Western Digital Earnings: Consumer Electronics, Branded Unit Shipments Drive Sales

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Western Digital (NASDAQ:WDC) announced its Q1 FY 2015 earnings on October 28, reporting a 4% year-on-year rise in net revenues to $3.94 billion. The hard drive manufacturer reported a corresponding 4% y-o-y rise in the number of units shipped to nearly 65 million units during the quarter. [1] Net revenues were slightly higher than the guidance of $3.85 billion given by the company at the end of fiscal Q4 2014. Moreover, a favorable mix of high-margin hard drives led Western Digital’s non-GAAP gross margin to improve by 25 basis points over the prior year quarter to 30.1% – higher than the company’s guidance of about 29%. The company has given revenue guidance of about $3.8 billion for Q2 2015 and expects margins to stay at around 30% through the end of the calendar year.

The average selling price (ASP) per unit shipped by Western Digital was flat over the prior year quarter at $58 per drive, while the average capacity per drive crossed the 1 terabyte (1 terabyte = 1000 gigabytes) mark for the first time. A similar capacity gain was reported by competing hard drive manufacturer Seagate (NASDAQ:STX) in its quarterly report (see: Seagate Earnings: Hybrid Drives, Enterprise Storage Drive Results).

See our full analysis of Western Digital here


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Branded And Consumer Electronics Drive Unit Sales

Western Digital’s branded storage segment, which includes external storage drives and personal storage bays, grew by over 10% over the prior year quarter to 6.8 million units, highlighting the strong performance of the company’s My Cloud personal cloud drives with the introduction of 5TB and 6TB models to its WD Green range of products and 6TB drives to its WD Red product line. Additionally, the company launched the My Book Live Duo drive in June to address the growing demand in the consumer network-attached storage (NAS). [2] Management mentioned that its sales have been impressive and the company expects My Book Live to further contribute to the growth in the branded division.

Western Digital manufactures hard drives for TVs, DVRs, gaming consoles and other media devices, which it categorizes under consumer electronics storage division. Consumer electronics unit shipments have grown by 40% year-over-year to 30 million units in the calendar year 2014 thus far. Much of the growth in this division is attributable to storage drives for gaming products driven by strong sales of gaming consoles by Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. [3] We currently forecast the company to ship about 63 million consumer electronics and branded drives in this calendar year – a 14% rise from 2013 sales. In the coming years we expect the number of shipments to rise more moderately to about 80 million units by the end of the decade.

Enterprise Storage Units Witness Limited Growth

Western Digital’s enterprise storage division, which includes both solid state drive (SSD) and non-SSD products, has witnessed a slow year-to-date shipments for storage drives. In the first calendar year quarter, the number of units shipped by this division was 1% lower than the prior year period at 7.1 million units, while it declined sharply by over 10% y-o-y to just over 7 million units shipped during the June quarter. Although shipments rose sequentially in the quarter ending September to 7.7 million units, it was still a 2% decline over the year-ago period. [4] A similar trend was observed by Seagate, with enterprise shipment units declining by 4% annually to 15.1 million units in the first half of 2014. However, Seagate was able to increase shipments in the most recent quarter, with enterprise unit shipments rising by almost 9% y-o-y to 8.8 million units. [5]

In terms of SSDs, the company generated $155 million from enterprise SSDs in the quarter ending December last year,with a strong outlook for 2014. However, sales remained subdued in the first half of the calendar year with enterprise SSD sales declining sequentially to $134 million in the March quarter and further to $113 million in the quarter ending June. However, management maintained that it was not a major concern for the company at the time,  since it has new product releases lined up. As a result of new releases in its PCIe storage and refreshed SAS storage product lines, the company witnessed 40% sequential growth in revenues to $156 million in the September quarter. Management also mentioned that this growth rate was higher than the industry average during the period.

Furthermore, the company’s new product launches include a PCIe storage platform developed by integrating technology from its acquisitions of sTec, Virident and its subsidiary Hitachi Global Storage Technologies. The company announced the launch of PCIe connected hard drives in June, almost three quarters after acquiring PCIe flash specialist Virident for $685 million in 2013. [6] PCIe drives are different from regular hard drives as they connect to the faster PCI slot in systems rather than SATA or SAS. As a result, these drives can provide more bandwidth, eliminate bottlenecks and enhance storage performance of regular storage drives due to the fast connectivity offered. The company expects meaningful contribution from PCIe storage sales from mid-2015 onwards as this is still a niche domain.

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Notes:
  1. Western Digital Q1 FY 2015 Earnings Call Transcript, Seeking Alpha, October 2014 []
  2. WD’s My Book® Duo Offers Superior Performance, High Capacity, and Comprehensive Data Protection, Western Digital Press Release, June 2014 []
  3. PS4 Selling Faster Than Xbox One, Forbes, January 2014 []
  4. Western Digital Q1 FY 2015 Supplemental Information, Western Digital Investor Relations, October 2014 []
  5. Seagate Q4 FY 2014 Supplemental Information, Seagate Investor Relations, October 2014 []
  6. PCIe Hard Drives? You Read That Right, Says WD, The Register, June 2014 []