Western Digital’s Strong Quarter Driven By Consumer Electronics And Branded Products
Western Digital (NASDAQ:WDC) announced earnings for its second fiscal quarter on January 22, reporting a 4% growth in revenues from the same period last year. [1] The company’s net revenues in the quarter were almost $4 billion which is ~4% higher than the midpoint of revenue guidance given by the company at the end of last quarter. The revenue increase was mainly driven by a surge in the number of enterprise and consumer electronics units shipped, which were up by 17% and 36%, respectively, on a year-over-year basis. Additionally, the number of branded products (external USB hard drives) shipped was up 14% sequentially, which the company believes was due to a healthy response from customers to its recently launched WD My Cloud.
The company has gradually improved its margins over the last few quarters on the back of growing sales of enterprise storage units and branded products, both of which have higher margins than hard drives for desktops and laptops. Additionally, the industry-wide demand for storage units is increasingly shifting towards solid state drive (SSD) based solutions due to a requirement for better performance. Consequently, Western Digital acquired SSD manufacturing companies such as sTec, Velobit and Virident last year to bolster its SSD offerings. Since the beginning of 2013, WDC’s stock price has more than doubled; we have revised our forecast for the enterprise storage segment and our price estimate for the company’s stock to $93 which is about 10% higher than the market price.
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See our full analysis on WDC here
Seasonal Fluctuations In Demand For Consumer Electronics And Branded Products
Both the consumer electronics and branded product segments show seasonality owing to purchasing behavior of customers. Demand for consumer electronic products, which include TVs, DVRs, gaming consoles and other media devices, peaks in the quarter ending in December (the holiday season). Therefore, demand for storage units increases in the quarter preceding the holiday season since they are embedded in these consumer electronic products.
However, Western Digital witnessed a surge in sales in the consumer electronics segment this quarter, which it attributed to recently-launched fast-selling gaming consoles by Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. [2] Since Microsoft and Sony refreshed their product lines with these new consoles after 7-8 years, it is likely that the Xbox One and the PS4 continue to sell in good numbers over the next few quarters, boosting WDC’s consumer electronics channel. Considering the fact that these consoles have replaceable hard drives which users can replace with hard drives of their choice, we expect the company to continue to fulfill this demand.
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On the other hand, branded products – which include external storage drives for end users – usually sell more during the holiday season. Although the sequential growth in the sales of branded products is just a seasonal trend, we expect the recently launched Western Digital My Cloud to drive sales for the division (see WDC Launches Personal Cloud).
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Enterprise Storage Continues To Grow
Enterprise storage unit shipments have increased by 23% in the first two quarters of the fiscal year compared to the same period in 2012. The high growth rate of digital content, popularity of remote storage services, and adoption of cloud computing environments are all driving storage demand from data-centers. Within the enterprise and cloud storage division, the enterprise SSD is the fastest growing segment. The revenues generated by the enterprise SSD division grew by 75% year-on-year to $155 million in the quarter. Although its contribution to the top line was only $155 million, we expect the division to become more prominent for the company, as we noted in a previous article.
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WDC has given a revenue guidance of $3.65-$3.75 billion and gross margin guidance of 29.5% for the upcoming quarter. Considering the strong set of results in this quarter and the strong performance of the company’s new products, we expect its other new products such as the helium drive and the Black2 to drive revenues and help achieve its targeted results.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Western Digital Management Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2014 [↩]
- PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]