Western Digital Corp.
(
WDC
) is scheduled to announce its second quarter 2012 results on April
26, 2012 after market close, and we witness modest variation in
analysts' estimates at this point.
Second Quarter Overview
Revenues in the second quarter of 2012 moved down 19.4% year
over year to $1.99 billion. Western Digital shipped a total of 28.5
million hard drives as compared with 52.2 million in the year-ago
quarter. Revenue from sales of the branded products was $328.0
million, down 40.0% from the year-ago quarter and 33.0% from the
September quarter.
Considering different sales channels, OEM sales represented
59.0% of revenues, up from 45.0% in the prior year. Distribution
channel sales represented 25.0% of revenues, down from 33.0% in the
prior year. Retail sales as a percent of revenues were 16.0%, down
from prior year's 22.0%. The average selling price was
approximately $69.0 per unit, up $22.0 from the year-ago quarter
and up $23.0 sequentially.
Gross margin in the reported quarter was 32.5% versus 19.2% in
the year-ago quarter. Higher ASPs, partially offset by higher cost
per unit, contributed to the increased gross margin.
On average, per unit costs were approximately $10.0 higher than
in the previous quarter due to low production volume, increased use
of airfreight, a higher mix of externally procured heads and a
higher cost for other components that was impacted by the flood and
subsequently affected the company's supply-chain partners.
The company expects third quarter revenue to be in the range of
$2.0 billion to $2.15 billion; and R&D and SG&A spending
excluding acquisition and flood-related expenses of approximately
$275.0 million. The company also expects the tax rate to be between
6.0% to 9.0%, with the share count at approximately 239 million.
The non-GAAP earnings per share is expected to be between $1.15 and
$1.45 for the March quarter, which excludes acquisition and
flood-related expenses.
Agreement of Analysts
Out of the 14 analysts providing estimates for the third
quarter, three analysts raised estimates upward over the last
thirty days. Two analysts raised estimates for fiscal 2012, while
there was just one upward revision for 2013, in the last 30
days.
Analysts remain positive about western digital's HDD pricing.
Drive prices have declined slightly since the channel issues have
alleviated somewhat, but they are still significantly higher than
what they were before the flood.
Moreover, the analysts also expect the total shipments of WDC to
grow substantially on a sequential basis in the March quarter.
Whereas shipments to distributors are expected to come down during
the same period.
Other analysts are of the opinion that the acquisition of HGST
by WDC is an important event in the HDD history, in spite of the
regulatory issues faced by the company, and should drive record
profitability for both the companies. Moreover, the analysts also
expect the combined entity to operate rationally and within
profitability metrics consistent with the history of Western
Digital.
Magnitude of Estimate Revisions
Over the past 30 days, the Zacks Consensus Estimate for the
third quarter moved up by a penny to 7 cents per share. For fiscal
year 2012 and 2013, the analysts' estimates have moved up by 14
cents and 20 cents, respectively, to $6.62 and $8.98,
respectively.
Our Recommendation
Western Digital rolled out decent second quarter 2012 results,
exceeding our expectations with a substantial improvement in sales
from the year-ago period. The company is trying to lower its
interest expense by reducing the debt burden and is also trying to
improve its shipment, whereas the improvement in pricing
environment is also good compared to the pre-flood period. On the
other hand, the difficult business environment in Europe may hamper
the growth prospects of the company.
Moreover, the Hitachi deal is expected to strengthen its
foothold in the data storage business inspite of some regulatory
issues. Although the company has been able to handle competition
efficiently, but bigger players like Fujitsu Ltd, Samsung and
Toshiba pose a considerable challenge.
Currently, Western Digital has a Zacks #1 Rank, implying a
short-term Strong Buy rating.
WESTERN DIGITAL (
WDC
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