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Western Digital Corp. (WDC - Analyst Report) posted third-quarter 2013 adjusted earnings per share (“EPS”) of $2.10, comprehensively beating the Zacks Consensus Estimate of $1.79.

Revenues

Revenues during the quarter increased 24.0% year over year to $3.76 billion and were above the company’s guidance range of $3.55–$3.65 billion. Western Digital surpassed its revenue guidance primarily due to better-than-expected business and product demand, as well as restricted price declines.

The drives having a capacity of 810 gigabytes were exported during the reported quarter, which witnessed a 35% year-over-year increase. Western Digital also witnessed momentum in its branded and enterprise businesses and a good product mix-up in the company’s client business to cope with the ever-increasing amount of digital content.

WDC’s focus on the growth trends in digital data supported the robust results from the HGST and WD subsidiaries.

Operating Results

Gross margin in the reported quarter was 28.2% versus 32.2% in the year-ago quarter. Moreover, non-GAAP gross margin was 29.2%, which excludes $38.0 million related to amortization expense to acquire intangible assets of HGST. This apart, non-GAAP gross margin exceeded the guidance by 120 basis points.

Operating margin for the quarter was 11.1%, down from 17.9% reported in the year-ago quarter. Total operating expense increased 48.0% due to higher research and development (R&D) and selling, general and administrative (SG&A) expense.

Net income for the quarter was $391.0 million or $1.60 per share, up from $483.0 million or $1.93 per share in the year-ago quarter. Excluding amortization of intangibles related to the acquisition of HGST, employee termination benefits and other charges, non-GAAP/adjusted net income was $514.0 million or $2.10 per share, down from $619.0 million or $2.52 per share in the year-ago quarter.

Balance Sheet & Cash Flow

The company generated $727.0 million from cash from operations in the third quarter, down from $772.0 million in the year-ago quarter. Cash and cash equivalents were $4.06 billion, up from $3.82 billion in the previous quarter.

Out of the capital being allocated to the company, the company has repurchased 5.2 million shares for $243 million during the reported quarter.

Guidance

For the fourth quarter, Western Digital also expects the market share to remain unchanged. The company expects revenues in the range of $3.55 billion to $3.65 billion, while gross margin is expected to be well within the company’s model at approximately 28.5%. We expect R&D and SG&A spending to be approximately $550 million, which excludes the amortization of HGST intangibles. Moreover, the company expects non-GAAP earnings per share between $1.65 and $1.80 for the fourth quarter.

Our Take

The company’s third-quarter earnings exceeded our expectation, and revenues increased on a year-over-year basis. The company witnessed decent product demand and the price declines moderated.

Moreover, decent performance by Western Digital’s HGST and WD subsidiaries helped the company perform better in the third quarter, and it continued to capitalize on the secular growth of digital data.

We are also encouraged by Western Digital’s growing exposure in the small and medium business (SMB) space. Recently, the company expanded its SMB product suite. Higher IT spending from the SMBs is a good sign and we believe that Western Digital is well positioned to capitalize on the opportunity. On the other hand, decline in PC sales may affect business going forward.

Currently, Western Digital has a Zacks Rank #3 Rank (Hold). Investors can also consider other technology stocks.

Super Micro Com.(SMCI - Snapshot Report) has a Zacks Rank #1 (Strong Buy), Paychex Inc. (PAYX - Snapshot Report) having a Zacks Rank #2 (Buy) and AOL Inc. (AOL - Snapshot Report) having a Zacks Rank #2 (Buy).

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