Western Digital (WDC) Up 1.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Western Digital (WDC). Shares have added about 1.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Western Digital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Western Digital Q4 Earnings Beat, Revenues Lag Estimates

Western Digital Corporation reported fourth-quarter fiscal 2020 non-GAAP earnings of $1.23 per share, which surpassed the Zacks Consensus Estimate by 2.5%. Further, the bottom line improved 624% year over year and 45% sequentially.

Revenues of $4.287 billion increased 18% year over year. Performance was driven by robust demand from cloud customers during the quarter under review and robust uptake of client Solid State Drive (SSDs) for notebooks. Also, an uptrend in NAND flash pricing contributed to growth.

The top line also improved 2.7% sequentially but lagged the Zacks Consensus Estimate by 1.35%.

Quarter in Detail

Client devices’ revenues (45% of total revenues) increased 19% year over year and 5% sequentially to $1.831 billion, driven by solid revenues from client SSDs.

Moreover, the company witnessed increased demand for notebook solutions due to growing work-from home and web-based learning trends on account of the coronavirus pandemic. However, softened demand for hard drive revenues pertaining to desktop and smart video hard drives limited segment growth.

In Gaming domain, the company commenced shipping of flash solutions for the forthcoming console launches.

Client solutions’ revenues (16%) declined 9% year over year to $687 million. Also, the figure decreased 16% sequentially due to impact of COVID-19’s on retail demand.

Notably, lockdowns have forced brick-and-mortar retail stores to temporarily close down. Nevertheless, the company witnessed pickup in June, which continued into July.

Data center devices and solutions’ revenues (39%) increased 32% year over year and 11% sequentially to $1.684 billion, driven by strong traction for Enterprise SSDs.

Additionally, the company is witnessing robust demand for its high capacity drives and ramping production of 16 and 18-terabyte energy assisted drives.

Considering revenues by product group, HDD revenues (50.6% of total revenues) declined 3.1% from the year-ago quarter’s level and 3.7% on a sequential basis to $2.049 billion, owing to ongoing transition to SSDs. Flash revenues (49.4%) improved 49% from the year-ago quarter’s figure and 8.6% sequentially to $2.238 billion, driven by an uptrend in NAND flash pricing.

Key Metrics

The company shipped 23.1 million HDDs at an average selling price (ASP) of $87. The reported shipments were lower than the year-ago quarter’s figure by 16.6%.

On a quarter-over-quarter basis, HDD Exabytes sales declined 2%. Flash exabytes sales increased 8%. Total exabytes sales (excluding non-memory products) were down 1% sequentially.

ASP/Gigabytes (excluding non-memory products) inched up 1% sequentially.

Margins

Non-GAAP gross margin of 28.9% expanded 470 basis points (bps) on a year-over-year basis.

Notably, non-GAAP Flash gross margin was 30.5%, up from the year-ago quarter figure of 18.7%, driven by pricing uptrends and cost reduction measures. Meanwhile, non-GAAP HDD gross margin contracted 90 bps year over year to 27.2%.

Non-GAAP operating expenses declined 1.2% from the year-ago quarter to $713 million. Management remains focused on undertaking strict spending measures.

Non-GAAP operating income came in at $527 million, which soared 233.5% year over year. As a percentage of revenues, non-GAAP operating margin of 12.3% expanded 800 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Jul 3, 2020, cash and cash equivalents were $3.048 billion, compared with $2.943 billion reported as of Apr 3, 2020.

Total debt (including current portion) was $9.575 billion as of Jul 3, 2020, compared with $9.629 billion as of Apr 3, 2020, having repaid debt of $63 million in the fiscal fourth quarter.

Western Digital generated $172 million in cash from operations compared with $142 million reported in the previous quarter.

Free cash flow came in at $261 million compared with $176 million in the prior quarter.

Guidance

For first-quarter fiscal 2021, revenues are expected in the range of $3.7-$3.9 billion. Management projects non-GAAP earnings between 45 cents and 65 cents per share.

Non-GAAP gross margin is anticipated in the range of 25-27%. Non-GAAP operating expenses are expected between $700 million and $720 million. Interest and other expenses are estimated between $70 million and $80 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -62.41% due to these changes.

VGM Scores

At this time, Western Digital has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Western Digital has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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