Shares of Western Digital Corp. (WDC) went up 3.5% in afterhours trading yesterday, after the company reported better-than-expected second-quarter fiscal 2015 results.
The company posted non-GAAP earnings per share (excluding amortization of intangibles, restructuring charges and other one-time items) of $2.26, which beat the Zacks Consensus Estimate of $2.10. Also, earnings were up from $2.19 per share reported in the year-ago quarter and surpassed management’s guidance range of $2.00 and $2.10 per share.
Quarter Details
Though Western Digital’s revenues of $3.89 billion for the second quarter decreased 2.1% year over year, it came ahead of the Zacks Consensus Estimate of $3.83 billion. Reported revenues also came ahead of management’s guided range of $3.75 billion to $3.85 billion, primarily due to strength in Flash Platforms solutions businesses and solid performance by the HGST and WDC divisions.
During the quarter, Western Digital shipped 61 million hard drives at an average selling price (ASP) of $60. ASP for the quarter was up from $58 in the previous quarter and remained flat on a year over year basis. However, reported shipments, were down from 63.1 million in the year-ago quarter and 64.7 million HDDs shipped in the previous quarter.
Also, Western Digital’s market share in the total addressable market (TAM) decreased from 44% in the previous quarter to 43.4%. Market share also contracted from 44.4% reported in the year-ago quarter.
Nevertheless, the company reported $187 million in revenues from the Enterprise Solid State Drive (SSD) segment, which increased from $155 million in the year-ago quarter and $156 million in the previous quarter, primarily due to higher adoption of its product range.
Western Digital’s top 10 customers contributed 44% to revenues compared with 42% in the year-ago quarter and 45% in the prior quarter.
Western Digital’s non-GAAP gross margin expanded 42 basis points (bps) to 30.5% aided by better-than-expected business mix.
Operating expenses were down 5% year over year, primarily due to lower selling, general and administrative expenses, which positively impacted Western Digital’s operating results. Income from operations came in at $488 million, which increased from $478 million reported in the year-ago period. Operating margin increased 52 basis points (bps) on a year over year basis and came in at 12.6%
Non-GAAP net income came in at $539 million or $2.26 per share compared with $532 million or $2.19 per share in the year-ago quarter.
Cash and cash equivalents were $4.9 billion compared with $5.16 billion in the previous quarter. Long-term debt during the quarter amounted to $2.25 billion.
During the quarter, Western Digital generated $243 million in cash from operations compared with $827 million in the previous quarter. The company generated free cash flow of $97 million.
The company repurchased stocks worth $309 million and paid dividends worth $94 million during the quarter.
Guidance
For the third quarter of fiscal 2015, revenues are expected in the range of $3.6 to $3.7 billion. The Zacks Consensus Estimate is pegged at $3.73 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 $610 million. Management expects non-GAAP earnings per share to be between $1.90 and $2.00 (mid-point $1.95 per share) for the March quarter. The Zacks Consensus Estimate is pegged at $1.99 per share.
Our Take
Western Digital reported better-than-expected second-quarter fiscal 2015 results. Although, revenues decreased on a year-over-year basis, earnings compared favorably. 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).
Avago Technologies Limited (AVGO) is a better-ranked stock in the space, sporting a Zacks Rank #1 (Strong Buy).
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