Western Digital Corporation

WESTERN DIGITAL – EARNINGS PREVIEW

OVERVIEW OF WDC.

• Design, develop, manufacture and sell hard drives.

• Design and develop solid state drives

• November 2009 - entered the traditional enterprise market with WD S25, which is a 2.5-inch, SAS interface hard drive (cloud computing)

• Develop and manufacture hard drives for the desktop and mobile PC, enterprise, CE and external hard drive market

• Western Digital inherently bad reputation, product failures. However, they are cheaper than other drives and certainly have more drives available in more retail stores. The negative reviews could be a result of market penetration i.e. more of their products are out in the market.

• Business Development Manager for Western Digital in Australia, Damien Hodge said that his company was currently selling millions of WD hard drives to cloud computing providers such as Google – 26/11/2010

• In 2010, 64% of hard drive net revenue was derived from non-desktop markets, including notebook computers, CE products, enterprise applications, and WD-branded product sales, as compared to 62% in 2009

• For 2010 and 2008, no single customer accounted for 10%, or more, of the Company’s net revenue. For 2009, sales to Dell Inc. accounted for 10% of the Company’s net revenue.

FINANCIAL

• Low PE ratio of 6.05

• Short % of Float (as of Dec 31, 2010) 2.80% - very low short interest.

WDC : Sales by Region	2010	2009	2008	Growth
	$m	$m	$m	08/10
United States	1,889	1,492	1,949	97%
Asia	5,239	3,639	3,343	157%
Europe, Middle East and Africa	2,260	2,008	2,344	96%
Other	462	314	438	105%
Total	9,850	7,453	8,074	122%

Given the growth from 2008 to 2010, particularly sales in Asia, the low PE certainly does not align with high sales growth.

VALUATION

EBITDA for 2010 is around $2,035m. Market capitalisation is around $7,680m. Cash flow from operating operating activities was $1,942. The balance sheet has very little debt.

Current assets less total liabilities stands at around $2,101. This represents 27% of the share price. This values the revenue of $9,850m at $5,738m. Or put it another way the company is valued at around 2x EBITDA.

OPINION

I started off analysing the financials of this company. However I soon came to the conclusion that the financials are not what really matters for this company’s valuation, but the probability that the products that WDC produce will be the will be a 'windows phone' of the future. i.e. something that no one buys and is completely useless.

The hard drive makers have been bashed largely due to the growing coverage of cloud computing. The problem is that the wall street analysts sitting in New York offices with 4G networks have not tried a mobile broad band connection in developing nations such as the UK, China, India.

In the UK for example we have areas that still do not have mobile access, let alone a 4G network to download large excel files whilst on the move. Hotels charge £6.00 an hour to access the internet. Not ideal if you have all your critical documents sitting on a Google server farm. Impossible and expensive to work in the absence of a machine without a hard drive. And using public wi-fi channels ? Completely insecure as far as I am concerned. Apply this reasoning across the rest of the developing nations and it is apparent that hard drives are not going to disappear. Just looking at the sales figures in Asia clearly demonstrates that the demand for WDC products is certainly not abating.

Cloud computing is great in offices with good connectivity and countries with fast mobile connections, however it will take some years for the rest of the world to have such high speed connections which will eliminate the need for hard drives. Not to mention the significant investment required.

Other items that the analyst have failed to take note of is that the size of media files is growing faster than the increase in the available speed on mobile networks. So with the exception of music files, the excel spreadsheets, photo, HD media are also bigger.

Mobile operators are also moving away from unlimited mobile broadband access, to a pay per use. There is very little point in having all your home movies in a cloud network when you get wacked with a $1 bill each time you access them.

Mobile monopolies still exist across a lot of Europe. Further the European Commission has been meddling in the pricing of roaming and data charges, forcing roaming price caps by mobile operators. The impact of this is that where travelling Europeans were subsiding unlimited access for local non travelling users, this is no longer the case. The outcome is that all users are now subject to data caps with fees for exceeding the cap.