Western Digital Q2 Preview: Flash Storage To Continue To Boost Gross Margins

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Western Digital

Western Digital (NASDAQ:WDC) is scheduled to announce its fiscal second quarter 2018 earnings on January 25. While core hard drive product sales have remained low in recent quarters, the addition of SanDisk has helped boost net revenues. Although the impact of the SanDisk acquisition has now normalized in terms of revenue comparisons, the company expects steady high-single digit revenue growth to continue with flash storage products driving growth. At the end of the fiscal first quarter ended September, Western Digital gave positive guidance for the December quarter with with an expected 7% organic growth in revenues. In addition, gross margins are expected to continue to rise significantly, as SanDisk’s flash product portfolio has high gross profit margins.

We have a $75 price estimate for Western Digital’s stock, which is around 10% lower than the current market price.

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Guidance For The December Quarter

Western Digital’s management expects revenues of around $5.25 billion for the December quarter, which is 7% higher on a y-o-y basis. Gross margin is expected to be over 5 percentage points higher over the year-ago period to around 42%. The company expects non-GAAP operating expenses to only around 4% higher at around $830 million due to continued expense synergies with the integration of SanDisk. Disciplined expense management, higher revenues and healthier gross margins should help the company achieve its expected diluted earnings per share of $3.65, which is nearly 60% higher over the December quarter of last year.

Segment Performance Metrics

Hard drive manufacturers have witnessed a slowdown in demand for product sales in recent years. This trend continued in 2017 as well, with Western Digital’s unit shipments across most segments declining over the comparable prior year period. As a result, revenues for data center storage suffered with only an 11% revenue growth.

Comparatively, revenues for client devices were up 39% with the most growth coming from SanDisk product integration rather than organic growth. Similarly, client solutions revenues were up nearly 60% on a y-o-y basis to $3.2 billion. These revenues include branded and external hard drives, branded flash, and removable storage (from SanDisk). Much of the growth is attributable to the addition of SanDisk’s product portfolio to Western Digital.

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With the effects of the SanDisk acquisition normalizing, Western Digital will now report organic revenue growth in coming quarters (which over the next few quarters is expected to remain in the mid single digits). A positive for Western Digital is the resolution of the company’s standoff with SanDisk’s partner Toshiba, which sued Western Digital for ¥120 billion (around $1 billion) for allegedly “unfair competition and theft of trade secrets” in the June quarter. At the end of the December quarter both Toshiba and Western Digital signed a settlement agreement to continue to collaborate on developing flash memory storage.

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