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Western Digital (WDC) Beats on Q3 Earnings and Revenues

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Continuing its upbeat performance alive for the fourth straight quarter, Western Digital Corp. (WDC - Free Report) reported better-than-expected results for third-quarter fiscal 2017. The company reported adjusted earnings (excluding all one-time items but including stock-based compensation) of $2.07 per share, which came way ahead of the Zacks Consensus Estimate of $1.85 and marked a solid 71% year-over-year improvement.

Further, the company’s non-GAAP earnings of $2.39 per share surged 77% year over year and came well ahead of its guidance range of $2.00–$2.10.

Western Digital Corporation Price, Consensus and EPS Surprise

 

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

Western Digital revenues for the quarter increased 64.7% year over year to $4.65 billion and surpassed the Zacks Consensus Estimate of $4.54 billion. Western Digital witnessed strong demand for both hard drive and NAND-based products from all categories of customers, largely driven by cloud and mobility based applications, as well as better-than-expected PC demand in the reported quarter.

Segment Revenue Details

Client devices (49.9% of total revenue) soared 69.2% year over year to $2.32 billion. Management noted that increasing storage capacities in mobile phones and market preference for client SSDs are long-term tailwinds for this business.

Client solutions (21.6% of total revenue) increased a whopping 189.9% to $1 billion. The company noted that its flash and HDD product portfolio performed strongly during the quarter which more than offsets the typical seasonal revenue decline.

Data center devices and solutions (28.5% of total revenue) increased 20.1% to $1.33 billion on the back of strong demand for high capacity storage devices. Solid adoption of 10 Terabyte third generation Helium drive was also noted in the quarter.

During the quarter, Western Digital shipped 39.1 million HDDs at an average selling price (ASP) of $63, up from $60 reported in the year-ago quarter. However, reported shipments of 39.1 million were down from 43.1 million shipped in the year-ago quarter.

Operating Details

Adjusted gross margin increased to 39% from 28.1% in the year-ago quarter. The expansion was driven by lower product cost and pricing improvement.

Adjusted operating expenses, as percentage of revenues, climbed 230 bps to 19.3%, owing to increased research and development (R&D) and selling, general and administrative (SG&A) expenses.

Adjusted operating margin expanded 870 bps to 19.7% in the reported quarter as the benefit from improved gross margin were partially offset by increased operating expenses as a percentage of revenues.

Interest expense was $221 million a massive increase from $8 million reported in the year-ago quarter.

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 $300 million of cost of revenue synergies and $325 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 third quarter, the company realized synergies of approximately $150 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 Mar 31, 2017, cash and cash equivalents were $5.65 billion, up from $4.94 billion as of Dec 30, 2016. Long-term debt during the quarter was $12.91 billion, down from $12.94 billion at the end of previous quarter. During the quarter, Western Digital generated $998 million in cash from operations.

Guidance

For fourth-quarter fiscal 2017, revenues are expected to be approximately $4.8 billion, which is higher than the Zacks Consensus Estimate of $4.61 billion.

Adjusted gross margin is projected to be 40%, backed by continued favorable pricing and product mix across the company’s businesses. Total operating expenses are anticipated to be flat with the fiscal third quarter.

Interest expense is anticipated to be almost $200 million.

Management expects adjusted earnings to be in the range of $2.55–$2.65 per share for the fiscal third quarter.

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 significantly positive, in our view.

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) .

We note that Western Digital shares outperformed the Zacks Computer Storage Devices industry in the past one year. While shares gained 109.7%, the industry advanced 74.1% in the same period. We expect the momentum to continue given the impressive result and positive guidance in the rest of fiscal 2017.

Zacks Rank & Key Picks

Western Digital currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Couple of other similarly-ranked stock in the broader technology sector are Adobe Systems (ADBE - Free Report) and Magic Software (MGIC - Free Report) , both carrying a Zacks Rank #2.

Adobe and Magic Software have expected long-term EPS growth rate of 16.6% and 10%, respectively.

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