Western Digital (NASDAQ:WDC) Exceeds Q1 Expectations, Stock Jumps 11.5%
Leading data storage manufacturer Western Digital (NASDAQ: WDC) announced better-than-expected results in Q1 FY2024, with revenue down 26.4% year on year to $2.75 billion. The company also expects next quarter's revenue to be around $2.95 billion, in line with analysts' estimates. Turning to EPS, Western Digital made a non-GAAP loss of $1.76 per share, down from its profit of $0.20 per share in the same quarter last year.
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Western Digital (WDC) Q1 FY2024 Highlights:
Revenue: $2.75 billion vs analyst estimates of $2.66 billion (3.28% beat)
EPS (non-GAAP): -$1.76 vs analyst estimates of -$1.90
Revenue Guidance for Q2 2024 is $2.95 billion at the midpoint, above analyst estimates of $2.94 billion
Free Cash Flow was -$544 million compared to -$219 million in the previous quarter
Inventory Days Outstanding: 120, down from 130 in the previous quarter
Gross Margin (GAAP): 3.6%, down from 26.3% in the same quarter last year
“Western Digital’s fiscal first quarter results exceeded our expectations as the team’s efforts to bolster business agility and develop differentiated and innovative products across a broad range of end-markets have resulted in sequential margin improvement across flash and HDD businesses,” said David Goeckeler, Western Digital CEO.
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Memory Semiconductors
The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.
Sales Growth
Western Digital's revenue has been declining over the last three years, dropping by 9.07% on average per year. This quarter, its revenue declined from $3.74 billion in the same quarter last year to $2.75 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Even though Western Digital surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 26.4% year on year. This could mean that the current downcycle is deepening.
Western Digital may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 5.05% next quarter, analysts are expecting revenue to grow 17.3% over the next 12 months.
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Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Western Digital's DIO came in at 120, which is 13 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Key Takeaways from Western Digital's Q1 Results
Although Western Digital, which has a market capitalization of $12.6 billion, has been burning cash over the last 12 months, its more than $2.03 billion in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We were impressed by how significantly Western Digital blew past analysts' EPS expectations this quarter, driven by strong outperformance in its flash memory division. We were also glad its inventory levels shrunk. On the other hand, its operating margin fell and its gross margin shrunk. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. Aside from the earnings print, Western Digital said it would separate its HDD and flash memory businesses into two independent, public companies. The spin-off comes after activist hedge fund Elliot Management disclosed a nearly $1 billion stake in the company last year. Elliot is known for pushing its portfolio companies to pursue value-added strategies for shareholders. The transaction is targeted for the second half of calendar year 2024, and the stock is up 11.5% after reporting. It currently trades at $43.45 per share.
So should you invest in Western Digital right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.
