Western Digital Posts Mixed Results As Unit Shipments Stagnate

Western Digital (NASDAQ:WDC) announced its Q2 FY 2015 earnings on Tuesday, January 27, reporting a 2% year-on-year decline in net revenues to $3.88 billion. The hard drive manufacturer reported a 3% y-o-y decrease in the number of units shipped, to 61 million during the quarter. ^[1] Net revenues were slightly higher than the guidance of $3.80 billion given by the company at the end of fiscal Q1’15. Moreover, a favorable mix of high-margin hard drives led Western Digital’s non-GAAP gross margin to 30.5% – slightly higher than the company’s implied guidance of about 30%. The company has given revenue guidance of about $3.6-$3.7 billion for Q3 FY 2015 and expects margins to stay at around Q2 levels through next quarter.

The average selling price (ASP) per unit shipped by Western Digital was flat over the prior year quarter at $60 per drive, while the average capacity per drive stood at 1.1 terabyte (1 terabyte = 1000 gigabytes) per drive. Western Digital shipped nearly 66.4 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the quarter, which was an increase both sequentially (+2%) and annually (+21%). A similar capacity gain was reported by competing hard drive manufacturer Seagate (NASDAQ:STX) in its quarterly report (see: Enterprise Storage, Notebooks Drive Seagate’s Revenue Growth).

See our full analysis of Western Digital here

Unit Shipments Witness Limited Growth

Western Digital manufactures hard drives for TVs, DVRs, gaming consoles and other media devices, which it categorizes under the Consumer Electronics Storage division. Consumer Electronics unit shipments rose by 40% year-over-year to 30 million units through the first three calendar year quarters. ^[2] 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] However, the company’s Consumer Electronics unit sales rose by only about 6% y-o-y to 9.3 million units during the December quarter – presumably due to a tougher year-on-year comparison. Western Digital’s consumer electronics storage unit sales in Q2’15 were over 50% higher than Seagate’s sales in the same period. Similarly, the company outsold Seagate by over 70% for the full calendar year.

Western Digital’s Branded Storage segment, which includes external storage drives and personal storage bays, grew by a mere 2% over the prior year quarter to 7.1 million units. However, it was a sequential improvement of nearly 6% highlighting the strong performance of the company’s My Cloud personal cloud drives in the consumer market in the holiday season. The company continued to witness strong customer adoption of its My Cloud drives, with over 4 million customers downloading My Cloud related software and apps. Western Digital ended the calendar year at over 56 million units sold by the consumer electronics and branded division combined. 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.

Western Digital’s enterprise storage division, which includes both solid state drive (SSD) and non-SSD products, has witnessed low sales through the year. 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. However, unit sales picked up both sequentially (+4%) and annually (+3%) in the December quarter to over 8 million units. ^[2] A similar trend was observed by Seagate, with enterprise shipment units staying flat at prior year levels through the first three calendar year quarters at just under 24 million units. However, Seagate was able to increase shipments in the most recent quarter, with enterprise unit shipments rising by almost 16% y-o-y to 9.1 million units. ^[4]

In terms of SSDs, the company generated $155 million from enterprise SSDs in the quarter ending December 2013, 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. The company witnessed further sequential improvement in the December quarter, with revenues of $187 million from enterprise-grade SSDs. Management expects demand to seasonally decline in the March quarter, but still expects the company to post higher revenues on an annual basis.

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1. Western Digital Q2 FY 2015 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. Western Digital Q2 FY 2015 Supplemental Information, Western Digital Investor Relations, January 2015 [↩] [↩]
3. PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]
4. Seagate Q4 FY 2014 Supplemental Information, Seagate Investor Relations, October 2014 [↩]