What Factors Will Weigh On Western Digital’s Fiscal 2019 Earnings?

Western Digital’s (NASDAQ: WDC) revenues have so far seen a low double-digit drop in fiscal 2019. The top line will likely fall in the high teens for the full fiscal, given the NAND headwinds. The entire industry is seeing normalization of NAND pricing, and this will likely result in lower earnings for Western Digital in fiscal 2019. In fact, we forecast the adjusted earnings to decline in the high 50s percent for the full fiscal. We have created an interactive dashboard ~ What To Expect From Western Digital In Fiscal 2019? ~ which shows our earnings and share price projection for the company. You can adjust various drivers to see the impact on the company’s revenues, earnings, and price estimate. Below we discuss our forecasts in detail. In addition, here is more Information Technology data.

Expect Revenues To Decline In High Teens

Western Digital’s Data Center Solutions segment, which includes products such as enterprise-grade hard drives, fell as solid state drives that are primarily used in data centers, and for cloud-based storage, will likely see revenues decline in the high teens. The overall data center market is expected to witness a slowdown in the near term, which will likely have an impact on Western Digital’s business as well. In fact, Gartner predicts the growth rate to slow from 11% in 2018 to 4% in 2019, and a decline of 4% in 2020. Client Devices segment includes revenue generated from global sales of hard drive units as well as solid state drives for desktops, laptops, smartphones, and consumer electronics. The segment revenues were down in high single-digits for the six month period ending December 2018, and the decline for the full fiscal will likely be in the low teens, in our view. This can primarily be attributed to the softness in the smartphone market. Smartphone shipments likely declined by over 3% in 2018, and are expected to see growth of under 3% in 2019, according to IDC. The overall PC shipments also declined in low single-digits in 2018, according to the research firm Gartner. However, 2019 could see PC TAM (total available market) to be flat (y-o-y). The Client Solutions segment, which refers to branded flash and removable storage products, such as USB flash drives, microSD cards, and other removable storage, will likely see the worst hit on sales, given the trends in NAND pricing. In fact, prices for NAND memory have seen significant declines over the last year, as major vendors largely completed the transition from planar NAND to 3D NAND, boosting supply. In addition, the foreign tariffs imposed on China have resulted in weaker demand, amid an overall slower growth in the Chinese economy. China’s growth is projected to decelerate from an estimated 6.6% in 2018 to 6.2% in 2019. This will have an impact on the overall sales of Western Digital.

Looking at margins, the company expects margin pressure to remain primarily on the flash products for the calendar year 2019. We forecast the adjusted EBITDA to be $3.8 billion, reflecting a decline in EBITDA margins of a littler under 300 basis points. We expect the earnings to be $6.10 on an adjusted basis in fiscal 2019, reflecting a decline of over 50% to the prior fiscal earnings. Our price estimate of $53 for Western Digital is based of a 9x forward price to earnings multiple.

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