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:

• 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 expansion into new hard drive markets;
• business conditions and growth in the desktop, mobile PC, enterprise, consumer electronics and external hard drive markets;
• pricing trends and fluctuations in average selling prices;
• failure to continue to effectively integrate WD’s media and head technologies;
• changes in the availability and cost of commodity materials and specialized product components that WD does not make internally;
• negative impacts of the conditions in the global credit markets on our current investment portfolio; and
• other factors listed in our periodic SEC filings and on this Web site in Risk Factors.
  

Robert Blair - 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 opportunities and demand in the hard drive industry; customer preference for the WD brand; our capital expenditures; repurchases of our stock; our short-term investments; our cash conversion cycle; seasonality of the June quarter; and our current financial outlook for the June 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 February 5, 2008, 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.

John Coyne - President & Chief Executive Officer

Good afternoon everyone and thank you for joining us. With me today is CFO Tim Leyden.

The market for hard drives continued to demonstrate strong year-on-year unit growth of 16.2 percent in the March quarter, while exhibiting an 8.6 percent seasonal decline from the exceptionally strong December quarter, as we had anticipated in our original guidance for the third quarter issued on January 23rd. 

We are extremely pleased with the March quarter results we released earlier today. The WD team again delivered excellent performance, continuing our strong track record of profitable growth. 

Our Q3 revenue performance reflects customer preference for the WD value proposition of quality and reliability, a compelling product portfolio and responsive and timely availability, supported by a demonstrated willingness and capability to invest in the future.  Our earnings performance is the result of healthy market demand, a competitive cost structure, disciplined financial management, and a committed team with a passion to succeed.

Let me share some highlights of our March quarter performance compared with the same quarter last year:

• Hard drive revenues rose by 43 percent to $2 billion and 22 million.
• Hard drive unit shipments grew by 41 percent to 34.5 million.
• Earnings per share expanded by 132 percent to $1.23. 
• Gross margins increased 680 basis points to 22.6 percent.

 
We continued to demonstrate financial and operational discipline, generating substantial cash from operations and maintaining our industry-leading asset velocity.  From the beginning of the quarter we focused closely on sales linearity and achieved a significant improvement in performance year–on-year.  Our sales in the final week of the quarter were 9.8 percent of our total quarter volume, compared with 13 percent in the same week a year ago. 

As we watched demand and supply patterns emerge throughout the quarter, we made the decision to shut down our component and drive factories for substantially all of the last week of the quarter.  We did so in order to balance our supply with demand and ensure that we created no overhang of inventory to pressure the seasonally-weak June quarter.  Consequently our total inventory remained flat quarter-on-quarter at an industry leading 25 days, which included finished goods up modestly by less than one day of supply.  This supply/demand alignment action reduced gross margins in the quarter by some 60 basis points. 

Reflecting our confidence in the future of the hard drive industry and WD’s strategy and business model, we announced a new share buyback authorization of $500 million over five years.

We continue to grow faster than the industry in practically all market segments we serve—desktop, enterprise, branded and mobile.  The one exception to the WD growth story in the March quarter was our DVR business, where, consistent with our January commentary, we chose to reduce our volumes in order to improve profitability in that business.

A key driver of our success is our focus on product quality and reliability.  During the quarter, WarrantyWeek published an analysis of five-year warranty claim trends for U.S. tech companies.  This data highlights significant and consistent improvement by WD over the last five years.  We have lowered the cost of warranty claims from an industry competitive 1.9 percent of revenues in 2003 to a clear industry leadership position of 0.9 percent in 2007.  At the same time, we have extended our average warranty period by some 50 percent.  While these improvements fall straight to the WD bottom line, more important is the fact that our customers also benefit substantially from the lower cost of ownership of WD drives and enhanced customer perception of systems which incorporate WD drives.

Earlier this week, we announced availability of the WD VelociRaptor™ 2.5-inch 300 gigabyte 10,000 RPM hard drive, the next generation product in our popular WD Raptor® enterprise SATA family. 

• This is the fastest SATA drive available in the industry today, delivering a 35 percent performance improvement over the WD Raptor drive.
• At 300 GBs it delivers the industry’s highest capacity in a 2.5-inch 10,000 RPM drive, double that currently available from competition.
• It incorporates the highest areal density shipping in the industry, at 290 Gb/sq in.   
• Our IcePack™ adapter allows the drive to be mounted in a 3.5-inch drive bay while reducing operating temperature some seven degrees further improving long-term reliability.
• WD VelociRaptor continues our industry-leading GreenPower initiative launched last July, by delivering all these attributes while consuming 35 percent less power than the previous Raptor family.  

This product demonstrates the continued momentum in WD’s development and deployment of leading technologies and further enhances our broad product portfolio. 

In summary, we are pleased with our sustained progress against our profitable growth objective year to date. We continue to feel good about the robust demand forecasted in our industry over the next several years and about WD’s opportunity to continue to prosper by providing compelling solutions to customers.

Tim will now provide a Q3 financial report and our outlook for Q4.

Closing remarks

I would like to recap the highlights of the call. We are very pleased with our sustained progress against our profitable growth objective year to date. We continue to feel good about the robust demand forecasted for the industry over the next several years and we feel good about WD’s opportunity to continue to prosper by providing compelling solutions to our customers. With that, I’d like to thank you for joining us on our call today and I look forward to updating you on our progress in the future.

Tim Leyden - Executive Vice President & Chief Financial Officer

Our March results reflect strong execution by the WD team. Throughout the quarter, we leveraged our operational flexibility and financial management discipline to carefully match supply with demand. This resulted in outstanding revenue growth and operational results that delivered 680 basis points of gross margin improvement over the same quarter last year and revenue and earnings that exceeded our updated guidance. A strong January and February, coupled with a measured approach to March’s more competitive environment, led to better revenue linearity for WD year-on-year, enabling us to generate $431 million in operating cash flow and pay down $260 million in debt, while also repurchasing $44 million of common stock.
 
Revenue for our third fiscal quarter was $2.1 billion. This includes $89 million from external sales of media and substrates. Hard drive revenue of $2.022 billion was up 43% from the prior year, and hard drive shipments totaled 34.5 million units, up 41% from the prior year period.  

Average hard drive selling price was approximately $59 per unit, down $2 from the December quarter and up $1 from the year-ago quarter. Product and channel mix changes as well as expected seasonal pricing factors contributed to the quarterly ASP decline. The percentage of our hard drive revenue generated by non-desktop PC applications was 54% in the March quarter, consistent with the December quarter, and it was 47% for the year-ago quarter.

We shipped 10.2 million 2.5-inch mobile drives in the March quarter, as compared to 8.7 million in the December quarter and 3.7 million in the year-ago quarter.  These increases were driven by continued strength in overall mobile storage demand coupled with increased customer preference for WD product offerings.

Sales in our desktop, enterprise and branded products businesses were in line with our expectations.

In consumer electronics, we shipped 3.1 million 3.5-inch drives for use in digital video recorders (DVRs) in the March quarter versus 4.1 million in the December quarter and 2.6 million in the year-ago quarter. Our moderation of unit shipments in this market generated the desired outcome of improved margins.  We continue to believe that this market offers us long-term profitable growth opportunities.

Hard drive channel revenue was 50% OEM, 34% distribution and 16% branded products versus 48% OEM, 34% distribution and 18% branded in the December quarter; and it was 47% OEM, 34% distribution and 19% branded in the year-ago quarter. These percentages exclude external sales of media and substrates, which totaled $89 million in the March quarter, or 4% of revenue, and $120 million in the December quarter, or 5% of revenue. As a reminder, there were no media and substrate sales in the year-ago quarter as we had not yet made the media acquisition.  There was no single customer that comprised more than 10% of total revenue, reflecting a healthy diversity of customers in multiple markets.

The Q3 geographic split of our hard drive revenue was 28% Americas, 31% Europe and 41% Asia, as compared to 32% Americas, 32% Europe and 36% Asia in the December quarter; and it was 36% Americas, 29% Europe and 35% Asia in the year-ago quarter. These percentages also exclude external sales of media and substrates.

Our gross margin percentage for the quarter was 22.6% versus 23.3% in the December quarter and 15.8% in the year-ago quarter. The decrease in gross margin vs. Q2 came from more competitive pricing, a higher OEM mix and the negative impact of our one week factory shut down, offset by increased volume and improved cost. 

Operating expenses totaled $179 million, or 8.5% of revenue. Total operating expense was slightly down from the December quarter. As compared to the prior year, operating expenses are up as a result of adding media operations, 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 $298 million, or 14% of revenue.

Interest and other non-operating expenses were approximately $8 million. This includes about $3 million of unrealized losses on our previously disclosed investments in auction-rate securities. These investments totaled $30 million at the end of the quarter.   

Our $10 million tax provision for the March quarter is approximately 3.5% of quarterly income before taxes and the year-to-date rate is approximately 4% ¾ excluding Q1 non-recurring items. We expect that our rate for the full year will continue to be at the low end of our previously stated 4% to 6% range.

Our net income totaled $280 million, or $1.23 per share.

In March we announced a realignment of our media operations related to the planned completion of the majority of our external media and substrate supply obligations. The total estimated cost of this realignment is about $16 million. This was recorded as an adjustment to the goodwill balance as of the end of the quarter and did not impact March’s operating results. We continued to make excellent progress on our media integration and are on track to meet our previously stated plans of full integration by the December quarter.   
  
Turning to the balance sheet, our cash, cash equivalents and short-term investments at the end of the quarter totaled $949 million as compared to $967 million at the end of December. 

Cash generated from operations during the quarter totaled $431 million. 

Capital expenditures for the quarter of $137 million were lower than our original expectation. Our non-cash charges for depreciation and amortization expense totaled $111 million. For the first nine months of 2008, our capital expenditures totaled $469 million. We now expect capital expenditures to be about $625 million for fiscal 2008, about $75 million lower than our most recent guidance as we align expenditures with anticipated demand and realized efficiency gains. Fiscal 2008 depreciation and amortization is expected to be about $410 million.

We reduced debt by a total of $260 million during the March quarter. We repaid the $760 million bridge loan and replaced it with a five-year credit facility that consists of a $500 million term loan, which is currently outstanding, and a currently unutilized $250 million revolving line of credit. We also repurchased approximately 1.5 million shares of common stock for $44 million. 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. Earlier this month, we announced an increase to our stock repurchase plan of $500 million. 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 March, we had cash and cash equivalents of $917 million and short-term investments of $32 million, which included $30 million of auction-rate securities. These auction-rate securities are currently accounted for as current assets and are held as available for sale securities. However, if the liquidity of these securities continues to be constrained by the market, we may have to reclassify them as long-term investments.  

As of the end of March, we had 44 days of receivables outstanding, 25 days of inventory, or 14 turns, and 64 days of payables. This resulted in a cash conversion cycle of 5 days, which is within our stated model range of 4 to 8 days. Going forward, we expect to trend towards the high end of that range as we weigh working capital investments against opportunities for growth in new markets and opportunities to reduce shipping costs.

I will now discuss our expectations for the fourth quarter of our fiscal year 2008. 

Revenue for the March quarter included $89 million from the sales of media and substrates to external customers. As we indicated previously, we will not in future be breaking out the amount of revenue generated from these external sales due to the planned reduction in these activities and the expected insignificant impact on our total revenue. Historically, drive demand goes down sequentially from the March to June quarter by approximately 2% to 3%. We would normally expect natural demand reductions in this range. However, late March competitive market dynamics now lead us to forecast a reduction of 4% to 6% and competitive pricing at the high end of historical norms in the June quarter. Consequently, we are forecasting total revenues to be in the range of $1.825 billion to $1.9 billion. This represents an increase of between 34% and 39% over the prior year period. 

We are modeling gross margin of approximately 20%. While this is down from the March quarter, it represents a 500 basis point increase over the 15% gross margin we reported for the June quarter of 2007. 

Operating expenses are projected to be approximately $180 million as we continue to invest in expanding our product and technology portfolio.

Our net interest expense is projected to be about $5 million, assuming no further investment losses.  We anticipate our tax rate to be at the low end of our previously stated range of 4% to 6% of pretax income, and our share count to be approximately flat with the March quarter.

Accordingly, we estimate earnings per share of between $0.77 and $0.83 for the June quarter.

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