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Western Digital (WDC) Q2 Earnings Top, Revenues Lag Estimates

Western Digital Corporation WDC reported second-quarter fiscal 2020 non-GAAP earnings of 62 cents per share, which beat the Zacks Consensus Estimate by 10.7%. However, the figure declined 57.2% year over year.

Revenues of $4.234 billion remained flat year over year but lagged the Zacks Consensus Estimate by 0.2%.

Uncertain macroeconomic environment and softness in NAND flash pricing trends impacted year-over-year results.

Segment Revenue Details

Client devices (42.4% of total revenues) declined 18.8% year over year to $1.797 billion due to decrease in total addressable market (TAM) for notebook and desktop hard drives. However, the figure was up 11% sequentially due to increased demand for client Solid State Drive (SSD), Smart Video, Mobility and desktop hard drives.

Management noted that decline in revenues from Client Hard Disk Drive (HDD) and softness in flash pricing hurt the segment results.

Notably, Western Digital’s SanDisk launched Smart Photo Manager, ibi capable of 1TB of storage for $129.99 in the to-be reported quarter.

Additionally, Western Digital announced shipping of high-capacity HDD samples to enterprise OEMs and hyperscale customers worldwide. These include 20TB Ultrastar DC HC650 SMR HDDs and 18TB Ultrastar DC HC550 CMR HDDs.

Western Digital Corporation Price, Consensus and EPS Surprise

Western Digital Corporation Price, Consensus and EPS Surprise

Western Digital Corporation price-consensus-eps-surprise-chart | Western Digital Corporation Quote

Client solutions (22.4%) remained flat year over year at $948 million. However, the figure increased 6% sequentially driven by strength in demand for hard drives and external SSDs.

Notably, the company continues to bear the brunt of unfavorable NAND flash pricing, which is currently on the decline thanks to oversupply and weaker-than-expected growth in end-market demand.

Data center devices and solutions (35.2%) jumped 38.6% year over year to $1.489 billion, driven by rising demand witnessed for capacity enterprise drives and enterprise SSD. However, the figure was down 3% sequentially due to the company’s exit from storage system business.

Other Metrics

The company shipped 29.2 million HDDs at an average selling price (ASP) of $81. The reported shipments were lower than the year-ago figure by 3.3%.

On quarter-over-quarter basis, HDD Exabytes sales declined 1%. Flash exabytes sales increased 24%. Total exabytes sales (excluding non-memory products) improved 1% sequentially.

Considering revenues by product group, HDD revenues (56.6% of total revenues) increased 16.3% from the year-ago quarter to $2.396 billion. Flash revenues (43.4%) fell 15.4% from the year-ago quarter to $1.838 billion.

ASP/Gigabytes (excluding non-memory products) was down 8% sequentially.

Margins

Non-GAAP gross margin of 25.9% contracted 540 basis points (bps) on a year-over-year basis, while it expanded 110 bps sequentially.

The year-over-year decline can be attributed to softness in Flash pricing, which more than offset improvement in HDD gross margin. Notably, non-GAAP Flash gross margin was down to 19.5% from 35.1% reported in the year-ago quarter. Meanwhile, non-GAAP HDD gross margin expanded 340 bps year over year to 30.8%.

Non-GAAP operating expenses increased 3.7% from the year-ago quarter to $765 million. Management remains focused on undertaking strict spending measures.

Non-GAAP operating income came in at $333 million, which decreased 43.5% year over year. As a percentage of revenues, non-GAAP operating margin of 7.9% contracted 600 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash and cash equivalents were $3.137 billion, down from $3.248 billion reported at the end of the previous quarter.

Total debt (including current portion) was $9.986 billion as of Dec 31, down from $10.21 billion as of Oct 4, having repaid debt of $388 million in the second quarter.

Western Digital generated $257 million in cash from operations compared with $253 million reported in the previous quarter.

Free cash flow came in at $377 million compared with $294 million in the prior quarter.

During the quarter, the company paid out dividends worth $149 million.

On Nov 14, Western Digital’s board of directors approved a cash dividend of 50 cents per share that was paid out on Jan 21.

Guidance

For third-quarter fiscal 2020, revenues are expected to be in the range of $4.1-$4.3 billion. The Zacks Consensus Estimate for revenues currently stands at $4.09 billion indicating a growth of 11.19% year over year.

Non-GAAP gross margin is anticipated in the range of 28.5-29.5%.

Non-GAAP operating expenses are expected between $740 million and $760 million. Interest and other expenses are estimated between $80 million and $85 million.

Management projects non-GAAP earnings between 85 cents and $1.05 per share. The Zacks Consensus Estimate for earnings currently stands at 74 cents.

From the Flash industry perspective, Western Digital revised estimates for bit supply growth at around low to 30% range in calendar 2020.

Zacks Rank & Stocks to Consider

Western Digital currently carries a Zacks Rank #3 (Hold).

Microchip Technology Incorporated MCHP, Perion Network Ltd PERI and Itron Inc. ITRI are some better-ranked stocks in the broader computer and technology sector. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Microchip, Perion and Itron are set to report quarterly results on Feb 4, 12 and 24, respectively.

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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.

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