A month has gone by since the last earnings report for Western Digital (WDC Quick QuoteWDC - Free Report) . Shares have lost about 3.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Western Digital Q3 Earnings and Revenues Lag Estimates

Western Digital Corporation reported third-quarter fiscal 2020 non-GAAP earnings of 85 cents per share, which surged 400% year over year and 37.1% sequentially.

Revenues of $4.175 billion increased 14% year over year. Performance was driven by robust demand from cloud customers during the fiscal third quarter and an uptrend in flash pricing.

However, the figure declined 1.4% sequentially.

Quarter in Detail

Client devices (43.9% of total revenues) increased 13% year over year and 2% sequentially to $1.831 billion, driven by solid revenues from client Solid State Drive (SSDs) and recovery in flash pricing.

Moreover, the company witnessed increased demand for notebook solutions due to growing work-from home and e-learning trends stemming from the coronavirus pandemic. However, softened demand for desktop and smart video hard drives hurt segment growth.

Client solutions (19.7%) increased 2% year over year to $821 million. However, the figure declined 13% sequentially due to COVID-19’s impact on retail demand.

Notably, lockdowns have forced brick and mortar retail stores to temporarily close down. The company expects the closure of physical stores to be a headwind in the near term.

Data center devices and solutions (36.4%) increased 22% year over year and 2% sequentially to $1.523 billion, driven by strong traction for Enterprise SSDs. Notably, the company’s latest 96-layer NVMe-based SSDs have completed more than 20 qualifications, with more than 100 qualifications in progress at multiple Cloud and OEM customers.

Additionally, the company is witnessing robust demand for its 14-terabyte drives and robust traction for 16 and 18-terabyte energy assisted drives.

Considering revenues by product group, HDD revenues (50.6% of total revenues) increased 2% from the year-ago quarter’s level to $2.114 billion. However, the figure dropped 11.8% on a sequential basis. Flash revenues (49.4%) improved 28% from the year-ago quarter’s figure and 12.1% sequentially to $2.061 billion.

Key Metrics

The company shipped 24.4 million HDDs at an average selling price (ASP) of $85. The reported shipments were lower than the year-ago quarter’s figure by 12.2%.

On a quarter-over-quarter basis, HDD Exabytes sales declined 6%. Flash exabytes sales increased 7%. Total exabytes sales (excluding non-memory products) were down 5% sequentially.

ASP/Gigabytes (excluding non-memory products) moved up 5% sequentially.

Margins

Non-GAAP gross margin of 27.9% expanded 260 basis points (bps) on a year-over-year basis.

Notably, non-GAAP Flash gross margin expanded 560 bps from the year-ago quarter’s figure, driven stronger pricing trends and cost reduction measures. Meanwhile, non-GAAP HDD gross margin expanded 70 bps year over year to 29.3%.

Non-GAAP operating expenses declined 0.5% from the year-ago quarter’s level to $738 million. Management remains focused on undertaking strict spending measures.

Non-GAAP operating income came in at $427 million, which increased 129.6% year over year. As a percentage of revenues, non-GAAP operating margin of 10.22% expanded 516 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Apr 3, 2020, cash and cash equivalents were $2.943 billion, down from $3.137 billion reported as of Dec 31, 2019.

Total debt (including current portion) was $9.629 billion as of Apr 3, down from $9.986 billion as of Dec 31, 2019, having repaid debt of $212 million in the third quarter.

Western Digital generated $204 million in cash from operations compared with $257 million reported in the previous quarter.

Free cash outflow came in at $110 million compared with free cash flow of $377 million in the prior quarter.

During the quarter, the company paid out dividends worth $149 million.

On Apr 30, Western Digital suspended its dividend policy to strengthen reinvestment in innovation and growth as well as to facilitate ongoing deleveraging efforts.

Guidance

For fourth-quarter fiscal 2020, revenues are expected in the range of $4.25-$4.45 billion.

Non-GAAP gross margin is anticipated in the range of 29-31%.

Non-GAAP operating expenses are expected between $740 million and $760 million. Interest and other expenses are estimated between $75 million and $80 million.

Management projects non-GAAP earnings between $1.00 cents and $1.05 per share.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted 6.7% due to these changes.

VGM Scores

Currently, Western Digital has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, 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 broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Western Digital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.