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Western Digital Updates Q4 View to Reflect SanDisk Buyout

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As announced earlier, Western Digital Corporation (WDC - Free Report) updated its fourth-quarter fiscal 2016 guidance yesterday to reflect the impact of the recently completed acquisition of SanDisk Corporation. Although the recently guided revenues were higher than the Zacks Consensus Estimate, the non-GAAP earnings projection fell short of the same.

Investors’ reactions were mixed as shares of Western Digital fluctuated between gains and losses during yesterday’s after-hour trade. However, it ended with a decline of 2.6%.

The world’s largest hard-disk drive (HDD) manufacturer now projects fourth quarter revenues to come between $3.35 billion and $3.45 billion (mid-point $3.40 billion), up from its previous guidance range of $2.6 billion to $2.7 billion. The updated guidance is significantly higher than the Zacks Consensus Estimate of $3.244 billion.

However, the company lowered its non-GAAP earnings guidance range to 65–70 cents (mid-point 67.5 cents) per share from the earlier forecasted range of $1.00 to $1.10. The updated guidance range is significantly lower than the Zacks Consensus Estimate of 95 cents per share.

The company’s downbeat bottom line guidance reflects higher interest expenses and increased share count due to the acquisition of SanDisk, which it completed on May 12.

Western Digital is heavily counting on SanDisk to keep itself floating amid a challenging business environment.  Notably, Western Digital derives the bulk of its revenues from the sale of hard-disk drives (HDDs), mainly used by PC manufacturers. The company is the largest U.S. manufacturer of HDDs with 44% market share, closely followed by Seagate Technologies’ (STX - Free Report) 40%. However, the persistent decline in PC sales has been hurting Western Digital’s HDD shipments over the past several quarters, which in turn dented revenues.

Therefore, the world’s leading HDD manufacturer is trying to lower its dependency on PC storage and focus on the rapidly growing flash and cloud storage businesses to boost its top line.

The acquisition of SanDisk will open newer growth avenues for Western Digital and help in capturing market traction in the newer storage technology, Solid State Drive (SSD). The merger will lead to economies of scale, lower costs, increase market reach and improve product breadth, among other things. The company will also be able to offer competitive solutions in cloud-based computing, which has taken the digital storage solution space by storm over the past couple of years.

However, it’s too early to determine the extent to which Western Digital benefits from the SanDisk acquisition. Furthermore, an increased debt burden is likely to remain a drag on the company’s bottom line.

Western Digital currently carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the broader technology sector are Silicon Motion Technology Corp. (SIMO - Free Report) and Facebook Inc. , both sporting a Zacks Rank #1 (Strong Buy).

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