Western Digital Corp. (WDC) reported third quarter 2012 earnings per share (EPS) of $2.52, comprehensively beating the Zacks Consensus Estimate of $1.58.
Revenues
Revenues during the quarter increased 34.8% year over year to $3.03 billion. Western Digital shipped a total of 44.2 million hard drives as compared with 28.5 million in the year-ago quarter.
Total revenue includes $614 million for Hitachi’s Global Storage Technologies (HGST). Moreover, the average selling price for the hard drives was $68 in the quarter.
Western Digital recorded 64% of revenue from OEM sales; distribution channel sales were 28% of the total, while retail sales were 8%. The company witnessed a decline in the retail channel percentage, which was lower than prior quarters due to a total available market that is running at about 1/2 of last year's run rate and also as a result of Hitachi's lower presence in that channel.
Operating Results
Gross margin in the reported quarter was 32.2% versus 18.2% in the year-ago quarter. Excluding acquisition related adjustments, non-GAAP gross margin was 35.5%. Average cost per unit continues to hover above the pre-flood level, on the back of lower capacity utilization, increased use of air freight, and higher mix of externally procured heads and higher costs for other components.
Total operating margin for the quarter was 17.9%, down from 7.0% reported in the year-ago quarter. Total operating expense increased by 72.6%, as a result of higher R&D expense and SG&A expense.
Net income for the quarter was $483.0 million or $1.96 per share, down from $146.0 million or 62 cents in the year-ago quarter. Excluding charges and expenses related to the Thailand flooding and the planned acquisition of HGST, non-GAAP net income was $619 million or $2.51 per share.
Cash Position
The company generated $1.21 billion in cash from operations in the quarter, up from $378.0 million in the previous quarter. Cash and cash equivalents were $3.37 billion versus $3.92 billion reported in the previous quarter.
Capital spending and depreciation and amortization in the March quarter totaled $139 million and $188 million, respectively. The company has a debt balance of $2.51 billion, up from $231.0 million reported in the previous quarter.
Our Take
The company’s third quarter results exceeded our expectations, with EPS handsomely beating the Zacks Consensus Estimate and sales improving substantially on a year-over-year basis. However, the company witnessed an increase in its debt burden, which may result in higher interest outflow.
Western Digital witnessed a substantial improvement in gross margin as a result of higher ASP, which is above the pre-flood level. The company is cash rich, and has good cash generation ability.
The company also announced better operations in Thailand, which has made significant progress to restore its manufacturing capacity following the recent flooding. Moreover, the international business and overall demand for the company products are also improving.
This apart, the Hitachi deal is expected to strengthen its foothold in the data storage business. Although the company has been able to handle competition efficiently, but bigger players like Seagate Technology plc (STX), Fujitsu Ltd, Samsung and Toshiba pose considerable challenges.
The company has a short term Zacks #1 Rank (implying a short-term Strong Buy).
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