Western Digital Q2 Earnings Top, Revenues Lag, View Weak
Shares of Western Digital Corp. WDC went up 4.6% on Jan 28, 2015, after the company reported better-than-expected second-quarter fiscal 2016 earnings.
The company reported non-GAAP earnings per share (excluding amortization of intangibles and other one-time items) of $1.60, which beat the Zacks Consensus Estimate of $1.53 per share. However, earnings were down from $2.26 per share reported in the year-ago quarter.
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Quarter Details
Western Digital’s revenues of $3.32 billion for the second quarter not only decreased 14.7% year over year but also marginally lagged the Zacks Consensus Estimate of $3.35 billion. Reported revenues were however within management’s guided range of $3.3 billion to $3.4 billion. The year-over-year decline was due to weak hard disk drives (HDDs) total addressable market (TAM) during the quarter. Also, weaker-than-expected gaming sector coupled with soft enterprise volumes during the quarter impacted revenues.
During the quarter, Western Digital shipped 49.7 million hard drives at an average selling price (ASP) of $61. ASP was up from $60 reported in the last quarter and the year-ago quarter. However, reported shipments were down from 61 million in the year-ago quarter and from 51.7 million HDDs shipped in the previous quarter.
Western Digital’s market share in the total addressable market (TAM) decreased from 43.6% in the previous quarter to 43.2%. Market share also declined from 43.4% reported in the year-ago quarter.
Nevertheless, the company reported $270 million in revenues from the Enterprise Solid State Drive (SSD) segment, which increased from $187 million in the year-ago quarter and $233 million in the previous quarter.
Western Digital’s top 10 customers contributed 44% to revenues, flat year over year but down from 48% in the prior quarter.
Western Digital’s non-GAAP gross profit decreased 20.5% on a year-over-year basis to $944 million. Non-GAAP gross margin also decreased 207 basis points (bps) to 28.5%.
Non-GAAP operating expenses were up 4.2% year over year, primarily due to higher selling, general and administrative expenses. Non-GAAP income from operations came in at $402 million, which decreased from $667 million reported in the year-ago period. Operating margin also decreased 504 bps on a year-over-year basis to 12.1%. The decrease in margins was primarily due to higher operating expenses as a percentage of revenues (up 297 bps on a year-over-year basis).
Non-GAAP net income came in at $374 million or $1.60 per share compared with $539 million or $2.26 per share in the year-ago quarter.
Cash and cash equivalents were $5.36 billion compared with $5.1 billion in the previous quarter. Long-term debt during the quarter was $2.06 billion.
During the quarter, Western Digital generated $598 million in cash from operations compared with $545 million in the previous quarter. The company generated free cash flow of $449 million. The company declared a cash dividend of 50 cents during the quarter.
Guidance
For the third quarter of fiscal 2016, revenues are expected in the range of $2.8 to $2.9 billion. The Zacks Consensus Estimate is pegged at $3.25 billion.
Non-GAAP gross margin is expected to be up on a sequential basis. Total operating expenses (research and development, and selling, general and administrative) are expected to be approximately $500 million. Management expects non-GAAP earnings per share to be between $1.20 and $1.30 for the third quarter. The Zacks Consensus Estimate is pegged at $1.43 per share.
Our Take
Western Digital reported mixed second-quarter fiscal 2016 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. Both revenues and earnings decreased on a year-over-year basis, primarily due to lower HDD TAM. The company also provided a tepid revenue and earnings guidance citing seasonal factors.
Nonetheless, the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are long-term positives. Additionally, higher demand for storage is expected to lead to a positive earnings surprise in the upcoming quarter.
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 flattish margins in the near term.
Also, 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 expected to be growth catalysts, going forward.
It is worth mentioning that Western Digital recently proposed to buy SanDisk SNDK for $19 billion, or $86.50 per share in a mostly cash deal. Western Digital is one of the largest HDD producers in the U.S., and we believe that the acquisition will make it the world’s largest flash storage solution provider.
Moreover, strategic acquisitions to expand its offerings in the SSD segment are expected to place Western Digital in a better position compared to its peers such as Seagate Technology STX.
Western Digital currently carries a Zacks Rank #3 (Hold).
MeetMe, Inc. MEET is a better-ranked stock in the technology space, carrying a Zacks Rank #1 (Strong Buy).
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