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Western Digital Stock Up on Raised Q4 Guidance, New CFO

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Shares of Western Digital Corporation (WDC - Free Report) rallied in yesterday’s afterhours trading session after the world’s leading hard-disk drive (HDDs) manufacturer announced the appointment of a new Chief Financial Officer (CFO) and raised its fourth-quarter fiscal 2016 outlook.

Western Digital announced that the current CFO, Olivier Leonetti is leaving the company “to pursue other opportunities”. He will be succeeded by the current executive vice president, finance and chief strategy officer, Mark Long, on Sep 1.

Apart from this, the company updated its fiscal fourth-quarter outlook to reflect the integration of its recently completed SanDisk acquisition. Western Digital had announced the completion of the buyout on May 12.

The company now projects revenues of $3.46 billion, up from its previous guidance of $3.35 billion to $3.45 billion (mid-point $3.40 billion). The Zacks Consensus Estimate for the quarter stands at $3.41 billion.

Also, Western Digital forecasts non-GAAP earnings of 72 cents per share, higher than the prior projection of 65–70 cents (mid-point: 67.5 cents). The Zacks Consensus Estimate is currently pegged at 68 cents.

However, the company has maintained its prior projection for non-GAAP gross margin of 31%.

The upbeat revenues and earnings outlook for the fiscal fourth quarter boosted investor confidence to a large extent. This was reflected by a 4.7% jump in the company’s shares yesterday.

Note that this was the second time that Western Digital had updated its fiscal fourth-quarter outlook to accommodate the impact of the integration of the SanDisk acquisition.

The last time that the company had updated its fourth-quarter outlook was on May 26, when it raised the revenue guidance to $3.35–$3.45 billion from $2.6–$2.7 billion.

However, it had lowered its non-GAAP earnings guidance to the range of 65–70 cents per share from $1.00–$1.10. The company had cited an increase in interest expenses and higher share count, which resulted from the acquisition of SanDisk, as the main reason behind the lowered bottom-line guidance.

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

As a result, the world’s leading HDD manufacturer has been struggling to lower its dependence on PC storage and instead, focus on the rapidly growing flash and cloud storage businesses to boost the top line.

The acquisition of SanDisk will open newer avenues for growth for Western Digital and help the company 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 is still too early to determine the extent to which Western Digital will benefit 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 CEVA Inc. (CEVA - Free Report) and FormFactor Inc. (FORM - Free Report) , both carrying a Zacks Rank #2 (Buy).

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