Western Digital Earnings Preview: Consumer Electronics Units To Drive Sales Again

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Western Digital Corporation (NASDAQ:WDC) is scheduled to announce its Q4 FY 2014 earnings on July 30. The company reported a 1.5% year-on-year decline in net revenues in the March quarter and expects the decline to continue through the fourth fiscal quarter. Western Digital has given a revenue guidance of $3.5 billion for the quarter – 6% lower than the prior year quarter. [1] However, the company’s gross margin improved by 44 basis points y-o-y to 28.6% in the March quarter, driven by a nearly 2% lower cost of products. Going forward, WDC’s margins could continue to rise due to an increasing mix of high-margin products complemented by a reduction in costs.

Western Digital witnessed strong growth in its consumer electronics units, with gaming consoles driving most of the growth. Additionally, the company is targeting the end-user market with a series of products including personal cloud and network-attached storage (NAS) for homes and small businesses. Comparatively, the number of enterprise storage units shipped by the company in the June quarter was 1% lower than the prior year quarter at 7.1 million units.

We have a $96 price estimate for WDC’s stock, which is slightly lower than the current market price.

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See our full analysis of Western Digital here


Consumer Electronics Likely To Continue Growth

The number of units shipped by Western Digital in its compute segment (desktop and notebook units) and branded product sales declined by about 4% each over the prior year quarter to about 38.4 million units and 6.2 million units, respectively. These declines were offset by a continued surge in consumer electronics unit shipments. Consumer electronics product sales grew by more than 30% year-on-year (y-o-y) to 8.5 million units during the quarter, with the growth mainly coming from storage drives used in gaming consoles. [2]

Western Digital sold almost 17.4 million consumer electronics storage drives in the previous two quarters combined (through December and March quarters). Comparatively, the company sold less than 13 million drives in the year ago period. The surge in these product sales was mainly driven by fast-selling gaming consoles recently launched by Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. [3] Both Microsoft and Sony refreshed their product lines after almost eight years with the launch of Xbox One and the Playstation 4, respectively, due to which WDC faced strong demand for storage drives integrated with these consoles. Going forward, the demand for these gaming console storage units could continue to increase with continued strong console sales. Sales of the Xbox and Playstation 4 consoles could be further boosted by gaming companies targeting marquee releases in the latter half of 2014.

Slow Start To 2014 For Branded And Enterprise Storage Products

Western Digital has beefed up its My Cloud personal cloud drives this year with the introduction of 5TB and 6TB models (1 terabyte = 1,000 gigabytes) to its WD Green range of products and 6TB drives to its WD Red product line. The company expects to capitalize on the expected demand for personal clouds in the coming quarters (see WDC Launches Personal Cloud). However, the company’s revenues and units sold for the branded products division (which includes external hard drives and storage units sold via the retail channel) were subdued in the March quarter. The company attributed this to an increasing mix of cheaper 2.5″ drives compared to the 3.5″ drives, as well as increased competition, with Toshiba grabbing some market share. Unsurprisingly, Western Digital’s major competitor Seagate (NASDAQ:STX) also lost share to Toshiba during the March quarter. [4] However, the company expects the adoption of My Cloud to increase as the concept of personal cloud gains popularity among customers.

Additionally, Western Digital launched the My Book Duo drive in June to address the growing demand in the consumer network-attached storage (NAS) market. [5] Consumer NAS market typically refers to consolidated storage with capacities ranging from 4 terabytes (TB) to 8 TB. This is ideal storage capacity for a family or a very small business (with less than 5 systems accessing data). The drive offers multiple connectivity options across the network, including USB, Thunderbolt (for Macs) and eSATA in addition to WD’s SmartWare Pro software suite and Dropbox integration. The pricing for the storage bay is as low as $280 for a 4TB unit going up to $450 for 8TB of storage. This translates to about 5-6 cents per usable GB, which is on the lower end of NAS storage prices. [6]

The enterprise storage units sold by WDC in Q3 FY 2014 were flat over the previous year quarter at 7.1 million units – a disappointing result considering the more than 25% growth in numbers last year. The company attributed the stagnation in volumes to low demand for its products during the quarter, which it expects to pick up in the latter half of the year. Moreover, the revenues generated by the company through enterprise SSD sales rose by nearly 30% to $134 million in Q3. WDC management expects the momentum in enterprise-grade SSDs to continue through the June quarter.

PCIe Flash Based Storage To Outsell SATA?

The company announced the launch of PCIe connected hard drives, nine months after acquiring PCIe flash specialist Virident for $685 million. This announcement was made shortly after Seagate entered into an agreement with Avago Technology (NASDAQ:AVGO) to purchase Avago-owned LSI’s flash business for $450 million. SanDisk also acquired PCIe flash maker Fusion-io for $1.1 billion. The main advantage of PCIe connectivity for a hard drive is the speed of connectivity and reduction in lag time. [7] The company has a SATA Express card on offer, to which solid state drives, solid state hybrid drives or conventional hard drives can be connected and then further connected via the PCIe interface. Laptop and desktop manufacturers believe this connectivity could be the future of computer-based storage units, and could improve storage speeds of “compute units” since it bypasses the need for a SATA controller. [8]

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Notes:
  1. Western Digital Q3 FY 2014 Earnings Call Transcript, Seeking Alpha, April 2014 []
  2. Western Digital Q3 FY 2014 Supplemental Information, Western Digital Investor Relations, April 2014 []
  3. PS4 Selling Faster Than Xbox One, Forbes, January 2014 []
  4. Seagate Q3 FY 2014 Earnings Call Transcript, Seeking Alpha, April 2014 []
  5. WD’s My Book® Duo Offers Superior Performance, High Capacity, and Comprehensive Data Protection, Western Digital Press Release, June 2014 []
  6. Western Digital Launches My Book Due-2 Bay USB 3.0 DAS, Anand Tech, June 2014 []
  7. PCIe Hard Drives? You Read That Right, Says WD, The Register, June 2014 []
  8. PCIe SSD Flash Storage Roundup: The Few Become Fewer, Computer Weekly, June 2014 []