Western Digital 2005 Annual Report Download - page 24

The Company believes the rate of hard disk drive unit growth in the desktop PC market is affected by several
factors, including maturing PC markets in North America and Western Europe, an increase in first-time buyers of PCs in
Eastern Europe and Asia, the lengthening of PC replacement cycles and an increasing preference for notebook systems.
The Company expects that the mobile computing market, which is primarily notebook computers, to grow faster
than the desktop PC market due to customer preference in the next three years. Western Digital entered the mobile hard
disk drive market in October 2004, commencing volume production of its WD Scorpio
TM
family of 2.5-inch hard disk
drives for notebooks.
As the market for consumer applications expands, additional investments by the Company will be required. For
example, CE products such as handheld digital audio players currently utilize sub-2.5-inch form factor hard disk drives.
In January 2005, Western Digital announced it has plans to enter the miniature hard disk drive market with a 1.0-inch
6-gigabyte product. In addition, while CE products may require hard disk drives that are similar in nature to desktop
hard disk drives, these products have often required specialized features or functions driving additional development
versus desktop products.
The enterprise market for hard disk drives focuses on customers that make workstations, servers, network attached
storage devices, storage area networks, and other computing systems or subsystems. Western Digital serves this market
through its application of the SATA interface. The SATA interface contains many of the same benefits of the small-
computer-systems-interface, or SCSI Ì the predominant interface currently used in most enterprise hard disk drive
applications. The Company believes that the use of the SATA interfaces in enterprise hard disk drives is growing.
Results of Operations
Fiscal 2005 Overview
In 2005, Western Digital's net revenue increased by 19% to $3.6 billion on unit shipments of 61.4 million as
compared to 48.3 million in 2004. In 2005, 21% of WD's revenue was derived from non-desktop PC sources including
CE products, enterprise applications, notebook PCs and retail sales as compared to 14% in 2004. Gross margin increased
to 16.2% from 15.2% in 2004. Operating income increased by $42 million to $197 million, which included the impact
of a $19 million charge for the settlement of a patent infringement lawsuit. Operating margins increased to 5.4% as a
percentage of net revenue in 2005 compared with 5.1% in 2004. Western Digital generated $461 million in cash flow
from operations in 2005 compared with $190 million in 2004, finishing the year with $598 million in cash and short-
term investments, an increase of $221 million from the prior year.
Historically, industry unit shipments have increased 5% to 10% between the June and September quarters. The
Company anticipates traditional seasonal demand trends for the hard disk drive industry in the September 2005 quarter.
WD also expects to continue to benefit from its growing participation in the CE market and the on-going volume ramp
of its Scorpio 2.5-inch hard disk drives.
Summary of 2005, 2004 and 2003 Comparison
The following table sets forth, for the periods indicated, summary information from the Company's statements of
income (in millions).
Years Ended
July 1, 2005 July 2, 2004 June 27, 2003
Revenue, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,639 100.0% $3,047 100.0% $2,719 100.0%
Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 590 16.2 462 15.2 443 16.3
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 393 10.8 307 10.1 256 9.4
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 197 5.4 155 5.1 187 6.9
Net interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 0.2 Ì 0.0 3 0.0
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202 5.6 155 5.1 190 7.0
Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 0.1 4 0.1 8 0.3
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 198 5.5 151 5.0 182 6.7
18