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Western Digital Corp. (WDC - Free Report) reported fourth-quarter fiscal 2017 non-GAAP earnings (including stock-based compensation) of $2.63 per share, which beat the Zacks Consensus Estimate by 12 cents.

Excluding stock based compensation, non GAAP earnings were $2.93 per share as compared with $1.03 reported in the year-ago quarter. The figure was much better than management’s guided range of $2.55–$2.65 per share.

Revenues increased 38.5% year over year to $4.84 billion and surpassed the Zacks Consensus Estimate of $4.80 billion. The figure was slightly better than management’s guidance.

Western Digital reported revenues of $19.09 billion in the fiscal 2017, which grew almost 47% over fiscal 2016. The results benefited from strong demand for both hard drive and NAND-based products from all categories of customers, largely driven by cloud and mobility based applications. The company is also significantly gaining from the synergies related to the SanDisk and HGST acquisitions.

Western Digital’s stock has gained 35.3% year to date, substantially outperforming the industry it belongs to.



Segment Revenue Details

Client devices (49.8% of total revenue) soared 52.1% year over year to $2.41 billion. Despite weak PC market, the segment benefited from a diversifying customer base and continued expansion of product portfolio in mobility and client SSD.
 

Western Digital Corporation Price, Consensus and EPS Surprise

 

Western Digital Corporation Price, Consensus and EPS Surprise | Western Digital Corporation Quote

Management acknowledges long-term growth opportunity from applications like connected home, gaming and industrial markets. The company has already started multiple sampling activities for embedded products designed for the automotive market.

Client solutions (20.9% of total revenue) also surged 52.1% to $1.01 billion. The company noted that product strength along with global distribution capabilities drove results.

Data center devices and solutions (29.3% of total revenue) increased 14% to $1.42 billion on the back of strong demand for high capacity storage devices. Solid adoption of 10 Terabyte (TB) third generation Helium drive remained consistent in the quarter.

Management noted that on a cumulative basis, since the launch of the helium platform four years ago, Western Digital has shipped more than 18 million helium drives. The company is now focused on introducing the 12-TB helium drives, which is anticipated to help Western Digital maintain technological leadership in the long haul.

Management’s expectations for the Nearline platform Exabyte growth rate remains at 40% over the long term. Western Digital now estimates the industry’s Exabyte growth to be approximately 30% for calendar 2017.

During the quarter, Western Digital shipped 39.3 million HDDs at an average selling price (ASP) of $63. The reported shipments were down from 40.1 million shipped in the year-ago quarter.

Operating Details

Non GAAP gross margin increased to 41.3% from 31.2% in the year-ago quarter. The figure was better than management’s guidance of 40%. The expansion was driven by a favorable supply-demand environment for flash-based products, product cost improvements, a higher mix of flash-based revenue, and strength in the capacity enterprise HDD product line-up.

Non GAAP operating expenses, as percentage of revenues, decreased 160 bps to 16.8%, owing to lower research and development (R&D) – down 170 bps – and selling, general and administrative (SG&A) expenses – down 430 bps.

Non GAAP operating margin were 24.5% as compared with 12.9% in the year-ago quarter.

Non GAAP interest expense declined 5.7% from the year-ago quarter to $197 million, slightly lower than management’s guidance.

Acquisition Synergies

Western Digital stated that it is on track to achieve the $800 million of annualized savings from the HGST integration by the end of calendar year 2017. The company achieved $350 million of cost of revenue synergies and $350 million of operating expense synergies each on an annual run-rate basis at the end of the reported quarter.

In terms of SanDisk integration, at the end of the fiscal fourth quarter, the company realized synergies of approximately $200 million on an annual run-rate basis. This is in line with the company’s 18-month target of achieving $500 million of total run-rate synergies on an annualized basis.

Balance Sheet/Cash Flow

As of Jun 30, cash and cash equivalents were $6.38 billion, up from $5.65 billion as of Mar 31, 2016. Long-term debt during the quarter was $12.92 billion, slightly up from $12.91 billion at the end of previous quarter.

During the quarter, Western Digital generated $939 million in cash from operations as compared with $998 million.

Guidance

For first-quarter fiscal 2018, revenues are expected to be approximately $5.10 billion, which is slightly lower than the Zacks Consensus Estimate of $5.12 billion.

Non GAAP gross margin is projected to be almost 41%, backed by continued favorable pricing and product mix across the company’s businesses. Total operating expenses are anticipated to be flat with the fiscal fourth-quarter.

Interest expense is anticipated to be almost $208 million.

Management expects non-GAAP earnings to be in the range of $3.25–$3.35 per share. The mid-point ($3.30 per share) is significantly higher than the Zacks Consensus Estimate of $2.78.

For fiscal 2018, Western Digital forecasts non-GAAP earnings to be excess of $12.00. The company reported non-GAAP earnings of $9.19 in fiscal 2017. The Zacks Consensus Estimate is currently pegged at $10.45 per share.

Our Take

We believe that the shift toward non-PC applications, secular growth of digital data and increasing exposure to the small and medium business space are the long-term positives for Western Digital. The company’s growing footprint in the automotive as well as the connected home and industrial categories is a significant positive, in our view.

Western Digital will benefit from favorable NAND industry conditions that management believes will persist at least through the first half of calendar 2018. This will also help in gross margin expansion.

We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Continued investments in product innovation could result in flat margins in the near term.

Further, Western Digital’s entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are anticipated to be growth catalysts, going forward.

Moreover, the SanDisk acquisition not only expands Western Digital’s offerings in the SSD segment, but also provides a competitive edge against peers such as Seagate Technology (STX - Free Report) .

Zacks Rank & Key Picks

Western Digital currently has a Zacks Rank #4 (Sell).

Better-ranked stocks in the broader technology sector are Infineon (IFNNY - Free Report) and Applied Optoelectronics (AAOI - Free Report) . Both the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Infineon is expected to report earnings on Aug 1, while Applied Optoelectronics is set to report on Aug 3.

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