Western Digital Earnings: Slowdown In HDD Demand Offset By SanDisk Acquisition

Western Digital ( WDC ) announced its fiscal second quarter 2017 earnings on January 25, reporting a 47% annual increase in revenues to $4.9 billion. Revenues were slightly higher than the guidance given by the company at the end of the September quarter and the updated guidance given last month. With the addition of SanDisk's high-margin product portfolio to its business, Western Digital has observed a surge in gross margins over the last two quarters. Western Digital's gross margin (Non-GAAP) stood at 36.7% for the quarter, over 8 percentage points higher than the year-ago period.

On the other hand, the company's operating expenses (non-GAAP) surged to almost $800 million with significant contribution from SanDisk's operations. Despite the increase in operating expenses, Western Digital posted a diluted earnings per share of $2.30 for the quarter, which was much higher than what the company had anticipated earlier (around $2.10).

Segment Performance Metrics

Western Digital and rival hard drive manufacturer Seagate ( STX ) have witnessed a slowdown in demand for hard drive sales over the last couple of years. This trend has continued this year with Western Digital's unit shipments across all divisions declining uniformly over the comparable prior year period as shown in the table below. Western Digital has witnessed weakness in the compute (or client devices) segment over the last couple of years. Similarly, with low demand in the consumer market has led branded (or external) hard drive shipments to fall for the year. However, the most unimpressive figures were were enterprise unit shipments, which were down 12% y-o-y to 25.4 million units.

In terms of revenues, Western Digital observed significant revenue growth from Client Devices revenue stream which includes notebook and desktop hard drives, consumer electronics hard drives, solid state drives (SSDs) for non-enterprise customers, embedded storage and wafer sales. Combined revenues for the full year were up 17% to $7.7 billion. with significant growth coming in the September and December quarters due to the addition of SanDisk's product lines.

Similarly, the Client Solutions segment which primarily includes products sold via the retail channel including branded HDDs (or external hard drives), branded flash products and removable storage products (such as memory cards and USB flash drives) reported strong growth in revenues. Product sales were 83% for the full year to $3.1 billion with mainly inorganic growth in the second half of the year.

Guidance For March Quarter

Western Digital's management expects revenues of around $4.5 billion for the March quarter. According to management, revenue growth is significant even on a pro forma basis. Gross margin is expected to be around 10 percentage points higher over the year-ago period to around 38%. Moreover, the company aims to continue to reduce its operating expenses on a sequential basis to $800 million due to expense synergies with the integration of SanDisk. As a result, the company is targeting a diluted earnings per share of $2.05, which is almost 70% higher on a year-over-year basis.

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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 Nasdaq, Inc.

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

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