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Western Digital Corp. (WDC - Analyst Report) reported third-quarter 2014 non-GAAP earnings per share of $1.94, which beat the Zacks Consensus Estimate of $1.88. Despite being down 7.4% from the year-ago quarter, reported earnings surpassed management’s guidance range of $1.80 to $1.90.

Quarter Details

Western Digital reported revenues of $3.70 billion for the third quarter, which not only decreased 1.6% from the year-ago quarter but also lagged the Zacks Consensus Estimate of $3.73 billion. Nonetheless, reported revenues were within management’s guidance range of $3.65–$3.75 billion.

Revenues declined on a year-over-year basis primarily due to a drop in hard disk drive (HDD) average selling price coupled with seasonally lower demand for client and branded products and soft demand from the enterprise segment.

During the quarter, Western Digital shipped 60.4 million hard drives at an average selling price (ASP) of $58.0. Although reported shipment was up marginally from 60.2 million year over year, it was down from 63.1 million HDDs shipped in the previous quarter. Moreover, ASP for the quarter was down from $61.0 in the year-ago quarter and $60.0 reported in the previous quarter.

Western Digital’s market share in the total addressable market (TAM) decreased marginally from 44.4% in the previous quarter to 44.1%. Market share also shrank marginally from 44.3% reported in the year-ago quarter.

Nonetheless, Western Digital reported a significant rise in contribution from its non-PC segment which accounted for 53% of total revenue. In the previous quarter, revenues from the segment contributed 34% to total revenue.    

Moreover, the company reported $134 million in revenue contribution from the Enterprise Solid State Drive (SSD) segment which increased from $92 million in the year-ago quarter, primarily due to higher adoption of its product range.

Western Digital’s top 10 customers contributed 44% to the revenues compared with 45% in the year-ago quarter and 42% in the previous quarter.

Western Digital’s non-GAAP gross margin expanded 90 basis points (bps) aided by efficient operations and better-than-expected utilization.

Western Digital’s operating margins were up 24 bps during the quarter while operating expenses, as a percentage of revenues, increased 20 bps. Non-GAAP net income came in at $470 million or $1.94 per share compared with $514 million or $2.10 per share in the year-ago quarter.

Cash and cash equivalents were $4.57 billion compared with $4.66 billion in the previous quarter. During the quarter, Western Digital generated $697 million in cash from operations compared with $727 million in the previous quarter. The company generated free cash flow of $536 million.

The company repurchased stocks worth $244 million and paid dividends of $71 million during the quarter.

Guidance

For the fourth quarter, revenues are expected in the range of $3.5 to $3.6 billion, down sequentially due to seasonality. The Zacks Consensus Estimate is pegged at $3.719 billion.

Gross margin is expected in the range of 27% to 32%. Management expects non-GAAP earnings per share to be between $1.65 and $1.75 for the June quarter. The forecast includes a 10-cent dilution impact due to the acquisitions of sTec and Virident. The Zacks Consensus Estimate is pegged at $1.91 per share.

Our Take

Western Digital reported mixed third-quarter results wherein the bottom line came ahead of the Zacks Consensus Estimate but the top line missed the same. The company’s guidance remained tepid citing seasonal factors. Moreover, the recent acquisitions will have a dilutive effect on the company’s bottom line.

Nonetheless, the secular growth of digital data and growing exposure to the small and medium business space are long-term positives. We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Continued investment in product innovation could result in flattish margins in the near term.

Moreover, strategic acquisitions to expand its offerings in the SSD segment are 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 currently sports a Zacks Rank #1 (Strong Buy).

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