Western Digital Down Despite Q4 Earnings & Revenue Beat - Analyst Blog

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Western Digital Corp. ( WDC ) reported fourth-quarter fiscal 2014 non-GAAP earnings per share (excluding amortization of intangibles, restructuring charges and other one-time items) of $1.85, which beat the Zacks Consensus Estimate of $1.74.

Despite being down 5.9% from the year-ago quarter, reported earnings surpassed management's guidance range of $1.65 to $1.75 per share.

Shares of Western Digital went down 2.6% in after-hours trading on Wednesday as the year-over-year comparisons of both earnings and revenues were unfavorable.


Quarter Details

Western Digital reported revenues of $3.65 billion for the fourth quarter, which decreased 2.1% from the year-ago quarter but came ahead of the Zacks Consensus Estimate of $3.59 billion. Reported revenues also came ahead of management's guided range of $3.5-$3.6 billion.

Revenues declined on a year-over-year basis primarily due to a drop in hard disk drive (HDD) average selling price coupled with seasonally lower demand for notebook and desktop PC units and soft demand from the enterprise segment.

During the quarter, Western Digital shipped 63.1 million hard drives at an average selling price (ASP) of $56. ASP for the quarter was down from $60.0 in the year-ago quarter and $58.0 reported in the previous quarter. However, reported shipment was up from 59.9 million in the year-ago quarter and 60.4 million HDDs shipped in the previous quarter.

Western Digital's market share in the total addressable market (TAM) increased from 43.8% in the previous quarter to 45.7%. Market share also expanded from 44.9% reported in the year-ago quarter.

Western Digital's contribution from its non-PC segment (branded consumer electronics and enterprise HDD and SSD businesses) remained consistent at 53% of total revenue on a quarterly basis.

Moreover, the company reported $113.0 million in revenue contribution from the Enterprise Solid State Drive (SSD) segment, which increased from $104.0 million in the year-ago quarter, primarily due to higher adoption of its product range.

Western Digital's top 10 customers contributed 45% to revenues compared with 48% in the year-ago quarter and 44% in the previous quarter.

Western Digital's non-GAAP gross margin expanded 43 basis points (bps) to 29.5% aided by strong demand in gaming and notebook PCs and efficient operations.

Lower operating expenses (down 46.7% year over year) positively impacted Western Digital's operating results. Income from operations came in at $352.0 million, which increased from an operating loss of $221.0 million reported in the year-ago period.

Non-GAAP net income came in at $445.0 million or $1.85 per share compared with $477.0 million or $1.96 per share in the year-ago quarter.

Cash and cash equivalents were $4.80 billion compared with $4.57 billion in the previous quarter. During the quarter, Western Digital generated $713.0 million in cash from operations compared with $697.0 million in the previous quarter. The company generated free cash flow of $552.0 million.

The company repurchased stocks worth $272.0 million and paid dividends of $70.0 million during the quarter.

Guidance

For the first quarter of fiscal 2015, revenues are expected in the range of $3.8 to $3.9 billion. The Zacks Consensus Estimate is pegged at $3.82 billion.

Gross margin is expected to be approximately 29.5%. Total operating expenses are expected to be approximately $625.0 million. Management expects non-GAAP earnings per share to be between $1.95 and $2.05 for the September quarter. The Zacks Consensus Estimate is pegged at $2.06 per share.

Our Take

Western Digital reported better-than-expected fourth-quarter fiscal 2014 results. However, year-over-year comparisons were unfavorable primarily due to a fall in hard disk drive (HDD) average selling price and soft demand from the enterprise segment. The company provided a tepid revenue and earnings guidance citing seasonal factors.

Nonetheless, 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, modest growth in TAM and higher demand for storage are 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 investment in product innovation could result in flattish margins in the near term.

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 ) and SanDisk Corp. ( SNDK ).

Western Digital currently holds a Zacks Rank #2 (Buy). Investors can also consider NVIDIA Corporation ( NVDA ) which sports a Zacks Rank #1 (Strong Buy) and is worth buying.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: ASP , TAM , SSD , WDC , STX

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