Low Consumer Electronics And Branded Unit Shipments Could Hinder Western Digital’s Q3 Growth
Western Digital (NASDAQ:WDC) is scheduled to announce its Q3 FY 2015 earnings after market close on Tuesday, April 28. The hard drive manufacturer reported a 2% year-on-year decline in net revenues to $3.88 billion in the December quarter, corresponding to a decrease in shipment volumes during the quarter. Overall unit shipments fell by 3% y-o-y to 61 million in Q2’15. [1] A favorable mix of high-margin hard drives led Western Digital’s non-GAAP gross margin to improve to 30.5% – slightly higher than the company’s implied guidance of about 30%. The company gave a revenue guidance of about $3.6-$3.7 billion for Q3 FY 2015, with margins expected to stay at around Q2 levels through the March quarter.
Western Digital shipped nearly 66.4 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the December 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 at the time. In its most recent earnings, Seagate reported a 9% annual rise in capacity shipped to 55.2 exabytes (see: Seagate Q3 FY15 Earnings: Higher Profit Despite Missing On Revenue Guidance).
We have a $104 price estimate for WDC’s stock, which is slightly higher than the current market price.
See our full analysis of Western Digital here
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Consumer Electronics, Branded Storage
Western Digital’s consumer electronics division, which includes hard drives for TVs, DVRs, gaming consoles and other media devices, had a solid performance in the first three quarters of 2014, shipping 30 million units. Comparatively, the company sold just about 21 million storage units in the prior year period . [2] The company witnessed double digit growth in consumer electronics storage units through the first three quarters of the calendar year. 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 branded storage unit shipments, which includes external storage drives and personal storage bays, grew by a mere 2% over the prior year period to 7.1 million units in the December quarter. 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. 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.
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Enterprise Storage Sales Unimpressive In 2014
Western Digital’s enterprise storage division, which includes both solid state drive (SSD) and non-SSD products, witnessed low sales through the calendar year 2014. 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. [4]
A similar trend was observed by Seagate, with enterprise shipment units staying flat at prior year levels through the first half of the calendar year 2014. However, the company shipped 17.9 million enterprise storage units in the latter half of 2014, which was almost 13% higher than the comparable prior year period. This trend continued for Seagate in the March quarter this year, with unit shipments rising by 18% y-o-y to 9.1 million units. [5]
A key area of top line growth for Western Digital in 2014 was enterprise-grade SSDs. The company had new releases in its PCIe storage and refreshed offerings in its SAS storage product lines in mid-2014, due to which the company witnessed a 40% sequential growth in revenues to $156 million in the September quarter. There was further sequential improvement in revenues in the December quarter, with revenues of $187 million from enterprise-grade SSDs. However, management expects demand to seasonally decline in the March quarter, but still expects growth on a year-over-year basis.
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More Trefis Research
- Western Digital Q1 FY 2015 Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
- Western Digital Q1 FY 2015 Supplemental Information, Western Digital Investor Relations, October 2014 [↩]
- PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]
- Western Digital Q2 FY 2015 Supplemental Information, Western Digital Investor Relations, January 2015 [↩]
- Seagate Q3 FY 2015 Supplemental Information, Seagate Investor Relations, April 2015 [↩]