Western Digital Feels The Heat In The June Quarter: Slowdown In PC Sales Stifles Top-Line Growth

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Worldwide sales of personal computers and laptops witnessed a massive dip in the June quarter. Weakness in the PC market was impacted by the release of Windows 10 in July, which led buyers to hold back from purchasing desktop and laptop computers through the quarter. Western Digital’s (NASDAQ:WDC) fiscal fourth quarter earnings were significantly impacted by the low demand. The company reported a 13% year-on-year decline in net revenues to just under $3.2 billion, corresponding to a nearly 23% y-o-y decrease in the number of units shipped to 48.5 million during the quarter. [1] On the other hand, a favorable product mix led Western Digital’s non-GAAP gross margin to improve by about 30 basis points over the prior year period to 29.8%, which was within the company’s targeted long term margin of about 27-32%.

See our full analysis of Western Digital here

Limited Growth In Enterprise, Consumer Electronics, Branded Storage

Western Digital shipped nearly 56.2 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the quarter, which was a 2% annual rise in shipment capacity. With PC shipments declining, enterprise storage was largely responsible for the rise in storage capacity shipped. 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. The trend reversed at the beginning of the year as enterprise hard drive sales gained traction in the March quarter and shipments rose by 5% y-o-y to 7.5 million units sold through the quarter. The company kept up the momentum in the June quarter, selling 7.2 million hard drives, which was a 2% annual rise.

Solid state drive (SSD) sales continued to boost top line growth for the company. In line with the company’s expectations, revenues generated by SSD sales stood at $244 million for the quarter, which was more than a 100% y-o-y rise. Similarly, the company generated about $224 million from enterprise-grade SSDs through the March quarter, which was a 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.

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 9.1 million units in the June quarter – a 17% decline over the comparable prior year period, presumably due to tougher year-over-year comparisons. The company’s consumer electronics division witnessed elevated sales through 2014 due to a sharp rise in demand for HDDs used in gaming consoles. This demand has somewhat subsided over the last two quarters. Additionally, Western Digital’s Branded Storage segment, which includes external storage drives and personal storage bays, fell by 15% over the prior year quarter and to 5.1 million units. It was also a sequential decline of 15%, which is mainly attributable to seasonality. We currently forecast the number of consumer electronics and branded product shipments combined to rise more moderately to about 80 million units by the end of the decade.

PC And Laptop HDD Shipments Suffer

The PC market was exceptionally weak in the June quarter, owing to the anticipated mid-year release of Windows 10. According to IDC, PC shipments fell by almost 12% y-o-y in the second quarter this year, about 1 percentage point lower than previous estimates. [2] This translated to low PC and notebook hard drive sales for Western Digital in the June quarter. The company shipped about 27.1 million hard drives for desktops and laptops combined, which was a 16% year-over-year decline. [3] Western Digital witnessed a similar decline in the first calendar year quarter as well. Although hard drive makers were eagerly waiting for the Windows 10 release in July this year, it is likely that PC shipments don’t pick up immediately. It is likely that PC sales begin to stabilize stabilize from 2016 onwards. [4]

Talks With MOFCOM, Outlook For 2015

Western Digital acquired Hitachi Global Storage Technologies (HGST), Hitachi’s hard drive business, for $4.5 billion back in 2012. According to regulations laid down by the Chinese Ministry of Commerce (MOFCOM), Western Digital was required to wait 24 months before completing the merger between the two companies. In the meantime, HGST would continue to operate as an isolated entity within Western Digital. However, Western Digital is still waiting for approval from the Chinese authorities to merge the two companies. Western Digital’s management mentioned that they were in advanced talks with the authorities. If the company gets the go ahead to merge the two entities, it could lead to savings of about $400 million a year in operating expenses. [5]

For the coming quarter, Western Digital has given revenue guidance of about $3.2-$3.3 billion for Q1 FY 2016, which at the midpoint implies a 17% y-o-y decline. The company expects its gross margin (GAAP) to be at around 30% for the September quarter, which is within its long term expectations of 27%-32%. If the Chinese authorities agree to merging HGST with the parent company, it could significantly help Western Digital enhance its overall profitability despite an expected slowdown in product sales.

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Notes:
  1. Western Digital Announces Financial Results For Fourth Quarter And Fiscal Year 2015, Western Digital Press Release, July 2015 []
  2. PC Market Continues to Decline Ahead of Windows 10 Release, According to IDC, Business Wire, July 2015 []
  3. Western Digital Quarterly Fact Sheet, Western Digital Press Release, July 2015 []
  4. PC Sales Are Imploding, Business Insider, July 2015 []
  5. Western Digital Q4 FY 2015 Earnings Call Transcript, Seeking Alpha, July 2015 []
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