Western Digital Misses Guidance, Reports Low Unit Shipments For Q3’15

Western Digital (NASDAQ:WDC) announced its Q3 FY 2015 earnings on Tuesday, April 29, reporting a 4% year-on-year decline in net revenues to $3.55 billion. Correspondingly, the hard drive manufacturer reported a nearly 10% y-o-y decrease in the number of units shipped, to 54.5 million during the quarter. ^[1] Net revenues were slightly lower than the guided range of $3.60-$3.70 billion given by the company at the end of fiscal Q2’15. However, a favorable product mix led Western Digital’s non-GAAP gross margin to improve by a percentage point over the prior year period to 31.1%, which was slightly higher than the company’s implied guidance of about 30%. The company has given revenue guidance of about $3.50-$3.60 billion for Q4 FY 2015 and expects margins to be around 27%-32%.

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Continued Weakness In Enterprise Storage?

Western Digital shipped nearly 61.3 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the quarter, which was a 14% annual rise in shipment capacity. However, the total capacity shipped was about 8% lower than the December quarter. The company attributed the capacity decline to relatively lower demand for enterprise hard drives during the quarter. Western Digital’s enterprise storage division, which includes both solid state drive (SSD) and non-SSD products, witnessed low product sales through 2014. The company shipped just over 30 million enterprise-grade hard drives in calendar year 2014, which was about 2% lower than the previous year. Western Digital shipped about 7.5 million enterprise hard drives in the March quarter, which was a 5% increase over the comparable prior year period. The company expects demand to pick up in the latter half of the year. In terms of SSDs, the company generated $590 million from enterprise SSDs in the calendar year 2014, with a strong outlook for 2015. In line with the company’s expectation, SSD revenues continued to boost top line figures. The company generated about $224 million from enterprise-grade SSDs through the March quarter, which was a massive 67% rise over the comparable prior year period. As a result of new releases in its PCIe storage and refreshed SAS storage product lines, the company witnessed 20% sequential growth in revenues. We currently forecast Western Digital’s enterprise hard drive sales to grow moderately to about 31 million units in calendar year 2015 and subsequently to nearly 60 million units through the end of our forecast period.

Consumer Electronics, PC 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, owing to a solid demand for gaming consoles which use the 500 GB 2.5” form-factor storage disks. ^[2] 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. Unit sales in the March quarter stood at 8.6 million units, which was roughly flat over the comparable prior year period. Although the growth in this segment has slowed down over the last couple of quarters, competitor Seagate has sold 33% less consumer electronics drives than Western Digital in the same period.

Western Digital’s Branded Storage segment, which includes external storage drives and personal storage bays, fell by 3% over the prior year quarter and to 6.1 million units. However, it was a sequential decline of 15%, owing to seasonality. We currently forecast the number of consumer electronics and branded product shipments to rise more moderately to about 80 million units by the end of the decade.

The company continued to witness low demand for PC and laptop unit shipments, owing to a slowdown in the PC market. A similar trend was observed in the quarterly results of competing hard drive manufacturer Seagate (NASDAQ:STX) (see: Seagate Q3 FY15 Earnings: Higher Profit Despite Missing On Revenue Guidance). Western Digital shipped about 32.3 million hard drives for desktops and laptops combined, which was a 16% year-over-year decline. Low desktop storage unit sales can be attributed to PC sales hitting a six-year low during the March quarter. ^[3] PC sales were exceptionally low, as the refresh cycle of XP computer systems bottomed out as customers are now waiting for the launch of Windows 10. As a result, hard drive makers are also eagerly waiting for the Windows 10 release in July this year, which is likely to boost compute storage product sales.

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1. Western Digital Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
2. Western Digital Q3 FY 2015 Supplemental Information, Western Digital Investor Relations, April 2015 [↩]
3. PC shipments hit a six-year low as XP upgrades slow down, PC World, April 2015 [↩]