties regarding managing relationships with our external media suppliers, media component suppliers and external media customers;
• supply and demand conditions in the hard drive industry;
• actions by competitors;
• unexpected advances in competing technologies;
• uncertainties related to the development and introduction of products based on new technologies and successful expansion into new hard disk drive markets;
• business conditions and growth of the market for hard drives in the mobile PC, consumer electronics, enterprise, external hard drive and desktop markets;
• pricing trends and fluctuations in average selling prices;
• changes in availability and cost of specialized product components that we do not make internally and commodity materials;
• the risk that our business will suffer during the integration of our recently acquired media operations;
• failure to quickly and effectively integrate our recently acquired media technology with our head technology; and
• other factors listed in our periodic SEC filings and on this Web site in Risk Factors.
  

Robert Blair - Vice President Investor Relations

Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning: our expectations regarding supply and demand conditions in the hard drive industry, growth in the market for hard drives and growth opportunities for WD; the effects of seasonality in the December quarter; our plans to continue investing in new technologies and product roadmaps; our beliefs regarding the benefits of a vertically integrated hard drive business; our capital expenditure plans for fiscal 2008; and our current financial outlook for the December quarter.

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 Form 10-K filed with the SEC on August 28, 2007, as well as the additional risk factors reported in the press release included as Exhibit 99.1 to the Form 8-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 we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the reconciliation of these measures to the comparable GAAP results on the last page of our press release financial statements included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today, a copy of which can be found under the “SEC Filings” link in the Investor Relations section of our Web site at www.westerndigital.com.

John Coyne - President & Chief Executive Officer

Good afternoon and thank you for joining us. With me today is Tim Leyden, executive vice president and chief financial officer. After my remarks, Tim will provide the financial report on our first quarter and our outlook for the second quarter.

Our financial results for the first quarter reflect a continuation of our profitable growth in a strong market environment throughout the quarter.

The September quarter was unusual in that we saw strong industry demand emerge early in the quarter and sustained throughout. This was true in all geographic regions, markets and channels that we serve.  With public reporting of quarterly financials in the hard drive industry now completed, it is clear that improved demand combined with disciplined production increases allowed more stable pricing, which resulted in an improved industry-wide financial performance.

Through October, industry conditions have been seasonally strong. We believe that growth of 12 to 15 percent year-over-year and 4 to 5 percent quarter-over-quarter is likely in the December quarter. Distribution and manufacturers’ inventories combined are down year-over-year by some 11 percent exiting October. Based on current demand and factory build rates, we believe that the industry will be much better positioned entering the January to March quarter than in recent years.

At WD, our capacity is constrained relative to current demand.  As a result, we are working diligently to treat all customers fairly in this constrained environment. We expect that we will see allocation on certain capacities continue throughout the quarter.

In the first quarter, our investment strategy, product portfolio and execution in all market segments enabled us to address robust demand for mainstream and high capacity hard drives in both consumer and commercial applications.  We posted year-over-year hard drive growth of 37 percent in revenues and 29 percent in unit shipments. Combined with our solid performance in the March and June quarters, the WD business model has demonstrated our ability to deliver strong results in both good times and in periods where we face industry headwinds.

Each of WD’s businesses—desktop, consumer electronics, branded products, mobile, and enterprise SATA (Serial ATA)—turned in strong performances in Q1. As a result of our multi-year diversification strategy, for the first time we derived more than half of our quarterly revenues in the hard drive space from non-desktop applications 53 percent, up from 35 percent in the year-ago quarter. This greater diversification of our revenue base is a result of the investments made and our execution of the new product plans over the last several years, during which time we have become the world’s second largest maker of hard drives. The breadth of applications for hard drives is a major benefit for the industry and especially for those of us who have the ability to continue investing in future technologies and product roadmaps.

The company’s unit shipments for the first quarter included approximately 5.9 million 2.5-inch mobile hard drives, up 175 percent year-over-year, and approximately 3.7 million 3.5-inch hard drives for use in digital video recorders, an increase of 51 percent year-over-year. Branded products revenue, which increased 133 percent year-over-year, accounted for 18 percent of the Q1 total, continuing to demonstrate the strength of WD’s global brand. We addressed strong demand for higher capacity points in each of our segments with hard drives based on our own PMR (perpendicular magnetic recording) technology, most notably our 2.5-inch 250 gigabyte WD ScorpioÒ hard drives and our 3.5-inch WD GreenPowerÔ one terabyte drives. Both of these drive families are based on our industry-leading 200 gigabit per square inch PMR technology platforms. Earlier this week, we began shipping another industry-leading product, our third-generation PMR WD Scorpio mobile drive based on our own 250 gigabit per square inch PMR technology in capacities up to 320 gigabytes.

Turning to our media acquisition, integration of the media operation is proceeding smoothly, according to plan. We recently completed our first worldwide operations review in Asia involving the media team, along with the rest of the WD operations and engineering teams. We are very excited about our ability to capture the synergies and advantages of a vertically integrated hard drive business, thus enabling us to compete even more effectively on the basis of our quality, reliability, customer service, technology and execution, as we address the tremendous opportunities for profitable growth in the storage marketplace.

Tim Leyden - Executive Vice President & Chief Financial Officer

Western Digital’s execution and revenue diversification strategy, coupled with strong hard drive demand and stable pricing, enabled the company to deliver outstanding financial results.

Revenue for our first fiscal quarter was $1.766 billion.  This includes $40 million of revenue from external sales of media and substrate components shipped in the period between September 5 and September 28.  Total revenue was up 40% from the prior year, and hard drive shipments totaled 29.4 million units, up 29% from the prior year.  

Average hard drive selling prices were approximately $59 per unit, up $3 from the year-ago quarter and $4 from the June quarter as a result of firmer pricing and improved product mix. 

We shipped 5.9 million 2.5-inch mobile drives in the September quarter, as compared to 2.2 million in the year-ago quarter and 3.8 million in the June quarter. Our growth in this important segment demonstrates a continued acceptance of our leadership products by notebook PC manufacturers together with increasing demand in the mobile storage appliance market.

Turning to consumer electronics, we shipped approximately 3.7 million 3.5-inch drives for use in digital video recorders in the September quarter versus 2.5 million in the year-ago quarter and 2.7 million in the June quarter. This market continues to be a long-term growth opportunity for WD and the industry.

Channel revenue was 51% OEM, 31% distribution and 18% branded products versus 52% OEM, 37% distribution and 11% branded products in the year-ago quarter; and it was 47% OEM, 36% distribution and 17% branded products in the June quarter.  The Q1 OEM revenue percentage includes $40 million, or 2%, from external sales of media and substrates.  Revenue for each of our top five customers increased from the June quarter.  However, because of the increased diversification of our revenue base, no single customer comprised more than 10% of the total.

The Q1 geographic split of our business was 33% Americas, 32% Europe and 35% Asia, as compared to 35% Americas, 28% Europe and 37% Asia in the year-ago quarter; and it was 40% Americas, 26% Europe and 34% Asia in the June quarter. Revenue from external sales of media and substrates is included in the Asia percentage.

Our gross margin percentage for the quarter was 18.3% versus 17.3% in the year-ago quarter and 15.0% in the June quarter, reflecting improvements in pricing, mix and cost. 

Operating expenses totaled $188 million, including a $49 million charge for in-process research and development related to the Komag acquisition.

Operating income was $135 million, or 7.6% of revenue.

Net interest and other income totaled approximately $3 million.

Income tax expense was $69 million for the September quarter, including net non-recurring charges of $60 million.  Absent these charges, our tax rate was about 6.5% for the quarter.  During the September quarter, we had a $3 million favorable resolution of certain foreign tax contingencies.  Also, during the quarter, we licensed certain intellectual property to one of our international subsidiaries.  This resulted in a tax charge of $63 million.  We now expect that our future book tax rate will be in the 5% to 7% range.  However, I would highlight that our cash tax rate will continue to range between 2% and 3% for the foreseeable future. 

During the quarter, we adopted FIN 48, which prescribes the method by which companies should calculate reserves for tax contingencies.  The impact of that adoption was not material to net income or shareholders’ equity.  However, it did result in balance sheet reclassifications between deferred tax assets and liabilities.

GAAP net income totaled $69 million, or $0.31 per share.  Excluding the $60 million net tax charge, non-GAAP consolidated net income was $129 million, or $0.58 per share.  Excluding the net tax charge and the combined impacts of the acquisition, non-GAAP HDD net income was $182 million, or $0.81 per share.  A reconciliation of non-GAAP to GAAP results is on the last page of our press release financial statements.

Turning to the balance sheet, our cash and short-term investments at the end of the quarter totaled $851 million as compared to $907 million at the end of June.  The decrease is primarily the result of the net cash used for the acquisition.  As of the end of the quarter we have drawn down $750 million of our $1.25 billion bridge facility. 

Cash generated from operations during the quarter totaled $219 million. 

Capital expenditures for the quarter were $163 million. Non-cash charges for depreciation and amortization expense totaled $78 million. 

Following a recent review of demand, capacity, technology and efficiency roadmaps, capital expenditures for fiscal 2008 are now expected to be around $700 million, at the lower end of our previously estimated range. This includes about $100 million for our media operations. Depreciation and amortization expense for fiscal 2008 is expected to be about $400 million, including about $100 million for media operations.

We have completed the preliminary purchase price allocation related to our $1 billion acquisition of Komag.  We recorded a $49 million charge for in-process research and development.  In addition, we increased the book value of the media fixed assets by about $130 million, and recorded approximately $100 million in net deferred tax assets, $90 million of amortizable intangibles and $85 million of goodwill.  The asset valuation assessment indicated longer useful lives than we had initially estimated.  As a result, the incremental depreciation and amortization resulting from these fair value adjustments will be about $5 million per quarter.  This is included in the $100 million fiscal 2008 estimate of media depreciation and amortization referred to above. 

During the quarter, we repurchased 841 thousand shares of stock at a total cost of about $16 million.  Since May 2004, we have repurchased 15.1 million shares at a total cost of $204 million¾$46 million remains under our existing stock repurchase authorization. 

Our cash conversion cycle was a positive 10 days, consisting of 51 days of receivables, 29 days of inventory (or 13 turns) and 70 days of payables outstanding.  Excluding the impact of the acquisition, our conversion cycle would have been a positive one day, consisting of 48 days of receivables, 17 days of inventory (or 21 turns) and 64 days of payables outstanding. 

Now, I will move on to our expectations for the second quarter of 2008.  It is our intention to break out revenue from media sales for the December and March quarters, until our external obligations are complete.  All other operating results will be reported on a WD consolidated basis. 

As we indicated on our last call, we expect the media acquisition to become accretive in the June 2008 quarter.  Longer-term, from the end of calendar 2008, we expect that our blended media internal and external supply model will enable us to realize cost improvements at the gross margin line of up to 300 basis points.

We expect demand for the December quarter to be seasonally strong.  Accordingly, we estimate revenue for the December quarter to be between $1.875 billion and $1.925 billion, including approximately $100 million from external sales of media and substrates.

Gross margin for the December quarter is anticipated to be in the range of 18.5% to 19.0%.

Operating expenses are projected to be approximately $163 million as we continue to integrate media operations and invest in expanding our product and technology portfolio.

Net interest expense is projected to be about $11 million.  We anticipate a tax rate of between 5% and 7%, and our share count will be about 225 million.

Accordingly, we estimate earnings per share of between $0.73 and $0.77 for the December quarter.

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