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Western Digital (WDC) Down 8.1% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Western Digital (WDC - Free Report) . Shares have lost about 8.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Western Digital due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Western Digital's Q4 Earnings & Revenues Beat Estimates

Western Digital reported fourth-quarter fiscal 2021 non-GAAP earnings of $2.16 per share, which surpassed the Zacks Consensus Estimate by 48%. The bottom line increased 76% year over year and 112% quarter over quarter.

Revenues of $4.92 billion beat the Zacks Consensus Estimate by 9%. The top line increased 15% year over year and 19% sequentially. The performance was driven by higher demand from cloud customers and recovery in enterprise markets.

Quarter in Detail

Client Devices’ revenues (44% of total revenues) increased 13% year over year and 8% quarter over quarter to $2.166 billion. The top-line performance was driven by continued momentum in flash-based solutions, desktop hard disk drives (HDDs) and notebook demand along with ramp up of new gaming consoles. Demand for WD Black product line was strong due to gamers’ preference toward more customized solutions.

Client Solutions’ revenues (20%) increased 42% year over year and 10% sequentially to $977 million due to strength in both HDD and flash solutions across all key product categories.

Data Center Devices and Solutions’ revenues (36%) were up 6% year over year and 44% sequentially to $1.777 billion. Momentum in energy-assisted drives (especially 18 terabyte drive) as well enterprise solid state drives (SSDs) boosted the segment’s performance in the quarter under review.

Considering revenues by product group, HDD revenues (50.8% of total revenues) soared 22% year over year and 28% sequentially to $2.501 billion. HDD revenues benefitted mainly from demand for 18 TB energy assisted drives as well as steady demand from cloud customers.

Flash revenues (49.2%) rose 8% from the year-ago quarter’s figure to $2.419 billion. Sequentially, flash revenues increased 11%.

Going ahead, robust demand for its high-capacity drives and ramping production of 18-terabyte energy assisted drives and second-generation NVMe enterprise SSDs are expected to drive the top line.

Key Metrics

The company shipped 25.4 million HDDs at an average selling price (ASP) of $97. The reported shipments were lower than the year-ago quarter’s figure by 10%.

On a quarter-over-quarter basis, HDD Exabytes sales increased 34%. Flash exabytes sales increased 4%. Total exabytes sales (excluding non-memory products) were up 30% sequentially.

ASP/Gigabytes (excluding non-memory products) improved 7% sequentially.

Margins

Non-GAAP gross margin of 32.9% expanded 400 basis points (bps) on a year-over-year basis.

Non-GAAP flash gross margin was 35.5%, up 500 bps from the year-ago quarter’s levels. Non -GAAP HDD gross margin expanded 310 bps year over year to 30.3%.

Non-GAAP operating expenses increased 10.8% from the year-ago quarter’s level to $790 million.

Non-GAAP operating income came in at $828 million, which soared 57% year over year. As a percentage of revenues, non-GAAP operating margin of 16.8% expanded 450 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Jul 2, 2021, cash and cash equivalents were $3.37 billion compared with $2.734 billion reported as of Apr 2, 2021.

Long-term debt (including current portion) was $8.725 billion as of Jul 2, 2021 compared with $8.929 billion as of Apr 2, 2021. The company cleared debt of $213 million in the fiscal fourth quarter.

Western Digital generated $994 million in cash from operations compared with $116 million reported in the previous quarter.

Free cash flow came in at $792 million compared with free cash outflow of $11 million in the prior quarter.

During the quarter, the company did not pay out any dividends. On Apr 30, 2020, Western Digital suspended its dividend policy to strengthen reinvestment in innovation and growth as well as to facilitate ongoing deleveraging efforts.

 

Q1 Guidance

For first-quarter fiscal 2022, non-GAAP revenues are expected in the range of $4.9-$5.1 billion..

Management projects non-GAAP earnings between $2.25 cents and $2.55 per share.

Non-GAAP gross margin is anticipated in the range of 33-35%. Hard drive gross margin is expected to be relatively flat while flash gross margin is expected to improve quarter over quarter.

Non-GAAP operating expenses are expected between $755 million and $785 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 20.95% due to these changes.

VGM Scores

At this time, Western Digital has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Western Digital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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