Western Digital Earnings Preview: Can The SanDisk Acquisition Revive Depressed Product Sales?

Western Digital (NASDAQ:WDC) is scheduled to announce its Q2 FY 2016 earnings on Thursday, January 28. ^[1] The company has witnessed mixed results in terms of units shipped over the last few quarters, with a slow PC market weighing on the consumer IT market. The company has endured soft product sales in recent quarters, with the number of PC and laptop hard drive unit shipments declining by 26% y-o-y to about 87 million units through the first three quarters of 2015. Similarly, its retail sales have also fallen in the same period, with the combined consumer electronics and branded product shipments declining by over 4% over the prior year period to 68 million units. Comparatively, enterprise hard drive unit shipments have stayed flat on a y-o-y basis at about 22 million units through the first three quarters of the calendar year.

We have an $83 price estimate for Western Digital’s stock, which is significantly higher than the current market price. Western Digital’s stock price has fallen by over 40% through the December quarter as shareholders reacted negatively to the $19 billion acquisition of SanDisk, with reports suggesting that Western Digital may have overpaid for SanDisk.

See our full analysis of Western Digital here

Key Developments In Fiscal 2016 And Impact

The latter half of the calendar year (or Western Digital’s fiscal 2016) has been positive for the company thus far, with a number of key announcements that could boost revenues in the long run. Western Digital signed an agreement with Chinese state-backed Unisplendour Corporation (a subsidiary of Tsinghua Holdings), with the latter investing $3.8 billion in Western Digital for a 15% equity stake in late September. If the deal goes through, the newly issued shares will cost Unisplendour $92.50 a share, which is more than a 30% premium to the current market price and the stock price at the time of the announcement. ^[2] Through the investment, Unisplendour gets to nominate a member on Western Digital’s board as long as its stake remains in excess of 10%. Western Digital’s management indicated that the equity investment by Unisplendour would help facilitate growth and future strategic initiatives.

Subsequently, the company also announced the integration of its subsidiary HGST with the parent company almost three and a half years after acquiring it. ^[3] According to the company’s estimates, once the merger goes through successfully, it could help Western Digital save almost $400 million in operating expenses due to cost synergies in research and development and other expenses. ^[4] There could also potentially be savings of around $200 million in cost of goods sold.

SanDisk Acquisition Could Bolster The Enterprise Segment

Western Digital’s enterprise storage segment, which includes both solid state drive (SSD) and non-SSD products, was a fast-growing division within the company, with the number of hard disk drive shipments rising from under 9 million in 2011 to over 30 million in 2013. Subsequently, the company witnessed a slowdown in product sales, with unit shipments staying flat at 30 million units sold in 2014. The trend has continued in 2015 thus far, with the number of enterprise-grade hard drives sold by Western Digital staying at previous year levels of 22 million units through the first three quarters of 2015. Subdued product sales are partially attributable to SSD and flash-based storage gaining traction in the market. Western Digital enhanced its product portfolio in the September quarter with the expansion of enterprise-grade WD Red hard drive in capacities of 5TB and 6TB. ^[5]

Western Digital’s recent $19 billion acquisition of flash storage provider SanDisk Corporation (NASDAQ:SNDK) indicates a firm decision to solidify its presence in the enterprise storage segment. ^[6] SanDisk has been a leading flash-storage provider over the years, with expertise across various product categories that include enterprise-grade solid state drives (SSDs). Enterprise SSD has been a fast-growing space over last few years, with global revenues rising by over 30% in 2014 to $5.8 billion according to a Gartner report. ^[7] SanDisk had a strong presence in the market, with the combined SanDisk-Fusion-io entity grabbing a nearly 15% share in 2014. Western Digital has been betting on hard drives for a long time, and has often been reluctant to switch over to flash storage completely. SanDisk could fill that void perfectly, and the resulting vertical integration with its flash-assets and capabilities could give Western Digital an edge over rival Seagate (NASDAQ:STX) when it comes to flash storage. Moreover, with Fusion-io’s earnings beginning to contribute to SanDisk’s results in the most recent quarter, the Western Digital-SanDisk combined entity could have a very solid presence in this growing market segment. ^[8]

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Western Digital Sets January 28 For Q2 Fiscal 2016 Financial Results Conference Call/Webcast, Western Digital Press Release, January 2016 [↩]
2. Western Digital Announces Equity Investment By Unisplendour Corporation Limited, Western Digital Press Release, September 2015 [↩]
3. Western Digital Corporation Announces Decision from China’s Ministry Of Commerce Enabling Integration Of Substantial Portions Of HGST And WD Subsidiaries, Western Digital Press Release, October 2015 [↩]
4. WD and HGST: We tried to merge our two drive makers, MOFCOM said NO, NO, NO, The Register, December 2014 [↩]
5. WD Red Pro Drives Now Available In 6 TB, Western Digital Press Release, August 2015 [↩]
6. Western Digital to buy SanDisk in $19 billion deal, Reuters, October 2015 [↩]
7. Gartner: Dell nowhere to be seen as storage SSD sales go flat, The Register, May 2015 [↩]
8. Did Western Digital Corp. Overpay for SanDisk Corporation?, Motely Fool, October 2015 [↩]