Western Digital (WDC) Q4 Earnings & Revenues Beat Estimates

Western Digital Corp. WDC delivered fourth-quarter fiscal 2018 non-GAAP earnings of $3.61 per share which beat the Zacks Consensus Estimate by 9 cents and surged 23.2% from the year-ago quarter. However, the figure declined by 2 cents on a sequential basis.

Revenues increased 5.7% year over year to $5.12 billion and surpassed the Zacks Consensus Estimate of $5.06 billion. Moreover, the figure inched up 2.1% sequentially. The topline reflected company’s strong execution across broad end markets and diversified product portfolio..

Growth was driven by a higher mix of Flash-based revenues along with increase in capacity enterprise products. Increasing demand for data center devices and cloud solutions is a key catalyst.

Management is optimistic regarding the company’s BiCS3 offering, which leverages 64-layer 3D NAND flash technology.

Western Digital ramped up its 96-layer 3D flash technology, BiCS4. Also, the company anticipates introducing fifth-generation 14 TB helium drive by the end of this year.

Fiscal 2018 Highlights

Western Digital reported revenues of $20.65 billion in the fiscal 2018, improving 8.1% over fiscal 2017. Earnings of $14.73 surged 60.3% year over year from fiscal 2017 figure of $9.19 per share. Both the top and bottom line for full year 2018 came ahead of the respective Zacks Consensus Estimate and management’s guidance.

The results benefited from strong demand for both hard drive and NAND-based products across all categories of customers, largely driven by cloud based applications. The company is also significantly benefitingfrom the synergies related to the SanDisk and HGST acquisitions.

We may note that the Zacks Consensus Estimate for the fiscal 2018 earnings and revenues was pegged at $14.66 per share and $20.59 billion, respectively.

Share Price Movement

Notably, Western Digital have plunged around 3.4% in the after-hours trading. This can primarily be attributed to tepid revenue outlook for the first quarter. Moreover, the stock has lost 12.9% in the past year, against the industry’s rally of 32.3%.

Exabyte Growth Rate to Improve

The company shipped 39 million HDDs at an average selling price ("ASP") of $70. The reported shipments were lower than the year-ago figure of 39.3 million. However, the reported figures are better than the Zacks Consensus Estimate for total unit shipments of 37.46 million and ASP of $68.

During the quarter, the company shipped 106.5 exabytes, excluding non-memory products.

Western Digital’s year-over-year exabyte growth rate in capacity enterprise exceeded 90% in the first-half of calendar 2018, better than management’s previous estimate of 75%. For full year, the company anticipates the figure to rise 65%. Notably, the figure was 30% in calendar 2017.

Considering Datacenter Devices and Solutions segment, exabyte shipments surged 64.2% on a year-over-year basis from 33.5 units in the fourth quarter 2017 to 55 units in fourth quarter 2018.

Further, the company is well poised to capitalize on exponential data growth accompanied by global increase in the number of connected devices.

From the Flash industry perspective, Western Digital maintains its estimates for industry bit growth to be near the high-end of the long-term range (between 35% and 45%) in calendar 2018, backed by the continued transition to 3D flash.

Theongoing shift to BiCS4 deserves a special mention in this context. Consequently, for the calendar year 2018, management estimates 3D flash-based bit output to represent almost 75% of total captive bit supply.

Segment Revenue Details

Client devices (48.3% of total revenues) grew 2.7% year over year and came in at $2.47 billion. The segment continued to witness strong demand for embedded flash and client SSD products. Connected home, automotive, surveillance and industrial were strong growth verticals for the company’s products. Robust adoption of NVMe client SSDs, iNAND solutions and new design wins are key catalysts.

However, the company witnessed a comparatively softer demand across mobile and PC markets.

Client solutions (20.1% of total revenues) inched up1.8% to $1.03 billion, driven by solid adoption of SanDisk, G-Tech and WD brands.

Segmental growth was aided by bolstered presence across China and APAC markets. Moreover, management is optimistic regarding BiCS3 and BiCS4 offerings.

Data center devices and solutions (31.5% of total revenues) advanced13.6% to $1.61 billion on the back of strong demand for high capacity storage devices.

Management stated that new datacenter buildout by several cloud customers along with ongoing data explosion and increasing value of data are driving demand for high capacity helium drives globally. The 12 TB drive in particular is witnessing rapid adoption among other capacities across emerging and established markets.

Operating Details

Non-GAAP gross margin contracted 40 basis points (bps) on a year-over-year basis and 250 bps sequentially to 40.9%.

Non-GAAP operating expenses, as a percentage of revenues, decreased 70 bps to 16%. GAAP Research and development (R&D) expenses as a percentage of revenues declined 110 bps to 11.3%. GAAP Selling, general & administrative (SG&A) expense contracted 20 bps to 6.9%.

Consequently, non-GAAP operating margin expanded 40 bps to 24.9%.

Balance Sheet & Cash Flow

As of Jun29, 2018, cash and cash equivalents were $5.01 billion, up from $4.96 billion reported in the previous quarter. Total debt (long-term debt plus short term debt) was $11.17 billion, down from $11.20 billion at the end of the previous quarter.

Western Digital generated $863 million in cash from operations compared with $1.03 billion in third-quarter fiscal 2018. Free cash flow was $638 million in the reported quarter. During the quarter, the company paid dividends worth $150 million and repurchased shares valued at $436 million.

On May 2, 2018, Western Digital’s board of directors approved a cash dividend of 50 cents per share payable Jul 16, 2018, to stockholders on Jun 29, 2018 for quarter ended Jun 29, 2018.

Considering the fiscal year 2018, the company reported $4.2 billion as cash from operations. Moreover, Western Digital returned $1.2 billion in the fiscal year, to shareholders through dividends and share buybacks.

Guidance

For first-quarter fiscal 2019, revenues are expected to be in the range of $5.10-$5.20 billion. The mid-point ($5.15 billion) is likely to miss the Zacks Consensus Estimate of $5.35 billion.

Non-GAAP gross margin is anticipated between 38% and 39%.

Non-GAAP operating expenses are expected between $825 million and $835 million. Interest and other expenses are estimated approximately at $105 million.

Management projects non-GAAP earnings between $3 and $3.10 per share. The mid-point ($3.05 per share) is significantly higher than the Zacks Consensus Estimate of $3.17.

Western Digital revised long-term financial model. Increasing mix of flash based revenues and transition toward capacity enterprise compelled management to raise long-term margins.

Non-GAAP gross margin is now projected in the range 35-40% from the previous band of 33-38%. Non-GAAP operating margin is now envisioned to be 20-25% from the earlier estimated range of 18-23%.

However, the company continues to expect revenues to grow at long-term target range of 4-8%.

Our Take

Western Digital has been a pioneer when it comes to driving innovation in storage solutions. The company shifted focus to SSDs from HDDs, earlier compared with its peers. In this regard, the SanDisk acquisition aided the company, providing a considerable edge against contenders in the space, including Seagate Technology STX, among others.

Now, the company is looking forward to explore beyond the normalizing flash industry and softening trends in mobile and PC segments. The company is particularly hopeful of 96-layer, QLC 3D flash and 64-layer 3D flash technologies. The strengthened surveillance portfolio is also a positive.

We believe product innovations and acquisition synergies will propel growth despite the NAND pricing pressure plaguing it.

Zacks Rank & Stocks to Consider

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

A couple of better-ranked stocks in the broader technology sector are Microsoft MSFT and Intel INTC, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Microsoft and Intel have a long-term earnings growth rate of 12.3% and 8.4%, respectively.

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