Western Digital

Western Digital 2010 Annual Report and Form 10-K The Company Founded in 1970, Western Digital is a data storage pioneer and long- time leader in the hard drive industry. WD provides cost effective storage solutions for people and organizations that collect, manage, and use digital information. WD® hard drives and solid-state drives are found in desktop and notebook computers, corporate networks, and home entertainment systems, as well as sophisticated medical, military/ aerospace, and telecommunications systems. They are also used as personal storage for backup and portable applications. Customers rely on WD drives to keep data accessible and secure from loss. WD is responding to changing market needs by delivering an ever broadening range of storage solutions, deploying technologies which reduce energy usage, increase performance and improve ease of use, with the same quality, reliability, and on-time delivery that have made WD successful in the traditional computing markets. The company also is stepping outside those traditional markets with new products such as media players that enable consumers to manage and enjoy a wealth of digital content. Our products are marketed to leading OEMs, systems manufacturers, selected resellers and retailers under the Western Digital® and WD brand names. Product, financial, and investor information is available on the company’s website at www.westerndigital.com. John F. Coyne President and Chief Executive Officer Fellow Shareholders: Fiscal 2010 was another highly profitable growth year for WD, concluding a decade of strong financial performance as the company marked its 40th year of operation. REVENUE Looking ahead into our fifth decade, ever-increasing demand Dollars in millions $9,850 for cost-effective, high-capacity storage continues to provide $10,000 $9,000 opportunity for substantial growth and consistent value creation, $8,074 $8,000 $7,453 when addressed with an effective business model. With a $7,000 $6,000 $5,468 relentless focus on customer needs, quality, low-cost, and high $5,000 $4,341 $4,000 asset efficiency, WD has become solidly and increasingly profitable $3,000 since adopting the basis of its current business model a decade $2,000 $1,000 ago. Over the last five years, we have profitably grown revenue $0 FY2006 FY2007 FY2008 FY2009 FY2010 at a compound annual rate of 22%. In this same period we have The strong, underlying demand for storage grown operating income at a compound rate of 50% per annum. and continued customer preference for WD products led to a 32% increase in revenue In fiscal 2010, we grew revenue 32% to $9.8 billion and we from fiscal 2009. increased operating income by 194% year-on-year. The hard drive demand growth story continues to be fueled by the proliferation of multiple devices and applications that are resulting in the generation, utilization and storage of massive amounts of EARNINGS PER SHARE digital content—most notably video—on low-cost, high-capacity $7.00 $6.00 $5.93 hard drives. Storage devices are being utilized either locally or in $5.00 $4.00 $3.84 the cloud, with WD addressing both of these opportunities in a $3.00 $2.50 $2.08 significant way. We believe that the industry’s growth trajectory will $2.00 $1.76 $1.00 continue over the foreseeable future, creating significant additional $0 FY2006 FY2007 FY2008 FY2009 FY2010 opportunity for WD with its expanding product set, to continue to Our revenue expansion and our continued generate growth on a sustained and profitable basis. We are also focus on cost and efficiency resulted in strong year-over-year EPS growth. investing in and participating in adjacent markets such as solid state storage and media management in the home, to expand our addressable markets and our opportunities for continued profitable growth. CASH and CASH EQUIVALENTS LESS DEBT The growth opportunity in the hard drive market has been created Dollars in millions in large part by our ability to continually drive down average cost $2,400 $2,334 $2,000 per gigabyte, leading to attractive price points that have driven $1,600 $1,312 $1,200 mass market adoption of devices incorporating hard drive storage. $678 $595 $800 $507 $400 At the same time, we have gradually expanded gross margins $0 FY2006 FY2007 FY2008 FY2009 FY2010 while growing revenues by continuously increasing efficiencies and WD ended fiscal 2010 with $2.3 billion of net reducing costs. cash and cash equivalents, an increase of $1 billion from fiscal 2009. While remaining highly profitable, we have continued to generate significant amounts of cash, further strengthening the industry’s REVENUE DIVERSIFICATION* highest quality balance sheet. We generated $1.9 billion in cash Dollars in millions flow from operations during fiscal 2010. Our cash and cash $10,000 Desktop Revenue equivalent balance of $2.7 billion at the end of the fiscal year $9,000 Non-Desktop Revenue $8,000 36% exceeds our anticipated operating needs and provides us with $7,000 $6,000 44% 38% operational flexibility, the ability to continue to invest in advanced $5,000 $4,000 technology, expand our product breadth through the pursuit of 57% 64% $3,000 71% 62% internal and external opportunities and protect against continued $2,000 56% 43% $1,000 29% macro economic uncertainty. We continue to prudently review and $0 FY2006 FY2007 FY2008 FY2009 FY2010 evaluate all available avenues to increase shareholder value with * Revenue percentages are based on sales of hard drives only. our strong balance sheet. Remaining focused on our goal to diversify our product set beyond desktop computing, hard drive revenue from non-desktop markets Over the course of fiscal 2010, we derived significant return on expanded to 64% in fiscal 2010. our continuing investments in technology, new products, and improvements in our operations: 2.5-INCH MOBILE DRIVE SHIPMENTS Amounts in millions • We continued to lead the industry’s fastest growing segment— 90.0 2.5-inch drives—deploying industry-leading areal density 80.1 80.0 products at the 640 GB, 750 GB and 1 TB capacity points. 70.0 60.0 55.3 50.0 • We made our entry into the traditional enterprise market with 40.0 36.6 the introduction of our first 2.5-inch SAS-interface hard drives 30.0 20.0 for server applications—part of our multi-year investment and 12.3 10.0 5.4 commitment to serve this important and heretofore unserved 0.0 FY2006 FY2007 FY2008 FY2009 FY2010 market for WD. Reflecting our technology and product leadership in this high-growth market, WD • We brought to market our first client-oriented solid-state drive increased mobile drive shipments 45% from fiscal 2009. (SSD) to complement our existing portfolio of high reliability embedded SSDs, and we are in development of our first SSD for high-end enterprise applications. BRANDED PRODUCTS REVENUE Dollars in millions • In our branded products business, we broadened our $2,000 $1,818 portfolio of WD storage devices, with the introduction of $1,800 ® ™ ® $1,600 My Book Studio LX external hard drives for Apple users, $1,403 $1,445 $1,400 and the My Book AV DVR Expander external drives which $1,200 $1,000 $871 allow users to store more of their favorite movies and TV shows $800 locally. We also extended our family of WD media players with $600 ® ™ ® $400 $292 WD TV Live Plus, featuring added services such as Netflix , $200 YouTube™, Flickr®, Pandora®, Live365® as well as MediaFly™ $0 FY2006 FY2007 FY2008 FY2009 FY2010 that enables consumers to stream their favorite shows and Our continued strategy to focus on the personal content directly to their TVs. It was also the first industry’s high-growth sector of external ® storage resulted in a 26% increase in network media player compatible with Windows 7. branded products revenue from fiscal 2009, reflecting continued industry leadership in this market. CAPITAL EXPENDITURES and • On the manufacturing side, we improved the security of our RESEARCH and DEVELOPMENT SPENDING Dollars in millions supply of glass substrates and enhanced our long-term cost $1,348 $1,400 Capital Expenditures structure with the acquisition of Hoya’s media operations. $1,200 Research & Development $1,079 $1,028 $1,000 In closing, I want to acknowledge our loyal customers whose $800 $630 $600 $565 satisfaction with the WD value proposition is the primary reason for $400 $200 WD’s continued significant growth as a leading supplier of storage $0 devices. We will continue to work passionately and diligently to FY2006 FY2007 FY2008 FY2009 FY2010 earn their ongoing business. I also want to thank the WD team Fiscal 2010 represents the third year in which WD invested over $1 billion in research and and our supply partners for their exceptional contribution to WD’s development and capital expenditures to advance our technology position and to revenue, profitability and cash generation in fiscal 2010. accommodate our continued growth. CASH FLOW FROM OPERATIONS John F. Coyne Dollars in millions President and Chief Executive Officer $1,942 September 28, 2010 $2,000 $1,800 $1,600 $1,399 $1,400 $1,305 $1,200 $1,000 $800 $618 $600 $400 $368 $200 $0 FY2006 FY2007 FY2008 FY2009 FY2010 As a result of our agile response to the demand for hard drives, WD generated $1.9 billion in cash flow from operations. SHAREHOLDERS’ EQUITY Dollars in millions $5,000 $4,709 $4,500 $4,000 $3,500 $3,192 $3,000 $2,696 $2,500 $2,000 $1,716 $1,500 $1,157 $1,000 $500 $0 FY2006 FY2007 FY2008 FY2009 FY2010 WD’s long-term, sustained profitability has resulted in $4.7 billion of shareholders’ equity. (This page intentionally left blank) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.

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