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Western Digital Beats Expectations In Q4, But Fails To Impress Investors

August 01, 2014 | About:
ICRAOnline

ICRAOnline

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Hard disk drive (HDD) maker Western Digital (WDC) reported its fourth-quarter 2014 results topping Street’s expectations. Despite this, shares fell 2.64% in the after-hours. Let’s have a detailed view of the quarter’s results.

Operating Results -- A Mixed Bag

Western Digital reported revenue of $3.7 billion, down 2.1% year over year but better than analysts’ expectation of $3.6 billion. The higher-than-expected revenue growth was because of greater demand for low-margin gaming and notebook PC drives.

Unit volumes grew 5.3% to 63.1 million, which was offset by 6.7% decline in average selling price (ASP). Due to higher volumes, the company’s HDD market share grew to 45.7% from 44.9% in the year-ago quarter.

Gross margin remained flat at 28.2% for the period, though cost of goods sold dropped 2.1% year over year. Overall operating expenses halved from the prior year quarter. However, it should be noted that operating expenses were inflated last year due to a non-recurring charge relating to arbitration award. As a result, operating margin in the quarter stood at 9.6% as against (5.9%) recorded in the fourth quarter of 2013.

Reported earnings per share (EPS) were $1.32 versus a loss of $1.12 per share in the prior year quarter. But after adjusting for acquisition-related expenses, litigation charges, amortization of intangibles, and restructuring charges, non-GAAP EPS of $1.85 dropped 5.6% year over year. However, the adjusted EPS was better than the analysts’ expectation of $1.74.

Cash Generation Remains Strong

Western Digital had a cash and short-term investment balance of $5.1 billion at the end of fourth quarter, up from $4.3 billion in the year-ago quarter. Cash from operations was $713 million and free cash flow was $552 million. The quarter’s capex was 4% of the total revenue. The company returned $272 million through share buyback and $70 million as dividends. The company expects its 2015 capex to remain flat or slightly below the current level.

Forward Expectations Are Encouraging

The drive-maker expects improved demand from the rebounding PC and high-margin enterprise markets during the second half of 2014. Although research firm Gartner projected that the global PC market would continue to decline in 2014 and 2015, Western Digital is optimistic that is reflected in the company’s expectations. It also expects higher demand from its data center customers, which would push up its enterprise solutions.

The company aims to continue investing in growth areas including cloud, enterprise data centers, and mobility.

Growing SSD Focus Will Drive Further Growth

Though currently at a very nascent stage, the HDD-maker’s hold in the solid state drive (SSD) is growing at a stable rate. During the quarter, SSD revenue was $113 million, forming around 3.1% of the total revenue. But the company is confident that the growth rate of its enterprise SSD will outpace the industry-wide enterprise SSD growth rate in the longer run.

The company expects contribution from the SSDs to grow sequentially in the latter half of 2014 and through 2015. The improvement will be driven by new product launches featuring specialized capabilities from the acquired companies. Notably, the company acquired a series of SSD-makers such as sTec, VeloBit, Skyera, Virident last year to enhance its capabilities.

The company is seeing increasing demand from its data center customers. As storing data in a data center requires high-performance drives, SSDs are preferred over HDDs. Naturally, higher demand for SSDs are expected and Western Digital could benefit a lot. The optimism has been reflected in Mehdi Hosseini’s, an analyst of Susquehanna Financial Group, statement that says Western Digital’s SSD contribution could move up to 7% by 2016.

Putting Pieces Together

Western Digital’s better-than-expected results failed to make investors happy. But the company’s investment in growth areas suggests that Western Digital is on the right track. Its increasing SSD penetration indicates higher revenue in the coming years. The company is also generating positive free cash, which will help it to reward its shareholders.


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