摩根士丹利-美股-半導(dǎo)體行業(yè)-硬盤(pán)驅(qū)動(dòng)與NAND存儲(chǔ)環(huán)境變得更具挑戰(zhàn)性-20181026正式版

October26,201804:01AMGMT

WesternDigital|NorthAmerica

EnvironmentbecomingmorechallenginginbothharddrivesandNAND

StockRating

IndustryView

PriceTarget

Equal-weight

Cautious

$53.00

WDguideddownsharplyfortheDecemberquarter,indicating

multi-quarterdecelerationincloud,someimpactfromIntelprocessorshortages,andsofterNANDpricing;takingunusualactionstolowerNANDoutputbutearningsshouldbetoughthroughmid2019.LoweringestsandPT,stayEW.

WHAT'S

WesternDigital(WDC.O)

From:

To:

PriceTarget

$96.00

$53.00

CHANGED?

Ourtake:WhilewehaveremainedEWthestock,andnegativeontheshort-termNANDenvironment,wehavebeentoooptimisticaboutwherethestockcouldbottom.Our2019earningswhichwerealreadywellbelowconsensuscomedownover50%.Thecompanyistakingaggressiveactiontofixthememorysituation,withthehighlyunusualstepofidlingfabcapacitytoreduceinventory;thiswillnegativelyimpactGAAPearnings,butwillbeaminorhelptotheglobalsupplydemandenvironmentnextyear.Withallplayersslowingcapitalspendingintheshortterm,anddemandelasticityplayingoutnextyear,wedothinktherewillbeamarginrecoverybythesecondhalfofcalendar2019.Still,it'shardtohaveconvictioninthattimingandthepathtogetthereisfairlyrocky.Astheearningspowercomesdown,weshifttoEV/salesvaluation,whichdrivesourPTdownto$53,about10%abovetheaftermarketprice.

NANDin3q:bitsshippedwerestrong,butpricesweresoft,asexpected.Thecompanyreportedbitgrowthof28%sequentialllyinNAND,muchstrongerthanseasonal,andwithnewdisclosureswecanreportthatyearoveryearbitgrowthwasabout37%,slightlybetterthantheindustry;inventorieshavebeenbloated(daysofinventoryupfrom64to84yearoveryear)highlightingthatproductionwashigherthan37%.Pricesweresoft,down16%vs.2q,anddownabout28%yearoveryear;allindicationsarethatpriceswillfallbyasimilaramountin4q.NANDgrossmarginswere44%,downfrom51%lastquarter,andshouldfallbyabout10pointsin4qbasedontheoverallgrossmarginguidance.

WDistakingtheunusualactionofidlingfabcapacitytoreduceinventory

levels,whichhasamixedeffect.Thecompanysaidthattheywouldreducefullyearoutputby10-15percentnextyearbyreducingutilizationandslowingcapitalspending.Wehaveonlyseenonecompanydothatinthisdecade(Toshiba),and

MORGANSTANLEY&CO.LLC

JosephMoore

EQUITYANALYST

Joseph.Moore@

+1212761-7516

EthanPuritz

RESEARCHASSOCIATE

Ethan.Puritz@

+1+1-212-761-1744

VinayakRao,CFA

EQUITYANALYST

Vinayak.Rao@

+1212761-4669

CraigHettenbach

EQUITYANALYST

Craig.Hettenbach@

+1212761-6435

WesternDigital(WDC.O,WDCUS)

Semiconductors/UnitedStatesofAmerica

StockRating

Equal-weight

IndustryView

Cautious

Pricetarget

$53.00

Shrprice,close(Oct25,2018)

$54.01

Mktcap,curr(mm)

$15,599

52-WeekRange

$106.96-52.25

MorganStanleydoesandseekstodobusinesswithcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.

Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.

1

haven'tseenSandisktakethisactionsincethefinancialcrisisin2009.Thistypicallyhasafairlynegativeimpactonearningsinafixedcostbusiness;WDwilltakeanonGAAPchargefor"underutilization"of$250mmto$300mmoverthenext3quarters,acommonpracticethatwedonotcarefor-itessentiallystripsoutperiodcostsofrunningthefabasonetimeinnaturefromnonGAAPnumbers.WDsaidthatthereisnocashaspecttothecharge,butwewouldnotethatitisessentiallytakingcashcostsoutofthenonGAAPnumbers.Onthepositiveside,though,itshouldallowthecompanytoreigninitsinventorysituation,couldmoderatelyimproveglobalsupplydemandbalance,andinthebestcasecouldseepeerstakesimilaraction.WDsaidthisshoulddrivesupplygrowthdownto36-38%,showingthatthecompanywasonatrajectorytogetcloseto50%.

Meanwhile,harddiskdrivesareshowingtheimpactofsomeclouddeceleration.WesternDigitalreportedHDDunitsandimpliedHDDrevenue18%and13%belowconsensusfortheSeptemberquarter,andguidedforfurtherweaknessinDecemberdrivenbyaperiodofweakercloudspendingonnearlinedrives,suggestingthatwecouldseeflattishexabytegrowthin1hCY19,aswellaspotentialweaknessinPCsduetotheIntelprocessorshortage.OurhardwareanalystKatyHubertybelievesthatindustrydatashowssomepotentialmarketsharelosstoSeagateinthequarter.

Detailsonthequarter:EPSinlinebutrevenuebelowexpectations.Revenueforthequarterwas$5.03bn,belowtheStreetat$5.135bnandMSeof$5.148bndrivenprimarilybyasupplydemandimbalancethathasweighedonflashpricing.GMcameinat38.0%,belowtheStreetandourestimateof38.4%.EPSforthequarterwas$3.04,inlinewiththeStreetand$0.03belowourestimate.ClientDevicesaleswereessentiallyflaty/yat$2.7bn,ClientSolutionssalesdecreased18%y/yto$932mn,andDataCentersalesincreased6%y/yto$1.4bn.

Numberscomedownsubstantiallyasthememorydownturnbeginsinearnest:

DecemberquartermissedtheStreetsignificantlyforbothsalesandEPSonthebackoflowermarginsandplannedunderutilizationtocorrectthesupplydemandimbalanceinNAND.WDexpects$4.3bninsales,18.5%belowtheStreetat$5.27bnand13.9%belowMSeof$4.99bn.TheyexpectaGMof32.5%,atthemidpoint,480bpsbelowtheStreetat37.3%and610bpsbelowourestimateat38.6%.EPSisexpectedtocomeinat$1.55,nearly50%belowtheStreetat$3.08andourestimateof$2.82.

ChangestoEstimates:Wemadesignificantchangestoourmodel.Our1Q2019salesandEPSestimatescomedownfrom$4,994to$4,322and$2.62to$1.55,bothinlinewithcompanyguidance.ForCY2019,oursalesestimatescomedownfrom$20,157to$16,690andourEPSestimatesdeclinefrom$9.60to$4.69.Forgrossmargins,wechangedourCY2019estimatesfrom36.4%to31.7%.Furthermore,werevisedouroperatingmarginassumptiondownwardaswellfrom17%to12.2%.Webelievethesechangesinp[artreflecttheongoingweaknessinNANDthatshouldpersistintoCY2019.Weexpecttobeatthelowendofconsensus.

Thoughtsonthestock:Whilewehavebeennegativeonfundamentalsandneutralonthestock,wehavebeentoooptimisticthatwecouldpredicttheearningstrough.Havingsaidthat,wecanatleastseeaclearpathtorecovery,aspricesfallingcloseto50%overthecourseof2018shouldcreatesignificant

2

elasticitynextyear-bearspointoutthatithasn'thappenedyet,butwedidnotexpectto.Ittakestime,whichiswhywehavebeenbearishon2018.EveryNANDvendorhaspushedoutspendingtosomedegree,andWDistakingadditionalactionstoreducesupplyfurther.Wewouldexpectmarginstobottominmid2019,andstarttorecoverthereafter.It'sprobablytooearly-andtoouncertain-totakeapositioninthestockonthatbasis,butitcertainlylookslikeafairlytypicalNANDcycle.

Withearningscomingdowntowardstrough,wearemovingtomoreofadownturnvaluationmethodology-weuse1.3xev/sales,vs.ourprior11xEPS;thisisaboutwherewehaveseenhistorictroughs,andissimilartotheev/salesmultiplesforSeagate(1.36)andMicron(1.32).ThistakesourPTdownto$53,about10%aboveaftermarketlevels.

3

RiskReward

WesternDigital(WDC,Equal-weight,$53PT)

MorediversifiedportfoliocapturesdemandinflashandcloudpartiallyoffsetbyNANDdownturn

120

$108.00(+100%)

100

80

60

$54.01

$53.00(-2%)

40

$29.00(-46%)

20

0

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19

Oct-19

PriceTarget(Oct-19)

HistoricalStockPerformance

CurrentStockPrice

WARNINGDONOTEDIT_RRS4RL~WDC.O~

Source:ThomsonReuters,MorganStanleyResearch

PriceTarget

$53

Derivedfromthebase-casescenario.

Bull $108

~12xFY19eEPSof$9

FasterrealizationofmergersynergiesandprolongedtightnessinNANDsupply.NANDsupplyremainsextremelytightwithacceleratingdemandonthebackofproductlaunches(e.g.iPhone)andseculartailwindsinenterprise.LongleadtimesforcapitalequipmentandconversionofNANDtoDRAMcapacitypushoutmeaningfulsupplyadditionstolateFY19improvinginvestorsentimentaroundsustainabilityofEPS.Demandfromhyperscalecloudprovidersre-acceleratesinCY18andindustryholdssteadypricingincompetitivesegmentslikenotebooksandcapacityenterprise.WDtradesatthehigh-endofSanDisk'shistoricalP/Erangeonoff-peakearningsinlightofenterpriseHDDsharegainsandsignsofWD'sleadingcoststructureon3DNAND.

Base $53

1.34xEV/CY2019Sales

MorediversifiedproductportfoliodrivesbalancedgrowthbutNANDdeclinesandincreasedcompetitionpressuregrossmargin.Grossmargindeclinestowardthehigh-endofthelong-termtargetaslooseningsupplypressuresNANDpricethroughCY18.HDDfundamentalsremainweakandsofterflashpricesacceleratethetransitionawayfromdisk.WearemovingfromP/EtoEV/Salesaswefeelitsmoreappropriategivenwhereweareatinthecycle

Bear $29

.9XEV/CY2019Sales

FasterdeclineofNANDprices,combinedwithmorecompetitiveHDDindustrypricingpressuresgrossmargin.Grossmarginfallsnearthemidpointofthe

InvestmentThesis

WeexpectNANDpricestodrop31%inFY19onimprovingNANDsupplywhichdrivesour15%belowconsensusEPSforecast.DisagreementswithNANDJVpartnerToshibaMemoryCorp.addtouncertainty.

KeyDebates

CanWesternDigitalmaintainasimilarcostadvantagein3DNANDasin2DNAND?TheevidenceistippinginWD'sfavorwith75%ofbitson3Din2017comparedtorecentexpectationsof50%.WDwillexitCY2017withthevastmajorityofshipmentson3Dandwithprospectsofimprovingcostadvantageandmarginupsidenextyear.

Whatisthelong-termunitgrowthoutlook?UnlikeHDDpeers,weseemodestlong-termrevenuegrowthonthebackofrisingdemandforSSDsacrossendmarketsandcloudgrowthsupportingbothHDDandSSDformfactors.Guidancefor4-8%long-termgrowthappearsreasonableandthecompanyisexpectedtodeliverabovethisrangeinthecurrentyear.Thatsaid,NANDpricevolatilityraisestheriskthatrevenuedeclinesinFY19beforerecoveringinthefollowingyears.

PotentialCatalysts

+GreaterthanexpectedsynergiesfromHGSTandSNDK

+Betterthanexpectedclouddemand

+Fasterexecutionon3DNANDtransition

-Near-termdatapointsonNANDsupply/demandcomingintobalance

-CompetitorsmessaginghigherNANDcapexgrowthin2018and/orweakeningSSDdemandonthebackofhigherNANDprices.-Continuedweakcloudandenterprise

4

target33-38%rangeastheindustryincreasesNANDsupplyfasterthandemandandHDDindustrydigestsexcessinventorybuiltoverthelastyearandahalf.InvestorsgivelesscredittotheNANDbusinesswhichpushesthestocktowardthelow-endofpasttwoyearHDDtradingranges.

demandduetolimitedDRAMsupply.

-DisruptionatFlashVenturesJVlimitsexecutionon3D

RiskstoAchievingPriceTarget

3DNANDtransitiontakeslongerandiscostlierthanplannedand/orcoststructureisn'tasattractiveas2D

HGSTandSNDKsynergiesfallbelowplan

Weakeningdemandresultsinpricingpressure

Slowingarealdensity/technologytransitionlowersmarginsinHDDs

5

FinancialSummary

Exhibit1:IncomeStatementSummary

WDC:SnapshotforthequarterendedSeptember2018

IncomeStatement

QtrResults:

Actual

LstQtr

QoQ

LstYr

YoY

Consensus

MSe

Revenue

$5,028.0

$5,117.0

-1.7%

$5,181.0

-3.0%

$5,135.5

$5,148.9

GrossMargin

38.0%

41.0%

-297

42.3%

-430

38.4%

38.4%

EPS**

$3.04

$3.61

($0.57)

$3.56

($0.52)

$3.04

$3.07

NxtQtrOutlook:

Low

High

Midpoint

-14.5%

$2,691.0

59.8%

$5,273.8

$4,994.4

Revenue

$4,200

$4,400

$4,300

GrossMargin

32.0%

33.0%

32.5%

-551

-12.6%

4510

37.3%

38.6%

EPS**

$1.45

$1.65

$1.55

($1.49)

($4.70)

$6.25

$3.08

$2.82

Source:CompanyData,MorganStanleyResearchestimates

Exhibit2:IncomeStatementVariance

Non-GAAPfinancials,$inMillionsexceptpershare

Reported

MSEst

Difference

F1Q19

F1Q19

Act.VEst.

TotalRevenue

5,028.0

5,148.9

(120.9)

CostofSales

3,117.0

3,174.2

(57.2)

GrossProfit

1,911.0

1,974.7

(63.7)

GrossMargin

38.0%

38.4%

-0.3%

R&D

576.0

581.8

(5.8)

SG&A

356.0

352.7

3.3

OtherOpex

(112.0)

(105.0)

TotalOpExpenses

820.0

829.5

(9.5)

OperatingIncome

1,091.0

1,145.2

(54.2)

OperatingMargin

21.7%

22.2%

-0.5%

NetIncome

906.0

934.6

(28.6)

EPS

$3.04

$3.07

($0.03)

DilutedSharesOut.

298.0

304.0

(6.0)

Source:CompanyData,MorganStanleyResearchestimates

6

ProjectedFinancialStatements

Exhibit3:WDC:ProjectedIncomeStatement

($inmillions)

F1Q16A

F2Q16A

F3Q16A

F4Q16A

F1Q17A

F2Q17A

F3Q17A

F4Q17A

F1Q18A

F2Q18A

F3Q18A

F4Q18A

F1Q19A

F2Q19E

F3Q19E

F4Q19E

F1Q20E

F2Q20E

F3Q20E

F4Q20E

F1Q21E

F2Q21E

F3Q21E

F4Q21E

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

Mar-18

Jun-18

Sep-18

Dec-18

Mar-19

Jun-19

Sep-19

Dec-19

Mar-20

Jun-20

Sep-20

Dec-20

Mar-21

Jun-21

Revenues

3,360

3,317

2,822

3,495

4,714

4,888

4,649

4,842

5,181

2,691

5,013

5,117

5,028

4,322

4,151

4,116

4,179

4,244

4,352

4,443

4,532

4,602

4,668

4,788

ConsRev

Q/QChange

5.3%

-1.3%

-14.9%

23.8%

34.9%

3.7%

-4.9%

4.2%

7.0%

-48.1%

86.3%

2.1%

-1.7%

-14.0%

-4.0%

-0.9%

1.5%

1.5%

2.5%

2.1%

2.0%

1.6%

1.4%

2.6%

Y/YChange

-14.8%

-14.7%

-20.5%

9.5%

40.3%

47.4%

64.7%

38.5%

9.9%

-44.9%

7.8%

5.7%

-3.0%

60.6%

-17.2%

-19.6%

-16.9%

-1.8%

4.8%

7.9%

8.4%

8.4%

7.3%

7.8%

Costofrevenues

2,405

2,411

2,069

2,674

3,379

3,355

3,126

3,161

3,268

3,323

3,086

3,265

3,364

2,931

2,924

2,916

2,784

2,770

2,742

2,762

2,777

2,781

2,819

2,893

SBC

5

4

4

8

13

11

13

12

13

13

11

12

11

One-timeitems

17

35

39

263

251

248

290

305

266

280

236

233

236

Costofrevenues-MW

2,383

2,372

2,026

2,403

3,115

3,096

2,823

2,844

2,989

3,030

2,839

3,020

3,117

2,931

2,924

2,916

2,784

2,770

2,742

2,762

2,777

2,781

2,819

2,893

GrossProfit-GAAP

955

906

753

821

1,335

1,533

1,523

1,681

1,913

(632)

1,927

1,852

1,664

1,391

1,228

1,200

1,395

1,474

1,609

1,681

1,755

1,821

1,850

1,895

GrossMargin

28.4%

27.3%

26.7%

23.5%

28.3%

31.4%

32.8%

34.7%

36.9%

-23.5%

38.4%

36.2%

33.1%

32.2%

29.6%

29.2%

33.4%

34.7%

37.0%

37.8%

38.7%

39.6%

39.6%

39.6%

GrossProfitNon-GAAP

977

945

796

1,092

1,599

1,792

1,826

1,998

2,192

(339)

2,174

2,097

1,911

1,391

1,228

1,200

1,395

1,474

1,609

1,681

1,755

1,821

1,850

1,895

GrossMargin

29.1%

28.5%

28.2%

31.2%

33.9%

36.7%

39.3%

41.3%

42.3%

-12.6%

43.4%

41.0%

38.0%

32.2%

29.6%

29.2%

33.4%

34.7%

37.0%

37.8%

38.7%

39.6%

39.6%

39.6%

GrossProfit-MW

977

945

796

1,092

1,599

1,792

1,826

1,998

2,192

(339)

2,174

2,097

1,911

1,391

1,228

1,200

1,395

1,474

1,609

1,681

1,755

1,821

1,850

1,895

GrossMargin

29.1%

28.5%

28.2%

31.2%

33.9%

36.7%

39.3%

41.3%

42.3%

-12.6%

43.4%

41.0%

38.0%

32.2%

29.6%

29.2%

33.4%

34.7%

37.0%

37.8%

38.7%

39.6%

39.6%

39.6%

Productdevelopment

385

389

359

494

639

585

613

604

592

629

602

577

576

527

506

502

531

552

566

578

589

598

607

622

%ofRevs.

11.5%

11.7%

12.7%

14.1%

13.6%

12.0%

13.2%

12.5%

11.4%

23.4%

12.0%

11.3%

11.5%

12.2%

12.2%

12.2%

12.7%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

One-timeItems

Productdevelopment-MW

385

389

359

494

639

585

613

604

592

629

602

577

576

527

506

502

531

552

566

578

589

598

607

622

%ofRevs.

11.5%

11.7%

12.7%

14.1%

13.6%

12.0%

13.2%

12.5%

11.4%

23.4%

12.0%

11.3%

11.5%

12.2%

12.2%

12.2%

12.7%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

SG&A

192

239

166

400

396

358

346

345

364

381

376

352

356

346

332

329

334

339

348

355

363

368

373

383

%ofRevs.

5.7%

7.2%

5.9%

11.4%

8.4%

7.3%

7.4%

7.1%

7.0%

14.2%

7.5%

6.9%

6.9%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

One-timeItems

SG&A-MW

192

239

166

400

396

358

346

345

364

381

376

352

356

346

332

329

334

339

348

355

363

368

373

383

%ofRevs.

5.7%

7.2%

5.9%

11.4%

8.4%

7.3%

7.4%

7.1%

7.0%

14.2%

7.5%

6.9%

7.1%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

OtherOpEx

56

27

140

122

68

45

39

80

52

48

35

80

46

-

100

100

100

-

-

-

-

-

-

-

Employee

termination,assetimpairmentandothercharges

56

27

140

122

68

45

39

80

52

48

35

80

46

100

100

100

OtherExpenses

OtherOpex-nonGAAP

(46)

(110)

(76)

(253)

(172)

(146)

(148)

(137)

(137)

(145)

(128)

(109)

(112)

(109)

(109)

(109)

(109)

(109)

(109)

(109)

(109)

(109)

(109)

(109)

Stockcompensationexpenses

(36)

(31)

(32)

(73)

(86)

(85)

(85)

(77)

(84)

(86)

(91)

(66)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

(68)

Amortizationofacquiredintangibleassets

(8)

(8)

(6)

(40)

(39)

(40)

(40)

(40)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

Acquisitionrelatedcharges

(27)

(16)

(116)

(10)

(5)

(2)

-

(4)

(6)

(2)

(1)

Chargesrelatedtocostsavinginitiatives

(15)

(24)

(30)

(33)

(15)

(22)

(16)

(9)

(12)

3

(1)

(3)

Other

(2)

(29)

2

(34)

(3)

(2)

1

(4)

-

3

-

OtherOpEx-MW

(10)

(79)

(44)

(180)

(86)

(61)

(63)

(60)

(53)

(59)

(37)

(43)

(44)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

(41)

OperatingExpenses-GAAP

633

655

665

1,016

1,103

988

998

1,029

1,008

1,058

1,013

1,009

978

873

939

931

965

891

914

933

952

966

980

1,005

OperatingExpenses-NonGAAP

531

518

449

641

863

797

811

812

819

865

850

820

820

764

730

722

756

782

805

824

843

857

871

896

OperatingExpenses-MW

567

549

481

714

949

882

896

889

903

951

941

886

888

832

798

790

824

850

873

892

911

925

939

964

OperatingIncome-GAAP

322

251

88

(195)

232

545

525

652

905

(1,690)

914

843

686

518

289

269

430

583

696

748

803

855

869

890

OperatingMargin%

9.6%

7.6%

3.1%

-5.6%

4.9%

11.1%

11.3%

13.5%

17.5%

-62.8%

18.2%

16.5%

13.6%

12.0%

7.0%

6.5%

10.3%

13.7%

16.0%

16.8%

17.7%

18.6%

18.6%

18.6%

OperatingIncome-NonGAAP

446

427

347

451

736

995

1,015

1,186

1,373

(1,204)

1,324

1,277

1,091

627

498

478

639

692

805

857

912

964

978

999

OperatingMargin%

13.3%

12.9%

12.3%

12.9%

15.6%

20.4%

21.8%

24.5%

26.5%

-44.7%

26.4%

25.0%

21.7%

14.5%

12.0%

11.6%

15.3%

16.3%

18.5%

19.3%

20.1%

20.9%

21.0%

20.9%

OperatingIncome-MW

410

396

315

378

650

910

930

1,109

1,289

(1,290)

1,233

1,211

1,023

559

430

410

571

624

737

789

844

896

910

931

OperatingMargin%

12.2%

11.9%

11.2%

10.8%

13.8%

18.6%

20.0%

22.9%

24.9%

-47.9%

24.6%

23.7%

20.3%

12.9%

10.4%

10.0%

13.7%

14.7%

16.9%

17.8%

18.6%

19.5%

19.5%

19.4%

TotalInterestIncome(expense),net

(8)

(7)

(8)

(290)

(503)

(224)

(221)

(237)

(195)

(181)

(1,042)

(114)

(103)

(115)

(113)

(111)

(108)

(106)

(104)

(101)

(99)

(97)

(95)

(93)

InterestandOtherIncome

5

6

6

9

5

5

7

9

16

16

8

-

(4)

(4)

(4)

(4)

(4)

(5)

(5)

(5)

(5)

(5)

(6)

(6)

InterestandOtherExpense

(13)

(13)

(14)

(299)

(508)

(229)

(228)

(246)

(211)

(197)

(1,050)

(114)

(99)

(111)

(109)

(106)

(104)

(101)

(99)

(96)

(94)

(91)

(89)

(86)

InterestIncome

InterestyieldingassetsatBegofPeriod

5,286

5,428

5,860

6,033

8,378

4,325

5,101

5,677

6,378

6,921

6,295

4,983

5,025

4,664

5,381

5,442

5,229

5,722

6,110

6,129

6,310

6,772

7,287

7,853

InterestIncome

5

6

6

9

5

5

7

9

16

16

8

-

(4)

(4)

(4)

(4)

(4)

(5)

(5)

(5)

(5)

(5)

(6)

(6)

Interestasa%ofCashandInvestments

0.4%

0.4%

0.4%

0.6%

0.2%

0.5%

0.5%

0.6%

1.0%

0.9%

0.5%

0.0%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

InterestExpense

Interestbearingliabilities

2,312

2,281

2,250

2,203

16,994

13,133

13,073

13,088

13,151

13,131

12,051

11,200

11,172

11,143

10,893

10,643

10,393

10,143

9,893

9,643

9,393

9,143

8,893

8,643

InterestExpense

(13)

(13)

(14)

(299)

(508)

(229)

(228)

(246)

(211)

(197)

(184)

(114)

(99)

(111)

(109)

(106)

(104)

(101)

(99)

(96)

(94)

(91)

(89)

(86)

InterestExpenseas%ofDebt

2.2%

2.3%

2.5%

54.3%

12.0%

7.0%

7.0%

7.5%

6.4%

6.0%

6.1%

4.1%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

OtherInterestincome1x

-

(81)

(276)

(3)

(15)

(40)

5

(1)

(905)

(13)

(4)

TotalInterestIncome(net)andOtherIncome-MW

(8)

(7)

(8)

(209)

(227)

(221)

(206)

(197)

(200)

(180)

(137)

(101)

(99)

(115)

(113)

(111)

(108)

(106)

(104)

(101)

(99)

(97)

(95)

(93)

PBT-GAAP

314

244

80

(485)

(271)

321

304

415

710

(1,871)

(128)

729

583

403

176

158

322

477

592

646

704

758

775

797

PBT-NonGAAP

438

420

339

242

509

774

809

989

1,173

(1,384)

1,187

1,176

992

512

385

367

531

586

701

755

813

867

884

906

PBT-MW

402

389

307

169

423

689

724

912

1,089

(1,470)

1,096

1,110

924

444

317

299

463

518

633

687

745

799

816

838

IncomeTaxExpense(Benefit)GAAP

31

(7)

6

(119)

95

86

56

135

29

1,597

(189)

(27)

72

56

42

40

58

64

77

83

89

95

97

100

EfectiveTaxRate

9.9%

-2.9%

7.5%

24.5%

-35.1%

26.8%

18.4%

32.5%

4.1%

-85.4%

5.5%

-3.7%

12.3%

14.0%

24.1%

25.6%

18.1%

13.5%

13.0%

12.9%

12.7%

12.6%

12.5%

12.5%

StatutoryTaxRate

32.0%

32.0%

32.0%

32.0%

32.0%

21.0%

32.0%

32.0%

32.0%

32.0%

21.0%

32.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

21.0%

IncomeTaxadjustments

5

(24)

(16)

(92)

34

(13)

(37)

27

(55)

1,544

(259)

(94)

(14)

IncomeTaxExpense(Benefit)NonGAAP

26

17

22

(27)

61

99

93

108

84

53

70

67

86

56

42

40

58

64

77

83

89

95

97

100

IncomeTaxExpense(Benefit)MW

26

17

22

(27)

61

99

93

108

84

53

70

67

86

49

35

33

51

57

70

76

82

88

90

92

EfectiveTaxRateMW

6.5%

4.4%

7.2%

-16.0%

14.4%

14.4%

12.8%

11.8%

7.7%

-3.6%

6.4%

6.0%

9.3%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

11.0%

ExtraordinaryItems

93

121

211

562

728

355

383

524

324

1,945

965

287

327

141

141

141

#REF!

41

41

41

41

41

41

41

NetIncome-GAAP

283

251

74

(366)

(366)

235

248

280

681

(3,468)

61

756

511

347

134

118

263

412

515

563

615

663

677

697

NetIncome-NonGAAP

412

403

317

269

448

675

716

881

1,089

(1,437)

1,117

1,109

906

456

343

327

472

521

624

672

724

772

786

806

NetIncome-MW

376

372

285

196

362

590

631

804

1,005

(1,523)

1,026

1,043

838

395

282

266

412

461

563

612

663

711

726

746

(524)

(287)

Discontinuedoperations

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

NetIncome-GAAP

283

251

74

(366)

(366)

235

248

280

681

(3,468)

61

756

511

347

134

118

263

412

515

563

615

663

677

697

EPS-NonGAAP

$1.76

$1.72

$1.35

$1.02

$1.54

$2.30

$2.39

$2.93

$3.56

($4.70)

$3.63

$3.61

$3.04

$1.55

$1.18

$1.15

$1.65

$1.82

$2.16

$2.32

$2.49

$2.65

$2.69

$2.75

EPS-GAAP

$1.21

$1.07

$0.32

($1.40)

($1.28)

$0.80

$0.83

$0.93

$2.23

($11.72)

$0.20

$2.46

$1.71

$1.18

$0.46

$0.41

$0.92

$1.44

$1.79

$1.95

$2.12

$2.28

$2.32

$2.38

EPS-MW

$1.61

$1.59

$1.22

$0.75

$1.25

$2.01

$2.11

$2.67

$3.28

($4.98)

$3.34

$3.40

$2.81

$1.34

$0.97

$0.93

$1.44

$1.60

$1.95

$2.12

$2.29

$2.44

$2.48

$2.54

Source:CompanyData,MorganStanleyResearchestimates

FY2014A

FY2015A

FY2016A

FY2017A

FY2018E

FY2019E

FY2020E

FY2021E

15,130

14,572

12,994

19,093

18,002

17,618

17,217

18,590

-1.4%

-3.7%

-10.8%

46.9%

-5.7%

-2.1%

-2.3%

8.0%

10,770

10,351

9,559

13,021

12,942

12,135

11,059

11,269

-

17

21

49

49

11

-

-

164

173

354

1,094

1,015

236

-

-

10,606

10,161

9,184

11,878

11,878

11,888

11,059

11,269

4,360

4,221

3,435

6,072

5,060

5,483

6,159

7,321

28.8%

29.0%

26.4%

31.8%

28.1%

31.1%

35.8%

39.4%

4,524

4,411

3,810

7,215

6,124

5,730

6,159

7,321

29.9%

30.3%

29.3%

37.8%

34.0%

32.5%

35.8%

39.4%

4,524

4,411

3,810

7,215

6,124

5,730

6,159

7,321

29.9%

30.3%

29.3%

37.8%

34.0%

32.5%

35.8%

39.4%

1,661

1,646

1,627

2,441

2,400

2,112

2,226

2,417

11.0%

11.3%

12.5%

12.8%

13.3%

12.0%

12.9%

13.0%

-

-

-

-

-

-

-

-

1,661

1,646

1,627

2,441

2,400

2,112

2,226

2,417

761

773

997

1,445

1,473

1,363

1,377

1,487

5.0%

5.3%

7.7%

7.6%

8.2%

7.7%

8.0%

8.0%

-

-

-

-

-

-

-

-

761

773

997

1,445

1,473

1,363

1,377

1,487

147

191

345

232

215

246

100

-

147

191

345

232

215

346

-

-

-

-

-

-

-

-

-

-

(33)

(149)

(485)

(603)

(519)

(439)

(436)

(436)

-

(141)

(172)

(333)

(327)

(272)

(272)

(272)

(41)

(29)

(22)

(159)

(163)

(164)

(164)

(164)

(13)

(3)

(159)

(17)

(13)

-

-

-

-

-

(69)

(86)

(19)

(3)

-

-

21

24

(63)

(8)

3

-

-

-

(33)

(8)

(313)

(270)

(192)

(167)

(164)

(164)

2,569

2,610

2,969

4,118

4,088

3,721

3,703

3,904

2,389

2,270

2,139

3,283

3,354

3,036

3,167

3,468

2,389

2,411

2,311

3,616

3,681

3,308

3,439

3,740

1,791

1,611

466

1,954

972

1,762

2,456

3,417

11.8%

11.1%

3.6%

10.2%

5.4%

10.0%

14.3%

18.4%

2,135

2,141

1,671

3,932

2,770

2,694

2,992

3,853

14.1%

14.7%

12.9%

20.6%

15.4%

15.3%

17.4%

20.7%

2,135

2,000

1,499

3,599

2,443

2,422

2,720

3,581

14.1%

13.7%

11.5%

18.8%

13.6%

13.7%

15.8%

19.3%

(39)

(34)

(313)

(1,185)

(1,532)

(442)

(419)

(383)

17

15

26

26

40

(16)

(18)

(22)

(56)

(49)

(339)

(1,211)

(1,572)

(426)

(401)

(361)

4,309

5,088

5,286

8,378

6,378

5,025

5,229

6,310

17

15

26

26

40

(16)

(18)

(22)

0.4%

0.3%

0.5%

0.3%

0.6%

-0.3%

-0.4%

-0.4%

2,438

2,312

16,994

13,151

11,172

10,393

9,393

8,393

(56)

(49)

(339)

(1,211)

(1,572)

(426)

(401)

(361)

2.3%

2.1%

2.0%

9.2%

14.1%

4.1%

4.3%

4.3%

-

-

(81)

(334)

(914)

(4)

-

-

(39)

(34)

(232)

(851)

(618)

(438)

(419)

(383)

1,752

1,577

153

769

(560)

1,320

2,036

3,034

2,096

2,107

1,439

3,081

2,152

2,256

2,572

3,470

2,096

1,966

1,267

2,748

1,825

1,984

2,300

3,198

135

112

(89)

372

1,410

211

283

382

7.7%

7.1%

-58.2%

48.4%

-251.8%

16.0%

13.9%

12.6%

32.0%

32.0%

32.0%

32.0%

32.0%

21.0%

21.0%

21.0%

-

8

(127)

11

1,136

(14)

-

-

135

104

38

361

274

225

283

382

135

104

38

361

274

203

253

352

6.4%

5.3%

3.0%

13.1%

15.0%

10.2%

11.0%

11.0%

344

397

987

1,990

3,521

750

#REF!

164

1,617

1,465

242

397

(1,970)

1,109

1,753

2,652

1,961

2,003

1,401

2,720

1,878

2,031

2,289

3,088

1,961

1,862

1,229

2,387

1,551

1,781

2,047

2,846

-

-

-

-

-

-

-

-

1,617

1,465

242

397

(1,970)

1,109

1,753

2,652

$8.10

$8.45

$5.87

$9.19

$6.15

$6.48

$7.10

$9.23

$6.68

$6.17

$1.01

$1.35

($6.48)

$3.80

$6.10

$9.09

$8.10

$7.86

$5.15

$8.06

$5.08

$5.69

$6.35

$8.51

7

Exhibit4:WDC:ProjectedBalanceSheet

($inmillions)

F1Q16A

F2Q16A

F3Q16A

F4Q16A

F1Q17A

F2Q17A

F3Q17A

F4Q17A

F1Q18A

F2Q18A

F3Q18A

F4Q1