A month has gone by since the last earnings report for Western Digital (WDC). Shares have added about 23.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Western Digital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Western Digital Q2 Earnings, Revenues Misses Estimates
Western Digital reported second-quarter fiscal 2019 non-GAAP earnings of $1.45 per share which lagged the Zacks Consensus Estimate by 6 cents and slumped 63% from the year-ago quarter. Moreover, the figure declined approximately 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 declined 16% sequentially.
Uncertain macroeconomic environment, declining trend in PC shipments and softness in NAND flash pricing trends adversely impacted results.
Segment Revenue Details
Client devices (52.3% of total revenues) declined16.4% year over year and came in at $2.214 billion. The figure was down 16.5% sequentially. Sluggish demand across smartphone and PC markets affected the segment results.
Client solutions (22.3%) slumped 24.7% year over year to reach $945 million. The figure inched up 1.4% sequentially.
Notably, the company is 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.
Management noted that revenues from client compute SSDs exceeded client compute HDD revenues for the first time.
Data center devices and solutions (25.4%) plummeted 25.1% year over year to $1.074 billion, owing to weakness in end-market. The figure was down 25.7% sequentially.
The company shipped 30.2 million HDDs at an average selling price ("ASP") of $67. The reported shipments were lower than the year-ago figure of 42.3 million. Notably, the Zacks Consensus Estimate for total unit shipments and ASP were pegged at 36.69 million and $67, respectively.
While Flash exabytes shipments improved 5% sequentially, HDD Exabytes shipments declined 17% on a quarter-over-quarter basis. Total exabytes sales (excluding non-memory products) declined 15% sequentially.
Considering revenues by product group, HDD revenues (48.7% of total revenues) declined 23.5% from the year-ago quarter to reach $2.06 billion. Flash revenues (51.3%) fell 17.8% from the year-ago quarter to reach $2.173 billion.
ASP/Gigabytes (excluding non-memory products) declined 18% sequentially.
Non-GAAP gross margin of 31.3% declined from the year-ago figure of 43.2% and contracted 670 bps sequentially. Management attributed the decline to unfavorable product mix for HDDs which included less capacity enterprise solutions and softness in Flash pricing.
Non-GAAP operating expenses declined 14.7% from the year-ago quarter to $738 million.
Non-GAAP operating income of $589 million plummeted 59.1% to $589 million. The company reported non-GAAP operating margin of 13.9% in the quarter which declined from the year-ago figure of 27% and contracted 770 bps on a sequential basis.
Balance Sheet & Cash Flow
As of Dec 28, 2018, cash and cash equivalents were $4.01 billion, down from $4.65 billion reported in the previous quarter. Total debt (including current portion) was $10.61 billion, down from $11.14 billion at the end of the previous quarter.
Western Digital generated $469 million in cash from operations compared with $705 million in first-quarter fiscal 2019. Free cash flow came in at $24 million in the reported quarter. During the quarter, the company paid dividends worth $144 million.
On Nov 7, 2018, Western Digital’s board of directors approved a cash dividend of 50 cents per share payable Jan 14, 2019.
For third-quarter fiscal 2019, revenues are expected to be in the range of $3.6-$3.8 billion.
Non-GAAP gross margin is anticipated to come in at 28%.
Non-GAAP operating expenses are expected between $760 million and $780 million. Interest and other expenses are estimated approximately at $105 million.
Management projects non-GAAP earnings between 40 cents and 60 cents per share.
Notably, management anticipates year-over-year growth trend to “resume in the second half of calendar 2019."
Western Digital anticipates exabyte growth rate in capacity enterprise to witness around 40% CAGR.
From the Flash industry perspective, Western Digital maintains its estimates for industry bit growth to be in the estimated long-term range (between 36% and 38%).
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -71.47% due to these changes.
Currently, Western Digital has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Western Digital has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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