Western Digital (WDC) Earnings & Revenues Miss Estimates in Q3

Western Digital Corporation WDC reported third-quarter fiscal 2019 non-GAAP earnings of 17 cents per share which lagged the Zacks Consensus Estimate by 65.3%. The reported figure slumped 95.3% and 88.3% from earnings of $3.63 and $1.45 reported in the year-ago and previous quarter, respectively.

Revenues decreased 26.7% year over year to $3.674 billion, missing the Zacks Consensus Estimate of $3.70 billion. Moreover, the figure declined 13.2% sequentially.

Uncertain macroeconomic environment, declining trend in PC shipments and softness in NAND flash pricing trends adversely impacted results and stock performance.

Notably, shares of Western Digital have shed 35.9% in the past year, against industry’s decline of 16.8%.

Segment Revenue Details

Client devices (44.2% of total revenues) declined 29.7% year over year and came in at $1.625 billion. The figure was down 26.6% sequentially. Sluggish demand across smartphone negatively impacted mobile embedded results. Meanwhile, management noted that decline in revenues from desktop and notebook domain. Softness in flash pricing and declining trend in PC shipments hurt the segment results.

Client solutions (21.9%) slumped 22.8% year over year to reach $804 million. The figure declined 14.9% sequentially.

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

However, management is banking on growth in average capacity per unit of flash devices, which improved 44% on a year-over-year basis in the reported quarter.

Data center devices and solutions (33.9%) plummeted 25% year over year to $1.245 billion, owing to weakness in end-market. However, the figure was up 15.9% sequentially, driven by rising demand witnessed for capacity enterprise drives.

Other Metrics

The company shipped 27.8 million HDDs at an average selling price (ASP) of $73. The reported shipments were lower than the year-ago figure of 36.4 million.

On quarter-over-quarter basis, HDD Exabytes shipments improved 13% and Flash exabytes shipments declined 5%. Total exabytes sales (excluding non-memory products) advanced 11% sequentially.

Considering revenues by product group, HDD revenues (56.2% of total revenues) declined 21.8% from the year-ago quarter to reach $2.064 billion. Flash revenues (43.8%) fell 32.2% from the year-ago quarter to reach $1.61 billion.

Western Digital Corporation Price, Consensus and EPS Surprise

 

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

ASP/Gigabytes (excluding non-memory products) declined 23% sequentially.

Margins Battered by Declining Flash Prices

Non-GAAP gross margin of 25.3% declined from the year-ago figure of 43.4% and contracted 600 bps sequentially.

The year-over-year decline can be attributed to softness in Flash pricing. Notably, non-GAAP HDD and Flash gross margins came in at 29% and 21%, respectively, compared with 33% and 55% reported in the year-ago quarters.

Non-GAAP operating expenses declined 12.7% from the year-ago quarter to $742 million and almost flat compared with the previous quarter’s reported figure of $738 million. Management remains focused on undertaking strict spending measures.

Non-GAAP operating income came in at $186 million, plummeting 86% on a year-over-year basis. The figure declined 68% sequentially.

The company reported non-GAAP operating margin of 5.1% in the quarter which declined from the year-ago figure of 26.4% and contracted 880 bps on a sequential basis.

Balance Sheet & Cash Flow Portray a Dismal Picture

As of Mar 29, 2019, cash and cash equivalents were $3.682 billion, down from $4.013 billion reported at the end of the previous quarter.

Total debt (including current portion) was $10.59 billion, down from $10.61 billion at the end of the previous quarter.

This translates to a net-debt balance of roughly $6.91 billion at the end of the reported quarter, which remains a major concern.

Western Digital Corporation Revenue (Quarterly)

Western Digital Corporation Revenue (Quarterly) | Western Digital Corporation Quote

Western Digital generated $204 million in cash from operations compared with $469 million reported in second-quarter fiscal 2019.

Free cash flow came in at ($110 million) compared with $24 million in the prior quarter.

During the quarter, the company paid dividends worth $146 million. On Feb 14, 2019, Western Digital’s board of directors approved a cash dividend of 50 cents per share payable Apr 15, 2019.

Guidance Bleak

For fourth-quarter fiscal 2019, revenues are expected to be in the range of $3.6-$3.8 billion (mid-point of $3.7 billion). The mid-point of the guided range is lower than the Zacks Consensus Estimate, currently pegged at $3.75 billion.

Non-GAAP gross margin is anticipated to come in at 24-25%.

Non-GAAP operating expenses are expected between $720 million and $740 million. Interest and other expenses are estimated approximately at $100 million.

Management projects non-GAAP earnings between 10 cents and 30 cents per share. The higher end of the guided range is lower than the Zacks Consensus Estimate, which currently stands at 57 cents.

Western Digital anticipates industry exabyte growth rate in capacity enterprise to witness improvement of 30% in 2019, compared with previous estimate of around low 20% range.

From the Flash industry perspective, Western Digital revised estimates for supply growth to now come in at around slightly more than 30% in calendar 2019 compared with earlier estimated long-term range of 36-38%.

Zacks Rank & Stocks to Consider

Western Digital currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader technology sector are Castlight Health, Inc. CSLT, Avid Technology, Inc. AVID and Synopsys, Inc. SNPS, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Castlight, Avid Technology and Synopsys is pegged at 22.5%, 10% and 10%, respectively.

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