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Western Digital Corp. (WDC - Analyst Report) reported first-quarter 2014 non-GAAP earnings per share of $2.12, which beat the Zacks Consensus Estimate of $2.04. However, earnings were down from $2.36 per share reported in the year-ago quarter.

Revenues

Although revenue of $3.8 billion was down 5.7% on a year-over-year basis, it topped the Zacks Consensus Estimate of $3.78 billion and was at the higher end of management’s guidance range of $3.7 billion–$3.8 billion. The company’s revenues declined primarily as a result of modest price declines and a seasonal change in business mix.

During the quarter, Western Digital shipped 62.6 million hard drives at an average selling price (ASP) of $58. Although the reported shipment was up from 59.9 million sequentially, it was up marginally from the year-ago quarter shipment of 62.5 million. However, ASP for the quarter was down from $60 in the previous quarter and $62 in the year-ago quarter.

Western Digital’s market share in the total addressable market increased from 44.9% in the previous quarter to 45.1%. Moreover, market share expanded from 44.9% reported in the year-ago quarter.

Nonetheless, Western Digital’s shift toward non-PC applications continued as 53% of the quarter’s revenues came from the segment. Moreover, the company reported $106 million in revenue contribution from the Enterprise Solid State Drive (SSD) segment which increased from $104 million in the previous quarter and $70 million contributed in the year-ago quarter.

Operating Results

Although Western Digital’s non-GAAP gross margin declined 67 basis points (bps) it exceeded management’s guidance by 70 bps primarily due to lower-than-expected price declines and better-than-expected cost optimization. The year-over-year decline was due to lower revenue base and lower ASPs.

Operating margin for the quarter remained relatively flat at 16.5% due to lower operating expenses. Western Digital’s non-GAAP net income came in at $514 million or $2.12 per share compared with $594 million or $2.36 per share reported in the year-ago quarter.

Balance Sheet & Cash Flow

Cash and cash equivalents were $4.87 billion, up from $4.31 billion in the previous quarter. During the quarter, the company generated $680 million in cash from operations compared to $684 million in the previous quarter.

The company repurchased 2.3 million shares for $150 million and paid dividends of $59 million during the quarter.

Guidance

For the second quarter, revenues are expected in the range of $3.775 billion to $3.875 billion. Gross margin is expected to be flat. Management expects non-GAAP earnings per share to be between $1.95 and $2.10 for the December quarter. The Zacks Consensus Estimate is pegged at $2.16.

Our Take

Although Western Digital’s first-quarter top- and bottom lines surpassed the Zacks Consensus estimate, year-over-year comparisons were dismal. Despite improvement in shipments, results were impacted by lower ASPs.

Nonetheless, the secular growth of digital data and growing exposure to the small and medium business space are long-term positives. The company is launching storage devices to attract more customers. Continued investments to innovate products could result in flattish margins in the near term.

Moreover, strategic acquisitions to expand its offerings in the SSD segment is expected to place Western Digital in a better position compared to its peers such as Seagate (STX - Analyst Report), SanDisk Corp. (SNDK - Analyst Report) and Fusion-io .

Western Digital Corp. carries a Zacks Rank #1 (Strong Buy).

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