Western Digital doing well

Best Western according to iSuppli

This is a view from iSuppli which describes the contents of a report it has for sale. The details of that are below.

Western Digital Corp.’s (WDC’s) share price recently hit a 10-year high—but is its stock-market success the product of Wall Street spin—or Main Street demand for the company’s Hard Disk Drives (HDDs)?

“WDC’s share-price increase is the result of fundamentals, including the company’s careful and strategic approach to the market and a management team that has shown it can play its HDD cards very shrewdly,” said Krishna Chander, senior analyst for storage systems at iSuppli Corp.

On Thursday, Feb. 27, WDC’s share price closed at $34.80, the highest level since 1997, and a major improvement since the dark days of September 2001, when the company’s stock dropped below $2. Although WDC’s stock price has declined somewhat since late February, the company’s shares have advanced significantly since February 2006, when they reached $24.18. In contrast, leading HDD supplier Seagate Technology LLC’s price has flattened since 2006, as presented in the attached figure.

Best Western
So what’s changed for WDC? One factor that has captured Wall Street’s attention is the company’s improving gross margin. WDC’s gross margin rose to 23.3 percent in the fourth quarter of 2007, up from 15.7 percent in the first quarter of the year. Along the way, it had purchased a component supplier, Komag, and has successfully reaped the benefits of this acquisition without a dilution in gross margin.

WDC also improved its market share slightly during 2007. The company’s share of global HDD shipments rose to 23 percent by the fourth quarter of 2007, up from 21.5 percent at the beginning of the year, according to iSuppli.

Capitalizing on a lull in the HDD price war, WDC achieved a significant rise in shipments during the second half of the year, with shipments rising by 18 percent in the third quarter and 16 percent in the fourth quarter.

Tall in the saddle
WDC’s successes reflect its careful, strategic approach to the market, iSuppli believes. The company never took a position as a leading-edge player in technologies including Giant Magneto-Resistive (GMR), Perpendicular Magnetic Recording (PMR) and small form-factor HDDs. Even in its product announcements, WDC never mentioned a new offering until it was ready to ship. This benefitted the company by allowing it to focus on improving its manufacturing processes for new products without the external pressure to rush offerings to the marketplace because of prior announcements.

The company also showed considerable aplomb in positioning itself, making moves including:

- Reducing its product mix for desktop PC HDDs to about 55 percent in the fourth quarter of 2007, down from 70 percent in the first quarter of 2007. Such HDDs command lower margins than products targeted at the notebook or enterprise markets.
- Eliminating its exposure to the 1-, 1.3- and 1.8-inch HDDs targeted at consumer electronics applications, an area where competition with NAND flash memory is a growing threat.
- Making successful inroads into the external HDD market, where demand is growing at a rate faster than 20 percent annually.
- Introducing the concept of green HDDs that have reduced power consumption.
- Its planned re-entrance into the market for SCSI HDDs for enterprise markets, where gross margins are potentially much higher than in the consumer electronics and PC segments.

WDC’s experience from the past participation in the market and its recent introduction of SATA drives for the enterprise has given it a level of penetration and credibility with major enterprise OEMs. Since this segment now has only three players—Seagate, Hitachi GST and Fujitsu—the arrival of a fourth entrant is a welcome addition to the supply base.

- Maintaining tight product and financial management. The company is only entering segments that are mature and that generate demand, including set-top box HDDs, enterprise drives for primary and secondary storage and mobile PCs.

Given its strong fundamentals, WDC is likely to continue to make gains in the HDD market—and on Wall Street, iSuppli believes.

Find out more about iSuppli’s HDD forecast and analysis with Chander’s latest report entitled: Storage Surges Ahead; Retires Mini HDD and HD DVD. For more information on this report, please visit: http://www.isuppli.com/catalog/detail.asp?id=9503.

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