Storage solutions provider Western Digital (WDC, Financial) is slated to announce its third-quarter 2014 on April 30. The company (or WD) had reported better-than-expected second quarter results. Amid a volatile pricing scenario, WD has been successful in boosting revenue growth thanks to its product launches (especially cloud-based products) and shift toward non-PC applications that helped in volume growth. Let’s peek at how WD is shaping up for the coming quarter.
Revenues
In the past quarter, WD’s revenue grew 4% year over year due to higher demand for solid state drives (SSDs) and its cloud solutions. During the quarter, WD noticed good demand for two of its newest cloud solutions, namely WD My Cloud and 6-terabyte (TB) helium-based sealed drive, Ultrastar He6.
WD My Cloud is a personal cloud solution that will help users to manage their personal digital content securely and to access the content from any remote place. Moreover, the cloud solution is compatible with Apple (AAPL, Financial)'s iOS platform and Android platform, which gives the product more acceptability.
Ultrastar He6 happens to be the world’s first helium-filled hard disk drive (HDD), which is expected to give enhanced storage experience with low power consumption. The drives are targeted at the data center, cloud storage and backup applications. This 6 TB drive could get stiff competition from archrival Seagate (STX, Financial)'s similar offering, which is set to be released shortly. But WD might have an upper hand due to the drive’s helium-content and early launch.
Demand for cloud solutions is escalating mainly due to ease of storing data securely and lower cost of supervision. Hence, it is expected that acceptance of these products could grow and boost revenue eventually.
Although a late entrant in the SSD space compared with Seagate, WD is already witnessing success in the field. According to the management, growth in WD’s enterprise SSD revenue (74.2%) in the past quarter topped the overall SSD enterprise market. WD has made certain acquisitions for expanding SSD exposure and the investments are paying off well. Given increasing appetite for SSDs and growing popularity of WD’s products, the trend is expected to continue in the coming quarters.
Improvement in the cloud and SSD areas could push the contribution higher. Moreover, WD’s revenue can get an upside from the PC market stabilization as well. Despite the positive aspects, WD expects third-quarter revenue to be within $3.65 billion and $3.75 billion because of seasonality.
Margins
Over the past quarters, WD has been successful in generating higher contribution from the non-PC field. Last quarter, WD generated 54% of revenue from the non-PC platform. This has helped the company to offset the adverse effect of lower pricing in the PC-related drives and expand gross margin.
In the past quarter, adjusted gross margin (non-GAAP) expanded roughly 140 basis points year over year driven by favorable product mix, or particularly greater mix of high-margin non-PC applications.
WD has also been able to manage cost effectively. For the past few quarters, cost of revenue has grown at a lower rate than the total revenue. But operating expenses have grown at a rate higher than total revenue on account of continuous investments. This would rationalize the operating margin in the near term, although the investment could pay off well in the long run.
Profitability
WD had acquired sTec and Virident last September, and due to this the company expects to bear a dilution of $0.10 per share in the quarter. The acquisitions are expected to be accretive to earnings starting from fiscal 2015. Had it not been for these acquisitions, higher contribution from the non-PC applications and cost containment efforts could have generated better earnings per share.
However, WD’s continuous share buyback programs could provide earnings per share a nice cushioning.
Final Words
WD is going to report a seasonally weak quarter and it is quite possible that movement in share price might not make investors happy. But WD’s growth story remains intact with improving contribution from non-PC arena, cost-reduction efforts and continuous investments, which are expected to offset any adverse effect from the unfavorable pricing environment.
