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What's in Store for Western Digital (WDC) in Q2 Earnings?

Zacks Equity Research

Western Digital WDC is scheduled to report second-quarter fiscal 2019 results on Jan 24.

Notably, the company has outpaced the Zacks Consensus Estimate in  three out of the trailing four quarters, with an average beat of 3.8%.

In the first quarter of fiscal 2019, Western Digital reported non-GAAP earnings of $3.04 per share, which lagged the Zacks Consensus Estimate by 2 cents. The figure also declined 14.6% from the year-ago quarter.

Further, revenues declined 3% year over year to $5.03 billion and missed the Zacks Consensus Estimate of $5.14 billion.

Guidance & Estimates

For second-quarter fiscal 2019, management anticipates non-GAAP earnings between $1.45 and $1.65 per share.

Notably, the Zacks Consensus Estimate for the to-be-reported quarter has witnessed downward revision in the past seven days. The company’s second-quarter fiscal 2019 earnings estimates moved down from $1.53 to $1.52, representing a decline of 61.5% from the year-ago quarter.

Further, for second-quarter fiscal 2019, revenues are anticipated to be in the range of $4.2-$4.4 billion.

The Zacks Consensus Estimate is pegged at $4.27 billion, representing a decline of approximately 20% from the year-ago quarter.

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

Factors to Consider

Western Digital faces stiff competition from Seagate STX, Hitachi, Samsung and Intel INTC in the storage market which has resulted in a decline in the average selling price (ASP). Moreover, the company intends to temporarily reduce flash output.

In the first quarter, the company shipped 34.1 million hard disk drives (HDDs) at an ASP of $72. The reported shipments were lower than the year-ago figure of 42.2 million.

Notably, the Zacks Consensus Estimate for total unit shipments for the fiscal second quarter is pegged at 36.69 million at an ASP of $67.

A declining trend in PC shipments is detrimental to business prospects of Western Digital, which continues to depend substantially on PC sales.

In fact, per latest Gartner’s preliminary data, PC shipments in the fourth quarter of 2018 fell 4.3% year over year to 68.6 million units. Going by IDC, worldwide PC shipment also dipped 3.7% on a year-over-year basis and totaled 68.1 million in the final quarter.

Moreover, in the last reported quarter, Client devices and Client solutions declined roughly 1% and 18% year over year, respectively. The Zacks Consensus Estimate for Client devices revenues for the to-be-reported quarter is currently pegged at $2.28 billion and $871 million, respectively.

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.

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, going ahead.

However, strong demand for high capacity cloud-based storage devices are expected to drive Data center devices and solutions revenues, which advanced 5.6% to come in at $1.45 billion in the first quarter.

The company recently unveiled three latest open-source innovations at the RISC-V Summit at Santa Clara, CA. The company also announced that it is making progress toward transitioning approximately one billion of its processor cores to RISC-V’s standard architecture.

In the quarter under review, the company unveiled Ultrastar DC HC620 HDD with storage capacity of 15TB. The HDD which utilizes SMR technology is anticipated to witness incremental adoption from enterprise data center clientele as it aims to reduce TCO and enhance areal density.

These product additions will enhance Western Digital’s existing product portfolio and aid it in getting a strong foothold in the global SSD market.

We believe that the adoption of company’s expanding storage solutions portfolio is likely to aid it in reviving financial performance.

Western Digital Corporation Price and EPS Surprise


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

What 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 #3 and an Earnings ESP of -2.63%, which makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stock That Warrants a Look

Here is a company, which, per our model, has the right combination of elements to post an earnings beat in the to-be-reported quarter:

Brown & Brown, Inc. BRO has an Earnings ESP of +5.38% and a Zacks Rank #1. The company is slated to report fourth-quarter 2018 earnings on Jan 28. You can see the complete list of today’s Zacks #1 Rank stocks here.

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