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Western Digital Beats on Q2 Earnings

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Western Digital Corp. (WDC - Free Report) reported second-quarter 2014 non-GAAP earnings per share of $2.19, which beat the Zacks Consensus Estimate of $2.08. Earnings also increased 4.9% from the year-ago quarter.


Western Digital reported revenues of $3.97 billion for the second quarter, which not only increased 3.9% from the year-ago quarter but also topped the Zacks Consensus Estimate of $3.86 billion. Reported revenues also came ahead of management’s guidance range of $3.775 billion–$3.875 billion.

During the quarter, Western Digital shipped 63.1 million hard drives at an average selling price (ASP) of $61.0. Reported shipment was up from 62.6 million sequentially and 59.2 million shipped in the year-ago quarter. However, ASP for the quarter was down from $62.0 in the year-ago quarter but up sequentially from $58.

Western Digital’s market share in the total addressable market (TAM) decreased marginally from 44.7% in the previous quarter to 44.4%. However, market share expanded from 43.6% reported in the year-ago quarter.

Nonetheless, Western Digital’s shift toward non-PC applications continued as 34% of the quarter’s revenues came from the segment. Moreover, the company reported $155 million in revenue contribution from the Enterprise Solid State Drive (SSD) segment which increased from $106 million in the previous quarter and $89 million contributed in the year-ago quarter. Moreover, the company reduced its reliance on its top 10 customers this quarter. Western Digital’s top 10 customers contributed 42% of the revenues compared to 45% in the year-ago quarter and 48% in the previous quarter.

Operating Results

Western Digital’s non-GAAP gross margin expanded 142 basis points (bps) aided by favorable business mix and a higher revenue base.

Operating margins declined 47 bps during the quarter primarily due to higher-than-expected operating expenses. Operating expenses as a percentage of revenues increased 150 bps. Western Digital’s non-GAAP net income came in at $532 million or $2.19 per share compared with $513 million or $2.09 per share reported in the year-ago quarter.

Balance Sheet & Cash Flow

Cash and cash equivalents were $4.66 billion compared with $4.87 billion in the previous quarter. During the quarter, the company generated $727 million in cash from operations compared to $680 million in the previous quarter. Western Digital generated free cash flow of $557 million.

The company repurchased stocks worth $150 million and paid dividends of $59 million during the quarter.


For the third quarter, revenues are expected in the range of $3.65 billion to $3.75 billion, sequentially down due to lower TAM impacted by seasonality. The Zacks Consensus Estimate is pegged at $3.690 billion.

Gross margin is expected in the range of 27% to 32%. Management expects non-GAAP earnings per share to be between $1.80 and $1.90 for the March quarter. The forecast includes a 10 cent dilution impact due to the acquisitions of sTec and Virident. The Zacks Consensus Estimate is pegged at $1.89 per share.

Our Take

Western Digital reported better-than-expected second-quarter results. However, the company’s guidance remained tepid as management cited seasonal factors. Moreover, the recent acquisitions will have dilutive effect on the company’s bottom line.

Nonetheless, the secular growth of digital data and growing exposure to the small and medium business space are long-term positives. The company is launching storage devices to attract more customers. Continued investments for product innovation could result in flattish margins in the near term.

Moreover, strategic acquisitions to expand its offerings in the SSD segment is expected to place Western Digital in a better position compared to its peers such as Seagate (STX - Free Report) , SanDisk Corp. and Fusion-io .

Western Digital Corp. carries a Zacks Rank #1 (Strong Buy).

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