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Factors Likely to Impact Western Digital (WDC) in Q3 Earnings

Zacks Equity Research

Western Digital Corporation WDC is set to report third-quarter 2019 results on Apr 29. Notably, the company surpassed the Zacks Consensus Estimate for earnings in two of the trailing four quarters, with an average positive earnings surprise of 1.9%.

Past-Quarter Performance

Western Digital had reported second-quarter fiscal 2019 non-GAAP earnings of $1.45 per share which lagged the Zacks Consensus Estimate by 6 cents and declined 63% from the year-ago quarter. Moreover, the figure was down 52% on a sequential basis.

Revenues decreased 21% year over year to $4.233 billion and missed the Zacks Consensus Estimate of $4.241 billion. Moreover, the figure was down 16% sequentially.

What to Expect?

For third-quarter fiscal 2019, revenues are expected to be in the range of $3.6-$3.8 billion. Management projects non-GAAP earnings between 40 cents and 60 cents per share.

The Zacks Consensus Estimate for third-quarter earnings is pegged at 49 cents per share, indicating a decline of 86.5% from the year-ago reported figure. Moreover, the Zacks Consensus Estimate for revenues stands at $3.69 billion, suggesting a drop of 26.4% from the year-ago reported figure.

Shares of Western Digital have dropped 36.6% in the past year compared with the industry's decline of 15.6%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Western Digital has not been doing well financially, of late. Uncertain macroeconomic environment, declining trend in PC shipments and softness in NAND flash pricing trends are expected to adversely impact the third-quarter-results.

Ballooning debt levels have also been troubling Western Digital for quite some time now. Moreover, any downturn in macroeconomic and foreign exchange volatility conditions is likely to make it difficult for the company to pay or refinance debts, which is likely to impact the quarter under review.

Western Digital also faces stiff competition from Seagate STX, Hitachi, Samsung and Intel in the storage market which has resulted in a decline in the average selling price (ASP). This trend is likely to have continued in the quarter under review. Notably, the company had shipped 30.2 million HDDs at an average selling price (ASP) of $67 in the second quarter. The reported shipments were lower than the year-ago figure of 42.3 million.

The Zacks Consensus Estimate for the third quarter for total unit shipments and ASP were pegged at 28.67 million and $72, respectively.

Moreover, the company intends to temporarily reduce flash output which is likely to impact the to-be reported quarter’s results.

Declining trend in PC shipments is likely to have been detrimental to business prospects of Western Digital in the third quarter, which continues to depend substantially on PC sales.

Moreover, sluggish demand across smartphone and PC markets will impact Client devices segment results in the to-be reported quarter. In the last reported quarter, Client devices revenue declined roughly 16.4% year over year. The Zacks Consensus Estimate for Client devices revenues for the to-be-reported quarter is currently pegged at $1.80 billion.

The company is also facing challenges owing to NAND flash pricing, which is currently on the decline on account of oversupply and weaker-than-expected growth in end-market demand which is likely to impact the top line in the third-quarter.

However, we believe the new products with further innovation in memory technologies will strengthen the company’s product portfolio and aid the results in the quarter under review.

We believe that the momentum from the launch of the Western Digital product suite will help the company to emerge as a major player in the rapidly growing storage market, in turn lending greater stability to revenue stream. Additionally, this will help Western Digital gain new customers, which in turn will positively impact the third-quarter results.

 What the Zacks Model Unveils

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Western Digital has a Zacks Rank #4 (Sell) and an Earnings ESP of +3.29%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With Favorable Combination

Here are some other stocks worth considering as our model shows that these too have the right combination of elements to deliver an earnings beat in the upcoming releases.

Xilinx, Inc. XLNX has an Earnings ESP of +2.03% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lockheed Martin Corporation LMT has an Earnings ESP of +4.16% and a Zacks Rank #3.

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Seagate Technology PLC (STX) : Free Stock Analysis Report
Western Digital Corporation (WDC) : Free Stock Analysis Report
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