Western Digital Revs Up, EPS Beats

Western Digital Corp. ([url=http://www.zacks.com/stock/quote/wdc]WDC[/url]) reported first quarter 2012 earnings per share (EPS) of $1.10, comprehensively exceeding the Zacks Consensus Estimate of 95 cents. Shares slipped a massive 5.48% in the after-market trade.

Moreover, the company expects huge impact in its result for the upcoming quarter and sees a major impact in its results for the December quarter due to the recent severe flooding in Thailand, as the company notes that 60.0% of the company's disk drives and 40.0% of the world’s disk drives are produced in Thailand.

Revenues

Revenues in the first quarter of 2012 moved up 12.4% year over year to $2.69 billion.

Revenue from sales of the company’s branded products was $489.0 million, up 15.0% from the year-ago quarter due to the continued strong customer preference for Western Digital’s products. Branded products revenue was up 28.0% from the prior quarter. There was no customer that comprised 10.0% or more of our total revenue.

The company shipped 41.2 million units into the compute space in the September quarter as compared to 39.2 million units in the previous quarter and 37.5 million units in the year-ago quarter. Moreover, the company’s market share grew by approximately 30 basis points sequentially and 190 basis points year-on-year. The company witnessed strong consumer activity than what is witnessed seasonally.

Geographically, demand in Asia was particularly strong in the quarter contributing about 59.0% of the revenue, up from 54.0% in the prior year. Europe generated about 22.0% of revenue, decreasing 100 basis points from the prior year but up from the 20% reported in the June quarter. America with 19.0% of revenue, declined from 23.0% from the prior year quarter and from 20.0% reported in the June quarter.

Operating Results

Gross margin in the reported quarter was 20.1% versus 18.2% in the year-ago quarter. The year-over-year increase was attributable to stable pricing environment. Moreover, product mix was favorable. Effective cost management and improved utilization also enabled the company to reach at the higher end of the gross margin guidance.

Consolidated R&D and SG&A spending totaled $282.0 million in the September quarter, up 24.8% on year over year basis but down 5.0% on a sequential basis.

Net income increased to $239.0 million or $1.01 per share from $197.0 million or 84 cents in the year-ago quarter. Excluding the costs associated with Hitachi Global Storage Technologies’ acquisition and related legal expenses, the adjusted net income for the quarter was $260.7 million or $1.10 per share.

Cash Position

The company generated $352.0 million of cash from operations in the quarter, down from $447.0 million in the previous quarter. Cash and cash equivalents were $3.67 billion, up from $3.49 billion reported in the previous quarter. Capital expenditures were $134.0 million, while depreciation and amortization totaled $158.0 million. The company made debt repayment of $31.0 million during the quarter, thereby reducing its debt balance to $263.0 million.

Second Quarter Guidance

The company expects hard drive shipments of between 22.0 million and 26.0 million units. Again the total revenue is expected to be in the range of $1.05 billion to $1.25 billion. R&D and SG&A spending will be approximately $230.0 million, excluding acquisition-related expenses and unusual charges.
Moreover, the company also expects a non-GAAP loss per share of between $1.10 and $1.50 for the December quarter, which excludes acquisition-related expenses and the unusual charges and expenses related to the flooding in Thailand.

Conclusion

Western Digital’s first quarter 2012 results exceeded our expectations and sales improved meaningfully on a year-over-year basis. The company is trying to lower its interest expense by reducing debt burden. Although Western Digital is cash rich, its cash generation ability has been tempered to an extent due to a stagnant pricing environment.

Moreover, the company’s acquisition of Hitachi Global Storage Technologies ([url=http://www.zacks.com/stock/quote/hit]HIT[/url]) will help it to strengthen its foothold in the data storage business. Although integration of the same remains an issue. However, intense competition in the hard disk manufacturing space and increase in component cost price are negatives working against the company. Moreover, the huge flood in Thailand will have a negative impact on profitability in the December quarter.

Currently, Western Digital has a Zacks #4 Rank, implying a short-term Sell rating.