Western Digital Earnings Preview: Consumer Electronics Shipments, Enterprise HDD Sales In Focus

Western Digital (NASDAQ:WDC) is scheduled to announce its Q4 FY 2015 earnings on Wednesday, July 29. ^[1] The company has witnessed mixed results in terms of units shipped over the last few quarters, with the number of unit shipments declining on a year-on-year (y-o-y) basis in the two previous quarters. A key growth area for Western Digital has been the number of consumer electronics units shipped, owing to the rise in demand for 500 GB 2.5” form-factor hard drives used in the gaming consoles by Microsoft (NASDAQ:MSFT) and Sony.

Western Digital reported a 4% year-on-year decline in net revenues to $3.55 billion in the March quarter, corresponding to a decrease in shipment volumes during the quarter. Overall unit shipments fell by 10% y-o-y to 54.5 million in Q3’15. ((Western Digital Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015)) The company gave revenue guidance of about $3.50-$3.60 billion for Q4 FY 2015, which at the midpoint implies a 3% year-over-year decline in net revenues.

We have a $102 price estimate for WDC’s stock, which about 20% higher than the current market price. Western Digital’s stock price has fallen by over 20% since the company reported its Q3 FY 2014 earnings in late April.

See our full analysis of Western Digital here

 Enterprise HDD Shipments Pick Up After An Unimpressive 2014

Western Digital’s enterprise storage division, which includes both solid state drive (SSD) and non-SSD products, witnessed weak sales through calendar year 2014. Unit sales suffered largely due to year-over-year decline in shipments during the first half of 2014, with sales picking up in the latter half of the year. Shipments for the full calendar year stood at just over 30 million units – about 2% lower than the previous year levels. ^[2] 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 further in the latter half of the year. A similar trend was observed by Seagate (NASDAQ:STX), 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. ^[3]

In terms of SSDs, Western Digital 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. 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.

Expected Weakness In 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. 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. This further slowed down to about 8.6 million units shipped in the March quarter this year, which was roughly flat over the prior year quarter.

Western Digital’s branded storage unit shipments, which includes external storage drives and personal storage bays, grew by a 5% over the prior year to 26.2 million units in calendar year 2014. However, unit shipments fell by 3% y-o-y to 6.1 million units through the March quarter. Branded sales are typically higher in the holiday season in the latter half of the year, due to which Q4 FY 2014 shipments could continue to be low. We currently forecast the number of consumer electronics and branded HDD shipments to rise moderately to about 67 million units in 2015.

Impact On Margins

A favorable mix of high-margin hard drives led Western Digital’s non-GAAP gross margin to improve by a percentage point to 31.1% in the March quarter. The company’s reported gross margin was slightly higher than the implied guidance of about 30%. Subsequently, the company expects gross margins to lie within the 27-32% range in the coming quarters. With declining HDD unit shipments for personal computers and an increasing mix of enterprise-grade hard disk drives, the company could post healthier margins in the coming quarters. Moreover, an increasing mix of products sold via the retail channel (branded products), could help boost margins even further since they are more profitable for the manufacturer. We currently expect Western Digital’s adjusted company-wide gross margin to improve by about 40 basis points to 35.7% through the calendar year 2015.

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1. Western Digital Sets July 29 For Q4 Fiscal 2015 Financial Results Conference Call, Western Digital Press Release, July 2015 [↩]
2. Western Digital Q3 FY 2015 Supplemental Information, Western Digital Investor Relations, April 2015 [↩]
3. Seagate Q3 FY 2015 Supplemental Information, Seagate Investor Relations, April 2015 [↩]