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Can Western Digital (WDC) Keep Earnings Streak Alive in Q4?

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Western Digital (WDC - Free Report) is scheduled to report fourth-quarter fiscal 2018 results on Jul 26.

Notably, Western Digital outpaced the Zacks Consensus Estimate in the trailing four quarters, registering an average positive earnings surprise of 6.2%.

On the heels of expansion in digital data, modest growth of TAM and higher demand for storage, the company remains well poised to capitalize on thegrowth prospects. Additionally, its expanding product portfolio, growing exposure to the SMB space and positive synergies from acquisition are likely to act as catalysts for the to-be-reported quarter.

Q3 Performance Highlights

The company delivered non-GAAP earnings of $3.63 per share, which beat the Zacks Consensus Estimate by 32 cents. The figure also surged 51.9% from the year-ago quarter.

Revenues also increased 7.8% year over year to $5.01 billion and surpassed the Zacks Consensus Estimate of $4.93 billion.

Growing demand for the company’s high capacity enterprise hard drives and flash-based products drove year-over-year growth. Increasing demand for data center devices and cloud solutions remains a key catalyst.

The company started deploying 64-layer 3D NAND technology across its product portfolio and is expected to ramp its 96-layer technology throughout this year.

Guidance & Estimates

For fourth-quarter 2018, Western Digital expects non-GAAP earnings between $3.40 and $3.50 per share. We note that the Zacks Consensus Estimate has remained unchanged over the past 30 days.

However, the Zacks Consensus Estimate for earnings is pegged $3.52 per share above the higher end of the guided range, representing year-over-year growth of 20.1%.

For fourth-quarter fiscal 2018, revenues are anticipated to be in the range of $5.0-$5.1 billion. The analysts polled by Zacks project revenues of roughly $5.06billion, near higher-end of management’s guidance, up approximately 4.4% from the year-ago quarter.

Let's discuss the factors which might give shape to fourth-quarter results.

Factors Likely To Influence Q4 Results

Product Rollouts: Key Catalysts

In the quarter under consideration, the company significantly expanded its surveillance portfolio. The company introduced new Purple drive in 10 GB and 12 GB capacities. The company also launched new Purple micro-SD card in 32 GB and 64 GB variants. Both the solutions are tailor made for futuristic surveillance cameras.

With the expansion in its Purple portfolio, Western Digital attempts to meet this demand effectively. These product additions will enhance the company’s existing product portfolio and aid Western Digital in gaining a strong foothold in the global SSD market.

Anticipating a potential acceleration in cloud deployments, Western Digital is also investing heavily to deliver high-capacity storage devices that will support expansion of cloud infrastructure and cloud applications.

Exabyte Growth Rate to Improve

In the third quarter, the company shipped 36.4 million HDDs at an average selling price ("ASP") of $72. The reported shipments were down from 6.9% from the year-ago quarter. The company shipped an industry-leading record of 100.3 exabytes, excluding non-memory products.

For the fourth quarter, the Zacks Consensus Estimate for total unit shipments is pegged at 37.46 million at an ASP of $68.

Growing SSD Market &Acquisitions to Drive Growth

Western Digital has been expanding into the SSD storage market due to declining sales in the PC market. The emergence of thinner laptops, tablets and demand for fast processing storage devices in the past few years has created an ideal market for SSDs.

Robust demand for embedded flash and client SSD products are likely to boost Client devices revenues. Notably, connected home, automotive, surveillance and industrial form strong growth verticals for the company’s products.

Further, the ongoing transformation to 3D NAND technology is another tailwind. Also, the company’s growing footprint in the automotive as well as the connected home and industrial categories are likely to act as a key catalyst.

Western Digital’s acquisition of SanDisk has aided the company’s growth and also helped it to gain traction in SSD.  Additionally, it has allowed Western Digital foray in to the NAND products market which owing to its strong demand will drive revenues.

We believe that all these factors will positively impact the company’s results in the to-be reported quarter and bolster its customer base going ahead.

What Does the Zacks Model Unveil?

Our proven model shows that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The Sell-rated stocks (4 or 5) are best avoided, especially when the company is seeing negative estimate revisions.

Western Digital has a Zacks Rank #3 and an Earnings ESP of -0.04%, which makes surprise prediction difficult.

Stocks with Favorable Combination

Here are a couple of stocks from the broader technology sector, you may want to consider as our proven model shows that these have the right combination of elements to post an earnings beat this quarter.

Yandex N.V. (YNDX - Free Report) has an Earnings ESP of +7.69% and a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

Cypress Semiconductor Corporation has an Earnings ESP of +0.43% and a Zacks Rank #3.

Fortive Corporation (FTV - Free Report) has an Earnings ESP of +0.84% and a Zacks Rank #3.

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