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Defiant Year

John Coyne had a banner year at Western Digital Corp. that defied expectations for how a maker of commodity computer products should perform during a downturn.

Wall Street took note—the Lake Forest-based maker of disk drives for computers and consumer electronics saw a 285% gain for the year to a market value of $10 billion.

Western Digital added a bit more than $7 billion to its market value in 2009.

Locally, only Irvine drug maker Allergan Inc. added more in market value with an $8 billion gain.

Western Digital’s big Wall Street jump and its picture-perfect year stemmed from a number of favorable factors, including stable prices for drives, steady stockpiles and better-than-expected demand.

Coyne had a big hand in Western Digital’s big year, adeptly steering the company through what in earlier years would have been a blood bath for drive makers.

“That type of leadership comes from the top,” said Richard Kugele, an analyst at Needham & Co. in Boston.

Coyne’s performance earned him the Business Journal’s businessperson of the year honor for 2009.

Coyne, who became Western Digital’s chief executive in 2007, acted quickly when the financial meltdown struck and the recession took hold in earnest in late 2008.

As corporations and consumers suddenly stopped spending on technology, Coyne swiftly cut jobs, pared executive pay, slowed production at factories and slashed other costs.

“When the world changes dramatically, it causes drive companies to scramble,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. “Western Digital had to quickly adjust to a difficult macroeconomic situation—it was impressive.”

The company cut about 2,500 jobs, or 5% of its workforce, and temporarily idled factories in Malaysia and Thailand that make drives and parts.

The move likely helped spare a price war and drive glut in a business known for boom and bust cycles.

First of Earnings Surprises

By late January, Coyne surprised Wall Street with better-than-expected quarterly profits after warning analysts to temper their expectations a month earlier.

In March, Western Digital paid $65 million to buy Aliso Viejo’s SiliconSystems Inc., a maker of a new type of data storage drive that uses flash memory chips instead of disks.

The drives are seen as becoming a bigger part of the market with Western Digital planning to release a model for servers and data storage computers in 2011.

In April, Western Digital made an impressive showing on the Fortune 500 list of the nation’s largest companies, moving up to No. 319 from No. 439 a year earlier with a 20% gain to $8 billion in 2008 revenue.

That same month, Western Digital topped Wall Street expectations with results for the first three months of 2009.

In May, Western Digital told analysts to expect better than projected results for the June quarter amid strong demand, steady stockpiles of drives and only modest price drops.

Two months later, the company’s results for the June quarter topped Wall Street’s already raised expectations.

In July, Western Digital sold a Malaysia parts plant to Japan’s Hitachi Ltd. as part of its restructuring outlined in late 2008.

By midyear, worries about Western Digital falling into an extended slump were gone.

“They have been able to restructure their business to meet the new demand levels,” Noland said. “From a Wall Street perspective, it’s all about profits and earnings growth.”

Western Digital’s main rival, Scotts Valley-based Seagate Technology LLC, ended up bearing the brunt of the downturn with its focus on drives for personal computers and servers. Drives for laptops and consumer electronics cushioned the blow for Western Digital.

By the second half of 2009, Western Digital—long No. 2 to Seagate—was neck and neck with its archrival in drives shipped.

In the September quarter, Western Digital shipped 44 million drives versus Seagate’s 46 million.

“From a production standpoint they are really close to each other today because Seagate misexecuted at a time when Western Digital executed well,” analyst Noland said.

Western Digital surpassed Seagate in the industry’s fastest-growing category—drives that go into laptops and their smaller cousins, netbooks.

Western Digital shipped 19 million drives for portable computers during the quarter, while Seagate shipped 14 million.

“They are now the largest supplier of notebook drives in the world,” analyst Kugele said.

In October came another topping of quarterly estimates for Western Digital.

Around the same time, the company announced plans to move its headquarters to Irvine in what was the largest office lease struck in 2009.

Observers give Coyne high marks for helping to make the drive business more professional and predictable.

With just three companies—Seagate, Western Digital and Hitachi—making 80% of the world’s drives, there’s been something of a détente in the cutthroat business.

In the 1980s, there were more than 75 drive producers.

Focused on Profits

Coyne and his counterparts now are more focused on grabbing sales of more profitable products.

“It seems like it’s gotten more rational,” Noland said. “It used to be that when the market starts to rebound, the drive makers would put out too much product and then there would be a glut. Today there is more of a willingness to think about profits first and market share second.”

In the past few years, Coyne has presided over a big shift as more of Western Digital’s sales now come from drives for portable computers, corporate data storage, consumer electronics and drives sold under the Western Digital name in stores.

The company used to rely more on high-volume, low-profit drives for PCs.

More than half of the company’s more than $8 billion in yearly revenue now comes from drives for portable computers and what Western Digital calls “non-desktop PC sources.”

Coyne, 58, is media-shy and declined to be part of this story. He’s known on Wall Street as “low key,” as one analyst said.

“He is sober, methodical and has a do-the-right-thing management style,” the analyst said. “That’s what works in the drive industry.”

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