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Western Digital (WDC) Q2 Earnings Top Estimates, Shares Fall

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Western Digital Corporation (WDC - Free Report) reported second-quarter fiscal 2022 non-GAAP earnings of $2.30 per share, which surpassed the Zacks Consensus Estimate by 8%. The bottom line increased 233% year over year but declined 8% quarter over quarter.

Revenues of $4.833 billion beat the Zacks Consensus Estimate by 0.6%. The top line increased 23% year over year. The performance was driven by higher demand from several end markets, particularly cloud customers. On a sequential basis, revenues declined 4%. Pandemic-induced supply chain and other related disruptions acted as a headwind.

For third-quarter fiscal 2022, the company expects non-GAAP revenues in the range of $4.45-$4.65 billion. The Zacks Consensus Estimate for revenues is currently pegged at $4.76 billion.

Management projects non-GAAP earnings between $1.50 and $1.80 per share. The Zacks Consensus Estimate for earnings is currently pegged at $2.00 per share.

Following the lower-than-expected outlook, shares dropped 11.2% in the premarket trading on Jan 28. In the past year, shares of Western Digital have declined 4.6% compared with the industry’s return of 9.1%.

Western Digital Corporation Price, Consensus and EPS Surprise

 

Western Digital Corporation Price, Consensus and EPS Surprise

Western Digital Corporation price-consensus-eps-surprise-chart | Western Digital Corporation Quote

 

Quarter in Detail

Beginning from first-quarter fiscal 2022, Western Digital started reporting revenues under three refined end-markets — Cloud (includes products for public or private cloud), Client (includes products sold directly to OEMs or through distribution) and Consumer (includes retail and other end-user products).

Revenues from the Cloud end market (39.7% of total revenues) increased 89% year over year to $1.92 billion. On a sequential basis, cloud revenues were down 14%. Supply chain troubles affected cloud hard drive deployments at several customers, impacting exabyte shipment.

Revenues from Client end market (38.4%) dropped 1% year over year but was unchanged sequentially to $1.854 billion. The metric was backed by strength by continued acceleration in 5G smartphones. Shipments of BiCS5 products for 5G smartphones were up 60% quarter over quarter and 50% year over year. However, client SSD and client hard drive revenues declined in the quarter under review.

Revenues from the Consumer end market (21.9%) were flat year over year but increased 9% sequentially to $1.059 billion. Strength in retail flash and momentum in the WD_BLACK premium SSD product line cushioned the top line.

Considering revenues by product group, HDD revenues (50.7% of total revenues) rose 16% year over year to $2.213 billion. The results benefited mainly from demand for energy-assisted enterprise drives from cloud and enterprise customers. However, revenues declined 14% quarter over quarter mainly owing to supply chain disruptions.

In the quarter under review, the company began shipments of its latest 20-terabyte CMR hard drives powered by OptiNAND technologies.

Flash revenues (54.2%) rose 29% from the year-ago quarter’s figure to $2.62 billion. Sequentially, flash revenues increased 5%. Demand for enterprise SSDs and ramp-up of new 5G phones incorporating the company’s latest BiCS5 node boosted flash revenues, added the company.

Key Metrics

The company shipped 21.6 million HDDs at an average selling price (ASP) of $97. The reported shipments declined 16% from the year-ago quarter’s levels.
On a quarter-over-quarter basis, HDD Exabytes sales fell 14%. Flash exabytes sales increased 13%. Total exabytes sales (excluding non-memory products) were down 11% sequentially.

ASP/Gigabytes (excluding licensing, royalties, and non-memory products) were down 6% sequentially.

Margins

Non-GAAP gross margin of 33.6% expanded 720 basis points (bps) on a year-over-year basis.

HDD gross margin expanded 500 bps year over year to 30.6%. Flash gross margin was 36.1% compared with 27.1% reported in the year-ago quarter.
Non-GAAP operating expenses increased 6.5% from the year-ago quarter’s level to $741 million.

Non-GAAP operating income came in at $882 million, soaring 157% year over year. As a percentage of revenues, non-GAAP operating margin of 18.2% compared with 8.7% reported in the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2021, cash and cash equivalents were $2.531 billion compared with $3.29 billion reported as of Oct 1, 2021.

The long-term debt (including the current portion) was $7.308 billion as of Dec 31, 2021, compared with $8.521 billion as of Oct 1, 2021.  In the quarter under review, Western Digital repaid the remaining balance of its Term-Loan B-4 in of $943 million and repaid $1.27 billion on its Term-Loan A-1.

Western Digital generated $666 million in cash from operations compared with $521 million reported in the previous quarter.

Free cash flow came in at $407 million compared with a free cash flow of $224 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 facilitate ongoing deleveraging efforts.

Q3 Guidance

Western Digital expects fiscal third-quarter non-GAAP gross margin in the range of 30-32%. Non-GAAP operating expenses are expected between $750 million and $770 million.

Zacks Rank & Other Stocks to Consider

Currently, Western Digital carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks from the broader technology sector include Salesforce (CRM - Free Report) , Hewlett Packard (HPE - Free Report) and Cadence Design Systems (CDNS - Free Report) . While Salesforce and Hewlett Packard sport a Zacks Rank #1 (Strong Buy), Cadence carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Salesforce’s fiscal 2022 earnings is pegged at $4.68 per share. The long-term earnings growth rate of the company is pegged at 16.8%.

Salesforce’s earnings beat the Zacks Consensus Estimate in all the preceding four quarters, the average surprise being 44.2%. Shares of CRM have declined 5.7% in the past year.

The Zacks Consensus Estimate for Hewlett Packard’s fiscal 2022 earnings is pegged at $2.03 per share, unchanged in the past 60 days. The long-term earnings growth rate of the company is pegged at 5.8%.

Hewlett Packard’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 14.4%. Shares of HPE have rallied 32.3% in the past year.

The Zacks Consensus Estimate for Cadence 2021 earnings is pegged at $3.25 per share. The long-term earnings growth rate of the company is pegged at 18.2%.

Cadence’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 11%. Shares of CDNS have returned 6.6% in the past year.