Western Digital Down Despite Q1 Earnings & Revenue Beat - Analyst Blog

Western Digital Corp. (WDC) reported first-quarter fiscal 2015 non-GAAP earnings per share (excluding amortization of intangibles, restructuring charges and other one-time items) of $2.10, which beat the Zacks Consensus Estimate of $2.04.

Despite being down from $2.12 per share reported in the year-ago quarter, earnings surpassed management's guidance range of $1.95 to $2.05 per share.

Shares of Western Digital went down 1.3% in after-hours trading on Tuesday as the year-over-year earnings comparison was unfavorable. Also, higher costs and a weak second-quarter guidance impacted share price.

Quarter Details

Western Digital reported revenues of $3.94 billion for the first quarter, which not only increased 3.7% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $3.89 billion. Reported revenues also came ahead of management's guided range of $3.8 billion–$3.9 billion.

Revenues increased on a year-over-year basis primarily due to strength in hard disk drive (HDD) businesses and Flash Platforms solutions businesses. Also, seasonally higher demand for client and branded products, coupled with constant demand from the enterprise segment, supported the year-over-year revenue growth.

During the quarter, Western Digital shipped 64.7 million hard drives at an average selling price (ASP) of $58. ASP for the quarter was up from $56 in the previous quarter and remained flat on a year over year basis. Also, reported shipments were up from 62.6 million in the year-ago quarter and 63.1 million HDDs shipped in the previous quarter.

Nevertheless, Western Digital's market share in the total addressable market (TAM) decreased from 45.7% in the previous quarter to 44%. Market share also contracted from 44.7% reported in the year-ago quarter.

Moreover, the company reported $156 million in revenue contribution from the Enterprise Solid State Drive (SSD) segment, which increased from $106 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 remained flat sequentially.

Western Digital's non-GAAP gross margin expanded 29 basis points (bps) to 30.1% aided by better-than-expected business mix and higher revenue base.

Operating expenses were up 22.1% year over year, primarily due to higher compensation expenses, which negatively impacted Western Digital's operating results. Income from operations came in at $469 million, which decreased from $542 million reported in the year-ago period.

Non-GAAP net income came in at $504 million or $2.10 per share compared with $514 million or $2.12 per share in the year-ago quarter.

Cash and cash equivalents were $5.16 billion compared with $4.80 billion in the previous quarter. During the quarter, Western Digital generated $827 million in cash from operations compared with $713 million in the previous quarter. The company generated free cash flow of $667 million.

The company repurchased stocks worth $223 million and paid dividends of $94 million during the quarter.

Guidance

For the second quarter of fiscal 2015, revenues are expected in the range of $3.75 to $3.85 billion. The Zacks Consensus Estimate is pegged at $3.91 billion.

Gross margin is expected to be flat sequentially. Total operating expenses (Research and development, and Selling, general and administrative) are expected to be approximately $600 million. Management expects non-GAAP earnings per share to be between $2.00 and $2.10 for the December quarter. The Zacks Consensus Estimate is pegged at $2.22 per share.

Our Take

Western Digital reported better-than-expected first-quarter fiscal 2015 results. Although, revenues increased on a year-over-year basis aided by strength in HDD and Flash Platforms, earnings compared unfavorably. The company provided a tepid revenue and earnings guidance citing seasonal factors.

Nonetheless, the 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 investments in product innovation could result in flattish margins in the near term.

Also, Western Digital's entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are expected to be the growth catalysts, going forward.

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 carries a Zacks Rank #3 (Hold).

Investors can also consider SunEdison, Inc. (SUNE) which is a better-ranked stock sporting a Zacks Rank #1 (Strong Buy) and therefore, worth buying.

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