Western Digital Corporation
Q2 2015 Earnings Call Transcript

Published: 28 Jan 2015

[Operator:]

Good afternoon and thank you for standing by. Welcome to Western Digital’s Second Quarter Financial Results for Fiscal Year 2015. [Operator Instructions] As a reminder, this call is being recorded. Now I will turn the call over to Mr. Bob Blair. Sir, you may begin.

[Robert Blair:]

Thank you. As we begin, I want to mention that we will be making forward-looking statements in our comments and in response to your questions, concerning, among other topics, our position and opportunities in the growth of data and the storage ecosystem; the growth areas in storage; our investment focus; our product offerings and our customers’ responses to our product offerings; and demand outlook on our financial performance, including our financial results and expectations for the March 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 10-Q filed with the SEC on November 4, 2014, and those listed in our registration statement on Form S-3 filed with the SEC on November 5, 2014. We undertake no obligation to update our forward-looking statements to reflect new information or events. In addition, references will be made during this call to non-GAAP financial measures. Reconciliation’s of the differences between the historical non-GAAP measures, we provide during this to the comparable GAAP financial measures are included in the quarterly fact sheet posted in the Investor Relations section of our website. The non-GAAP forward-looking guidance we provide during this call excludes amortization of intangibles related to the acquisitions of HGST, sTec, VeloBit and Virident, employee termination, asset impairment, litigation-related and other charges. Because we currently cannot fully quantify future amounts for those excluded items. We are unable to provide guidance for or reconciliation to the most directly comparable GAAP financial measures. The impact of these excluded items may cause the estimated non-GAAP financial measures to differ materially from the comparable GAAP financial measures. We ask the participants to limit their comments during the Q&A session to a single opening question and one follow-up question. I also want to note the copies of remarks from today’s call by Steve Milligan and Olivier Leonetti will be available on the Investors section of Western Digital’s website immediately following the conclusion of this call. And now I’d like to turn the call over to President and CEO, Steve Milligan.

[Steve Milligan:]

Good afternoon and thank you for joining us. After my opening remarks, Olivier Leonetti will provide additional commentary on our December quarter performance and our outlook for the March quarter. I am pleased with our financial results in the December quarter. We achieved strong revenue, gross margin and earnings performance. We also generated significant cash flow from operations in the quarter excluding the impact of the Seagate arbitration award. The diversified nature of our business together with ongoing secular growth in data and crisp execution by our HGST and WD subsidiaries continue to enable us to consistently deliver strong financial performance. Market dynamics in the December quarter were in line with our expectations. In our business we saw particular strength and demand for capacity enterprise and video surveillance hard drives and for enterprise SSDs. As anticipated there was a seasonal demand uptick for branded products. We expect ongoing hyper-scale cloud deployments coupled with our expanding product portfolio and customer engagement model to continue fuelling our growth and capacity enterprise for the foreseeable future. Terabyte growth in this category is expected to remain strong. Our flash platform solution business which includes our expanding portfolio of enterprise class SSDs maintained its growth trajectory in the quarter delivering revenue of $187 million. The demand outlook for the March quarter reflects a normal seasonal decline with moderation in client, branded products and performance enterprise with stable demand and capacity enterprise. We believe overall supply and demand and associated inventory levels remain balanced. I continue to be encouraged by the ongoing stabilization of the PC market where demand has been in line with our expectations. Furthermore, I am encouraged by the market’s response to our strategic growth initiative, which legally position the company to thrive in the evolving data storage ecosystem. We've strengthened our value proposition by enhancing our technical expertise, expanding our product portfolio and investing in our go-to-market capabilities. We will continue to prudently evaluate investment opportunities to advance these initiatives. We gained traction in key markets during the December quarter, a broad line-up of high-capacity hard drives, including those based on our proprietary HelioSeal platform continued to be embraced by both traditional enterprise and hyper scale data center customers. We continue to invest in high-growth vertical market applications. Specifically, we've seen strong customer acceptance of our WD Purple hard drives in the security surveillance market. We launched the 6-terabyte model in the December quarter that has been well received by customers. We expect strong ongoing growth in this space given the rapid adoption of digital video cameras and security surveillance systems worldwide. There continues to be strong growth momentum and branded with our portfolio of My Cloud solutions addressing both the consumer and prosumer markets. The My Cloud software and apps had now been downloaded by more than 4 million users worldwide. We are engaged with customers and partners on our recently announced Active Archive Platform. Proof-of-concept systems are up and running and initial customer feedback has been positive. This new category of storage solution will feature high-density peta-scale capacities in a single rack and deliver entirely new levels of storage efficiency and value. And as a reminder we expect revenue growth from our Flash Platforms business to outpace that of the industry. Before turning it over to Olivier, I would like to thank and recognize our employees worldwide for helping to deliver a strong second quarter. Our consistent financial performance is a testament to the strength of our team, a well diversified business, leading products and customer centric engagement model. Olivier?

[Olivier Leonetti:]

Thank you Steve. Expected seasonal demand and consistent execution help us exceed financial expectations in the December quarter. Industry shipments were in line with the TAM implied in our guidance provided in October. In our business, we saw continued strength in capacity enterprise, the anticipated seasonal increase in branded products as well as continued steady demand in performance enterprise. Aggregated channel inventories of Western Digital products remain within our four to six week range. Our revenue for the December quarter was $3.9 billion. This included $187 million in revenue related to our Flash Platforms Solutions Group. We shipped a total of 61 million hard drive at an average selling price of $60. The quarter-over-quarter increase in our [LSP] [ph] was driven by strength in capacity enterprise, surveillance along with the seasonal improvement in client and branded products. Our gross margin was 29.1%. Our non-GAAP gross margin was 30.5% which is better than our implied guidance due to business mix. This excludes $55 million of amortization of intangibles and other non-recurring charges. Operating expenses totalled $644 million. Our non-GAAP operating expenses were $620 million, excluding amortization of intangibles, restructuring charges, and the flood insurance recovery. Expenses were higher than our implied guidance due to incentive compensation and stock appreciation rights. Tax expense for the December quarter was $20 million or 4% of pre-tax income. The tax rate reflects the retroactive extension of the US federal R&D tax credit that was signed into law during the December quarter. Our net income totalled $460 million or $1.93 per share. On a non-GAAP basis, net income was $539 million or $2.26 per share. This includes the $0.07 per share tax benefit from the R&D tax benefit. Turning to the balance sheet, in the December quarter we generated $243 million in cash from operations and our free cash flow totalled $97 million. As a reminder we paid a total of $773 million related to an arbitration award in the December quarter. Our CapEx totalled $146 million or 4% of revenue. We repurchased 3.2 million shares for $309 million. We also declared a dividend in the amount of $0.40 per share. We closed Q2 with total cash and cash equivalents of $4.9 billion of which approximately $1.4 billion was held in the U.S. I’ll now provide guidance for the March quarter. We expect revenue to be in a range of $3.6 billion to $3.7 billion. Gross margin percentage roughly flat with our Q2 performance excluding the amortization of intangibles. R&D and SG&A spending of approximately $610 million, excluding the amortization of intangibles. The tax rate of approximately 7.5% and a share count of approximately $237 million. Accordingly, we estimate non-GAAP earnings per share of between $1.90 and $2 for the March quarter. Operator, we are now ready to open the call for questions.

[Operator:]

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

[Amit Daryanani:]

Good afternoon guys. Thanks for taking my questions. I have just two questions and a follow-up. First of all, can you talk on the pricing dynamic that you are seeing this quarter and potentially in the March quarter? One of your peers reported a couple of days ago they talked extensively about pricing concerns starting to creep up, so I'm curious what you are seeing and what you expect as it goes forward?

[Steve Milligan:]

This is Steve. If you look at our fiscal Q2, so the quarter we just finished, and it is consistent with my commentary, we saw nothing unusual from a pricing perspective, versus our expectations. And we see nothing unusual this quarter from a pricing perspective. So, what I would say is that pricing behavior and price levels are just simply consistent with our expectations.

[Amit Daryanani:]

Got it, and if I could just follow up MOFCOM, you issued a press release in December talking about the letter you guys received and the rectification you're doing. Is there any update on that as you go forward? Is there a time lime that we start to think about given the fact that you had the update in December?

[Steve Milligan:]

Yes. So let me review where we are at. We did announce recently that there were a couple of compliance issues that we had, that were resolved with MOFCOM. We were pleased to get those issues behind us. We have also indicated that given the resolution of those issues MOFCOM is now fully focused on reviewing our applications. Those issues needed to get resolved before MOFCOM began the formal evaluation of our application to have both separate listed. That is in process, and ongoing, and as I have indicated before, our relationship and dialogue with MOFCOM is consistent and constructive but at this point I can’t provide any update as to timing, as to when MOFCOM will provide any sort of ruling. But we are working with them in a constructive fashion and we will continue to do so.

[Amit Daryanani:]

Thank you, and congratulations on a nice quarter.

[Steve Milligan:]

Thank you.

[Operator:]

The next question comes from Rich Kugele with Needham & Company, your line is open.

[Rich Kugele:]

Thank you, good afternoon gentlemen. A couple of questions; first, can you just talk about the capacity enterprise segment and your ability to ship officially given some of the data center build-out plans as calendar 2015 unfolds?

[Steve Milligan:]

Sure. Yes, so we in the past quarter saw a good demand for our products, for capacity enterprise products, particularly from hyperscale customers. We expect that to continue. The last call I talked about having good visibility to the middle part of calendar 2015. That statement remains valid. Really what we are seeing is, we are seeing meaningful growth in terms of Petabyte deployments on behalf of our customers. We expect that to continue on through the balance of calendar 2015, how that translates to a unit of performance perspective is a little bit unknown at this point. It will vary depending upon the capacity point that has shipped as the industry transitions initially from a 4-terabyte drive to a 6-terabyte drive and then eventually at least for us to an 8-terabyte deployment. But, we are confident that we are going to continue to see strong terabyte growth for our business and for the industry and the capacity enterprise space.

[Rich Kugele:]

And you are comfortable with your component supply and ability to go and hit those demands?

[Steve Milligan:]

Well, I mean there is a little bit of a qualification as kind of yes and no answer, Rich. Supply is tight. We are comfortable with where we’re at, but it’s tight. And so, we’re watching that closely. And so these things, they use a lot of heads and disks, a lot of test time, and so we got to be watching that closely. But, right now, relative to our expectations, we’re comfortable with where we’re at. But, if we see more variability from an upside perspective, which is obviously possible we could run in the supply challenges.

[Rich Kugele:]

Okay, and then I will ask you obligatory TAM questions. In the December quarter, you obviously, 141, larger than what your competitor was talking about, but not too surprising. When you look at normal seasonality, how would you look at the March quarter? What should we be expecting?

[Steve Milligan:]

Yes. So, to reiterate what I talked about in terms of my [indiscernible] and I know that there were some analysts had different numbers out there, but the TAM for the December quarter pretty much turned out the way that we expected. So the TAM, and again we will see what numbers Toshiba publishes, but a TAM in the 141 million unit range was very consistent with the expectations that we had going into the quarter. I would say that if you want to call it a surprise, the mix might have been a little bit better than what we saw and therefore you see a bit higher revenue for us and the resulting merging benefit associated with the. If we looked at where we think the TAM will shake out in March, I think something in that mid-130 range is kind of a reasonable assumption.

[Operator:]

The next question comes from Aaron Rakers with Stifel, your line is open.

[Aaron Rakers:]

Thanks for taking the question. I do have a follow up as well. Going back on the enterprise business, can you talk a little bit about the competitive landscape? When we look at the numbers and look at what some of your component suppliers have reported, it would appear that Toshiba saw a pretty healthy quarter in enterprise shipments. So can you talk about seeing Toshiba being at all a disruptor, and going after some of those high-capacity deals? And if not, whether you think that changes on a going forward basis?

[Steve Milligan:]

We didn't see anything unusual in that regard. If we look at what happened in terms of higher enterprise shipments, and I am sort of using rough numbers here, I think our units increased on a quarter-on-quarter basis about 300,000 units; and a bit of that was capacity enterprise, a bit of that was performance enterprise. If you recall one of the things that we were focused on from a performance enterprise perspective was to continue to broaden our product portfolio so that we had full coverage from a market perspective. We began shipping our 15K small form factor drive, which allowed us to pick up some incremental business in the performance enterprise space. And with our strong portfolio and position in the capacity enterprise business, we were able to increase our business a bit there. We believe, although we will have to see how the final numbers shake out, that we maybe gain a little bit of share in that space. And so we are obviously pleased with that. From a customer, call it, satisfaction perspective, but we did not see anything from a competitive dynamic perspective in that space, that was unusual or shall we say alarming from our perspective.

[Aaron Rakers:]

Okay. And as a follow-up, maybe a higher level question, but when you think about your capital structure and kind of the return of cash going forward, your closest competitor raised a very impressive 20-year note in this latest quarter. How are you thinking about your return of capital and cash, and in particular how you think about the dividend trajectory on a going-forward basis, obviously in the context of the US held cash?

[Olivier Leonetti:]

So, let me take this question. So, we are always evaluating the way we deploy our capital and we believe that the current allocation is probably be a good balance between short-term management and prudent long-term investment in the business. And at this stage we have no particular plan to change the current capital allocation, but again are under evaluation all the time. To answer to your question, specifically about US cash, and how that is a constraint. We have a fair amount of liquidity in the US through our cash balances, $1.4 billion at this stage, but also debt capacity which is quite high as well, our leverage ratio is in the range of 4.7, as you know. So we can sustain our current allocation for at least four years or more.

[Steve Milligan:]

So one thing just to add to that is that -- the key thing is that we’re focused on longer term value creation and making sure that we have a capital structure that enables us to do that. And obviously the dynamics that influence that, our needs for cash, uses of cash, all of that, but it’s centred fundamentally on what do we need to do as a business to make sure that we are creating a long-term value for ourselves and our shareholders going forward.

[Operator:]

Next question comes from Keith Bachman with Bank of Montreal, your line is open.

[Keith Bachman:]

Thank you. I had two as well. Steve, I want to start with you. You indicated that pricing was consistent with your view. I wonder if you could flush that out a little more. What were like-for-like pricing either in December quarter, and/or what are you expecting in the March quarter? And against that trajectory, are the newer liner enterprise performance drives deviating from the overall pattern associated with the rest of your product portfolio?

[Steve Milligan:]

As an overall segment we had been saying, I recall that, low single-digit price decline, like-for-like. And really that’s still holding more or less a quite confident or consistent on a relative basis over the last few quarters. And so frankly we just did not see anything -- let me qualify. There is always pockets -- this is a competitive business. There is always pockets of where pricing in this segment might be doing something a little bit unusual here and there. But, we did not see anything unusual from a pricing perspective, either quarter, or we are seeing anything unusual in terms of the March quarter.

[Keith Bachman:]

Okay, but within that, just if you could [flash out] [ph], is near line – does that also embrace the near line product portfolio, that you're not seeing anything outside of that kind of low single-digit sequential difference?

[Olivier Leonetti:]

Well, near line is a little bit different in the sense that...but this again is not a change. I mean the first thing is, is that there is a fair amount of margin on those products...

[Keith Bachman:]

Right.

[Olivier Leonetti:]

We're also introducing higher capacity points in those products preceded by a 4-terabyte, you're going to see the clients for those capacity [points] [ph] that exceed the overall average, but that’s not anything unusual. When it gets introduced, it may be in limited supply as the supply begins to increase and you see greater customer acceptance of that. And as we come down the cost curve, the price declines and tend to be steeper. But that is nothing at all unusual.

[Keith Bachman:]

Okay. And then Steve, this is my follow-up question, if you wanted to provide your views, if the TAM comes out to a mid-130s, as you said, for the March quarter, how are you thinking about the TAM as you look out, particularly with related to PC clients? I'm sure you're aware of a lot of consternation, especially what the PC market can deliver this year. I wanted to see if you could just provide some high-level views as you look out over the next couple quarters on the VHED TAM and/or that PC client TAM? And that's it for me, thanks.

[Steve Milligan:]

Sure. We would expect at present and of course our expectations can change that the March quarter will be the [low points] [ph] for the year. So at this point for the June quarter, we think that we could see either a flat or maybe slightly up TAM in the June quarter; more obviously update our expectations for that as we move through the quarter. And then obviously as we move through the back half of the calendar year where we get help from the seasonality perspective, we would expect to see the TAM increase from there.

[Operator:]

The next question comes from James Kisner of Jefferies LLC, your line is open.

[James Kisner:]

Thank you. I'm guess this is going to press more on the PC market, or the client market. Your competitor ventured a guess, but the overall growth rate might be for the year for client units, I think they said low single digits. Would you agree with that? Do you have any view?

[Steve Milligan:]

We have consistently indicated that we expect that PC sales will -- well let me backup, what’s still happening is that we have been saying low single digit decline on a year-on-year basis in the PC space. That went consistent with our expectation and we would expect that going forward that we will continue to see that. As that relates to hard drive shipments into the PC segment we also have to contemplate the fact that more and more client units are using solid state devices versus rotating magnetic storage and so we will see more of a drag than that low single digit in terms of hard drive shift into the PC market. And so that’s very consistent with what we’ve been saying for the last several quarters and very consistent with our expectations.

[James Kisner:]

And a quick follow up, could you update us on the uptake of the Helium? Did it contribute at all to ASPs, or is it not material factor there? Thank you.

[Steve Milligan:]

Yeah. Relative to the helium, let me broaden that a little bit, clearly part of the reason that we saw an uptick in terms of our ASPs and also our margins were due to the strength in our capacity enterprise business of which helium is a part of that. Helium as an individual category, particularly as it relates to 6-terabyte drive probably did not have a material impact. We believe that as we transition to the 8- terabyte platform with the helium product, we will begin to see a bit of a larger impact.

[James Kisner:]

Thank you.

[Operator:]

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

[Sherri Scribner:]

Hi, thank you, I was hoping to get a little more detail on your surveillance market. You called it out as being strong this quarter. Can you give us a little more detail on the magnitude of that market and where it is represented in your unit numbers?

[Steve Milligan:]

Yes. Well is it in the consumer electronics number? So, our CE line on our data sheet is where the surveillance drives are contained, Sherri and it’s a market that we expect will grow in low single-digit growth rate and so some expanding area on an obviously now you are seeing in some of the news, and the impact of that. And so it’s a good market for us and it also carried a gross margin profile that is above the overall corporate average.

[Sherri Scribner:]

Okay great. And then, just thinking about the enterprise SSD market, that business looks like it was up 20% for you year-over-year. What types of growth expectations do you have for that segment going forward? Thanks.

[Steve Milligan:]

Yes. We had a very large order at Q2 last year. If you look at the sequential, it is pretty strong and we have indicated that would expect to grow faster than the market and the market is expected to grow at about 40% and we’re staying behind that trajectory.

[Operator:]

The next question comes from Katy Huberty with Morgan Stanley, your line is open.

[Katy Huberty:]

How are you thinking about any risk of cloud vendors either catching up with demand or getting through their investment cycle, and some more lumpiness as we go into the back half? Is there any visibility or high-level thoughts on whether we could see lumpiness further out in that market? And then I have a follow up.

[Steve Milligan:]

Yes, Katy, that's something that we keep a close eye on the -- we are seeing, as I indicated strong growth from a Petabyte prespective, when we talk to our customer, and they talk about what’s happening from what they are seeing they expect the Petabyte growth to continue. But at times they can be a little bit unpredictable in terms of the order flow and we saw that last year. So we felt pretty comfortable with where we are at right now, but it is something that we monitor pretty closely. But we are confident that overall data growth will continue to be very strong. It’s just a matter of how the storage get deployed against that where sometimes the lumpiness can potentially come in.

[Katy Huberty:]

Okay, and then Seagate is talking about turning over their entire product portfolio this calendar year. Is that something that impacts your OpEx, and if not, do you view yourself at any advantage or disadvantages as they go through that cycle?

[Steve Milligan:]

We are not expecting there to be any abnormal increase, I guess I would say, in terms of our operating expense as it relates to product deployments. And we are continuing to invest in some of these new growth initiatives, but that's different and refreshing our base hard drive products. So, we would not expect that we would see, call it a surge in our operating expenses as it relates to that and we continue to expect that we are going to have a competitive product line-up to matchup against our competitors.

[Katy Huberty:]

Thank you.

[Operator:]

The next question comes from Joe Yoo at Citi Research. Your line is open.

[Joe Yoo:]

Thank you, Steve and I apologize that I'm asking another pricing question, but I was wondering if you had any thoughts on the weakness of the Yen and its potential impact to hard drive pricing? And did it have any impact to your pricing strategy, or do you think that maybe it affected Toshiba's behavior?

[Steve Milligan:]

That would be speculative. I don’t know. And so if the question that ultimately would need to be directed to Toshiba to get a more specific question, I would reiterate really one thing and that relative to what we saw from the competitive dynamic perspective. We didn't really see anything that was particularly out of the ordinary. The other thing I would add, which is just kind of anecdotal comment. I was at Hitachi as a CEO there and Yen movement did not impact at all. anything that we did. But, I don't know how it impacts Toshiba.

[Joe Yoo:]

Great, thank you. And my follow-up is on the flash platform solution, can you provide some tangible factors that give you the confidence that you can grow above the market?

[Steve Milligan:]

Well, let me take the most tangible factor as we have been growing faster than the market. So I think that history is probably the thing that gives the most tangible proof of that. The other thing is that we have a product roadmap that we’re focused on, that has been discussed and shared with our customers. We are sampling some new products with our customers. We’re getting positive feedback and so as we go through the development process and when we go through prequalification process with our customers, our confidence in our ability to grow faster than the market just continues to be solid.

[Operator:]

The next question comes from Ananda Baruah with Brean Capital, your line is open.

[Ananda Baruah:]

Congratulations on a solid quarter. Two if I could. Steve, I would love to get your view on the need for the industry margin structure to continue to rise, as we talked about the cloud demand and hyperscale picks up and the negative supply environment there begins to tighten up, through the impact that can have on your ability to ship the overall TAM? I would love to get your thoughts there, and then I have a follow-up as well, thanks.

[Steve Milligan:]

Let me take that question in a different direction, rather than me speculating on where the industry margins go. Let me talk about the things that are impacting our business. What’s fundamentally happening from our standpoint is the secular forces, if you want to refer to it that way are basically -- what’s increasing is those elements of our business, they carry higher margins. So we have a tailwind, in effect, that is pushing us to higher-margin opportunities. Also, the things that we’re investing in the strategic growth initiatives, generally speaking carry higher margins. Right now, 58% of our business is “non-PC”. And we know and we said this in the past that the PC market is more price sensitive and there is less ability to differentiate and accordingly those products carry lower margin profiles. But, as our revenue increases in the non-PC segment generally carrying higher margins, we have a bias over time for gross margins increasing as opposed to decreasing over time. That being said, we continue to have a stated gross margin range of 27 and 32. But, as these things continue to evolve, we’ll look at whether or not we need to re-evaluate on that gross margin range.

[Ananda Baruah:]

Got it, that is really helpful. I appreciate it. And just as my follow up quickly, do you believe that the TAM has a chance to grow in 2015 over 2014?

[Steve Milligan:]

We believe that we’ll see low single-digit growth from an overall TAM perspective.

[Ananda Baruah:]

Got it, thanks a lot.

[Operator:]

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

[Steven Fox:]

Thanks, good afternoon. Steve, just going back over the pricing one more time. I understand what you are talking about, just typical pricing patterns, especially as you go up to a higher capacity. It seems like your competitor is saying that the typical pricing should not apply, because of the rising complexities and the tighter components, and just the overall cost of capacity. Can you just react to that statement as to whether there is the potential for the industry to change in terms of how it looks at pricing as you go from 4 to 6 to 8 terabyte products?

[Steve Milligan:]

Well it is kind of difficult for me to comment on that specifically. I mean the bottom-line to it is that I am going to repeat two things and that pricing was consistent with our expectation and at the end of the day and order for us to be able to do what we need to do, we have to have pricing that is competitive with the industry. Whatever that means in terms of you know what price declines, whatever it means but at the end of the day we did not see anything particularly unusual and remember that margins in that business carry higher margins. So I mean we are comfortable in general with where we are position in that regard.

[Steven Fox:]

Fair enough, it was worth a shot. And then just as a quick follow up, your average capacity was up 24% year-over-year. Obviously some of that, or a lot of that was driven by the enterprise capacity drivers. But can you sort of dissect that a little bit further and talk about how average capacity looks year over year in some of the other products. Thanks.

[Olivier Leonetti:]

I mean we could obviously as Steve indicated we saw big increase year-over-year and exhibiting the capacity enterprise. If I look at the rest of the business, performance enterprise going low single digits and the rest of much pretty much stable year on year.

[Steve Milligan:]

So I was kind of trying back to the point that was I making earlier as more and more of our business is deployed against non-PC applications, generally speaking those were higher mixed products where they would be branders, whether it would be surveillance, it would on the enterprise space and so as on mix transitions from an overall business prospective we are going to get a nice bump in terms of the average capacity point shift.

[Steven Fox:]

Great. Thank you very much.

[Operator:]

The next questions from Joe Wittine of Longbow Research. Your line is open.

[Joe Wittine:]

Hi, thanks. Steve, you acknowledge hard drives will lose share within the PC category, and we are going to see that accelerate exiting the year. So, I am kind of assuming your expectations of low single digit decline for PCs, is the current trajectory in your client units which is down 7% or 8% on a year-over-year basis, is that a good guesstimate or barometer going forward of what the trajectory will be? Thanks.

[Steve Milligan:]

We anticipate again we will see what Toshiba publishes that we lost a little bit of share in the Notebook space and that was primarily because which of what kind have happened over the last couple of quarters, some of that may have a little bit to do with gaming, and then also that is where margins tend to be lower and so that may be some of the area where we just chose to not participate in some of the business. So I would say that decline is steeper that what the industry is seeing.

[Joe Wittine:]

Helpful, thanks.

[Operator:]

The last question comes from Jayson Noland with Robert Baird. Your line is open.

[Jayson Noland:]

Great, thanks for taking me in. Steve, a question on the archive market. You have launched product that seems to be built specifically for that opportunity. Could you talk a little bit about traction there, and what the potential is longer-term?

[Steve Milligan:]

As I indicated in my remarks, we have got some, I hate to call sample units but we have got some customer applications running and test unit and that kind of thing and response so far. Our customers are very pleased that we actually now have to construct a subsystem for them, given that we have been a component supplier for so long and so we are encouraged and I think it’s fair to say that our customers are encouraged as well. It is some of the progress that we are making in that area.

[Jayson Noland:]

When you say you will be moving up the enterprise stack, is this an example of that and will some of that be more obvious down the road, or is it mostly going to be things that happen behind the scenes?

[Steve Milligan:]

Yes, this is an example of that. We are going to have to see all of that evolves. We will look at opportunity to intelligently move up the enterprise stack and will do our best to do that which we have done so far in a collaborative fashion with our customers. Our goal is not to compete with our customers but they figure out of that way of enabling them, so that they can extent their value proposition to their customers whether that be through other software services, other kind of offerings. So that is our base strategy is.

[Jayson Noland:]

Okay, great. Thank you.

[Steve Milligan:]

Any more questions?

[Operator:]

That was our last question.

[Steve Milligan:]

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

[Operator:]

That conclude today conference. Thank you for participating. You may disconnect at this time.