Western Digital Earnings: Revenues, Profits Fall After A Weak End To 2015

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Hard drive manufacturer Western Digital (NASDAQ:WDC) reported its fiscal second quarter 2016 earnings on January 28, reporting a nearly 15% year-over-year decline in net revenues to $3.362 billion. [1] The company reported a similar revenue decline in the fiscal first quarter as well. The total hard drives shipped by Western Digital through the quarter were about 19% lower than the previous year period at 49.7 million units. The decline was largely driven by sustained weakness in the PC market, which led to low product shipments. Moreover, the company’s retail product sales in the consumer electronics and external storage segment also contributed to the decline in shipments. The company expects weakness to continue through the March quarter, with expected revenues of about $2.85 billion, which is about 20% lower than Q3’15 revenues. [2]

Western Digital’s gross margin (GAAP) for the quarter stood at 27.3%, which was about 120 basis points lower than the comparable prior year period. This was close to the low end of the company’s targeted long-term margin of 27-32%. Moreover, Western Digital’s operating expenses through the quarter rose by about 2% y-o-y to $655 million. As a result, the company’s net income was over 40% lower than the prior year period at $251 million.

See our full analysis of Western Digital here

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Weak PC Demand Continues Through Second Half Of 2015

The PC market has weak over the last few quarters, owing to the anticipated mid-year release of Windows 10 at first. Subsequently, sales did not pick up even after the release of Windows 10, resulting in a decline in PC sales through the year. According to IDC, PC shipments fell by almost 11% y-o-y to 276 million units through 2015. [3] This translated to low PC and notebook hard drive sales for Western Digital for the full year. A strong U.S. dollar led to price increases in the PC market, while the option to upgrade to Windows 10 on existing machines further bottled the demand for new computers and laptops. The company shipped 123.4 million hard drives for desktops and laptops combined, which was a 21% year-over-year decline. On the plus side for the company, it is likely that PC sales begin to stabilize from 2016 onwards. [4]

Consumer Electronics, Enterprise Storage Shipments Also Down

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 sales stood at just under 8.5 million units in the December quarter – a 9% decrease over the comparable prior year period. Moreover, it was a 26% sequential dip, despite it being a typically strong quarter owing to the holiday season. The company attributed low sales to weakness in the gaming sector. Additionally, the company’s Branded Storage segment, which includes external storage drives and personal storage bays, fell by 10% over the prior year quarter to 6.4 million units. As a result, the combined branded and consumer electronics units for the full year were down by about 4% to 62.4 million units.

Western Digital’s enterprise storage segment 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 continued in 2015, with the number of enterprise-grade hard drives sold by Western Digital staying at previous year levels at just under 30 million units sold through the year. Subdued product sales are partially attributable to SSD and flash-based storage gaining traction in the market.

Enterprise SSD And Flash Storage

The company generated $270 million in revenues from enterprise-grade SSD sales, which was a 45% y-o-y rise. As a result, revenues generated by Western Digital through enterprise SSD product sales for the full year were up by a massive 65% to $971 million. Since the introduction of flash-based memory chips, there have been constant talks about how long it will be before hard disk drives eventually become obsolete. NAND-flash based storage has numerous advantages over rotating-disk drives, ranging from the sheer speed of read/write operations, low latency in data access, relatively low power consumption, as well as lighter and more durable drives with a greater resistance to mechanical shock. Western Digital’s presence in the SSD market is currently limited to only enterprise customers. Moreover, much of Western Digital’s SSD consumption in the retail segment is via solid state hybrid drives (SSHDs), which use a regular hard disk drive for core storage operations while a smaller built in SSD storage is added for cache memory purposes. [5]

With SanDisk’s enterprise and client SSD business integrated with its core HDD business, Western Digital expects its total addressable market (TAM) in the enterprise SSD market to grow at a CAGR of over 36% in the enterprise SSD space to $13 billion by 2017. Moreover, from currently having no presence in the client SSD, embedded storage and removable flash storage market, the combined entity could have a TAM of about $30 billion by 2017. [6]

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Notes:
  1. Western Digital Announces Financial Results For Second Quarter Fiscal 2016, Western Digital Press Release, January 2016 []
  2. Western Digital Q2’16 Earnings Call Transcript, Seeking Alpha, January 2016 []
  3. PC Market Finishes 2015 As Expected, Hopefully Setting the Stage for a More Stable Future, According to IDC, IDC Press Release, January 2016 []
  4. PC Sales Are Imploding, Business Insider, July 2015 []
  5. SSD vs SSHD: which is the best hard drive to buy?, PC Advisor, May 2014 []
  6. Western Digital SEC Filings, SEC, November 2015 []