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Western Digital (WDC) Q1 Earnings, Revenues Top Estimates

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Shares of Western Digital Corp. (WDC - Free Report) were up 5.3% in after-hour trading on Oct 26, following the company’s impressive first-quarter fiscal 2017 results.

Adjusted earnings (excluding amortization of intangibles and other one-time items) of $1.18 beat the Zacks Consensus Estimate of 13 cents (12.4%) but were down from $1.56 per share reported in the year-ago quarter. This was much better than management’s guided range of $1.0–$1.05 per share.

Western Digital’s revenues of $4.71 billion soared 40.3% year over year and easily surpassed the Zacks Consensus Estimate of $4.48 billion as well as the revised guided range of $4.45--$4.55 billion.

Western Digital witnessed strong demand for both hard drive and flash-based products from all categories of customers, largely driven by cloud and mobility based applications, as well as better than expected PC demand in the reported quarter.
 

 

 

Segment Revenue Details

Client devices (50.4% of total revenues) surged 42.2% year over year to $2.37 billion primarily backed by strong demand for hard disk drives (HDDs) in gaming and PC applications as well as flash-based products in PCs and mobile handsets.

Western Digital noted that during the quarter the 3 bits per cell based embedded NAND solutions saw increased adoption in mobile phones. The company has started shipping the product to majority of the world’s top mobile handset vendors.

Client solutions (20.7% of total revenues) increased a whopping 144.6% to $976 million, attributed to seasonality and healthy demand for removable and other flash-based products.

Recently, Western Digital announced the world’s first 1 terabyte SD card. The company noted that transition to 3D NAND technology of 64 layers continues to progress as planned. Western Digital has already started OEM sampling of the product and expects to deliver volume shipments of removable product with this technology in second-quarter fiscal 2017.

Moreover, the company’s plan to commercialize 64-layer 3D NAND in first-half calendar year 2017 remains on track.

Data center devices and solutions (28.9% of total revenues) increased 5.7% to $1.36 billion driven by strong demand for cloud-related storage. Demand for capacity enterprise HDDs (near-line product up 50% in terms of exabytes) was solid, while for performance enterprise HDDs it was stable. Additionally, Enterprise related solid state drives (SSDs) witnessed growth in the quarter.

Western Digital noted that the 10 terabyte helium drive gained further adoption at several of its major OEMs and cloud customers during the quarter. Further, the HelioSeal platform achieved a significant milestone with cumulative shipments exceeding 10 million units, representing approximately 76 exabytes of storage capacity since the launch of this platform in late 2013.

During the quarter, Western Digital shipped 47.5 million HDDs at an average selling price (ASP) of $61, up from $60 reported in the year-ago quarter. However, reported shipments were down from 51.7 million in the year-ago quarter.

Western Digital’s market share in the total addressable market (TAM) came in at 41.7% compared with 43.6% in the year-ago quarter.

Operating Details

Adjusted gross margin expanded 470 basis points (bps) year over year to 33.6%. The figure was better than management’s guidance of 33%. The expansion was driven by lower product cost and pricing improvement.

WESTERN DIGITAL Price, Consensus and EPS Surprise

 

WESTERN DIGITAL Price, Consensus and EPS Surprise | WESTERN DIGITAL Quote

Reported operating expenses, as percentage of revenues soared 460 bps to 23.4%, driven by 210 bps increase in research and development (R&D) expense and 270 bps growth in selling, general and administrative (SG&A) expense.

As a result, reported operating margin contracted 470 bps to 4.9%. Excluding one-time items, adjusted operating margin expanded 140 bps to 13.4% in the reported quarter.

Interest expense was $503 million a massive increase from $8 million reported in the year-ago quarter.

Acquisition Synergies

Western Digital stated that it is on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar 2017. The company anticipates exiting second-quarter fiscal 2017 by achieving more than $175 million of cost of revenue synergies and approximately $300 million of operating expense synergies each on an annual run rate basis.

In terms of SanDisk integration, management expects to exit the second quarter with realized synergies of approximately $130 million on an annual run-rate basis. This is in line with the company’s 18-month target of achieving $500 million of total run rate synergies on an annualized basis.

Balance Sheet/Cash Flow

As of Sep 30, 2016, cash and cash equivalents were $4.33 billion down from $8.15 billion as of Jul 1. The decrease was primarily attributed to repayment of $4.2 billion of debt, consisting of the acquisition bridge loan, the U.S. Term Loan B and SanDisk convertible debt.

Long-term debt during the quarter was $13.06 billion marginally down from $13.66 billion at the end of previous quarter.

During the quarter, Western Digital generated $440 million in cash from operations compared with $355 million in the previous quarter.

Guidance

For second-quarter fiscal 2017, revenues are expected to remain flat on a sequential basis.

Adjusted gross margin is expected to be 35%. Total operating expenses are expected to be approximately $805 million.

Interest expense is anticipated to be almost $205 million.

Management expects adjusted earnings to be in the range of $1.85–$1.95 per share for the second quarter.

Our Take

We believe that the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the long-term positives for Western Digital. The company’s growing footprint in the automotive as well as the connected home and industrial categories is significantly positive, in our view.

We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Continued investments in product innovation could result in flattish margins in the near term.

Further, Western Digital’s entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are anticipated to be growth catalysts, going forward.

Further, the SanDisk acquisition will open growth avenues for Western Digital and help it to gain market traction in advanced storage technology and the SSD segment.

The acquisition not only expands Western Digital’s offerings in the SSD segment but also provides a competitive edge against peers such as Seagate Technology (STX - Free Report) .

Zacks Rank & Other Key Picks

Western Digital currently has a Zacks Rank #2 (Buy). Other favorably ranked stocks in the broader technology sector are Acacia Communications and Veeco Instruments (VECO - Free Report) . Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Veeco and Acacia are scheduled to report earnings on Nov 1 and Nov 10, respectively.

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