It has been about a month since the last earnings report for Western Digital (WDC). Shares have added about 30.2% in that time frame, outperforming 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 catalysts.
Western Digital’s Q2 Earnings & Revenues Beat Estimates
Western Digital Corporation reported second-quarter fiscal 2021 non-GAAP earnings of 69 cents per share, which surpassed the Zacks Consensus Estimate by 30.2%. Further, the bottom line increased 11.3% year over year.
Revenues of $3.943 billion beat the Zacks Consensus Estimate by 1.4%. However, the top line declined 6.9% year over year. Deterioration in the Data Center Devices and Solutions’ revenues offset growth in the Client Devices and Client Solutions segments.
Quarter in Detail
Client Devices’ revenues (54.1% of total revenues) increased 19% year over year and 10%.
Quarter over quarter to $2.131 billion, driven by solid revenues from gaming SSDs and increased demand for SSDs in smart video.
Moreover, the company witnessed increased demand for notebook SSD solutions due to growing work-from home and web-based learning trends on account of the coronavirus pandemic.
Client Solutions’ revenues (25.5%) increased 6% year over year to $1.005 billion. Moreover, the figure increased 19% sequentially as online learning, remote work and uptick in gaming activities spurred demand for company’s both flash-based and hard drive products.
Data Center Devices and Solutions’ revenues (20.4%) declined 46% year over year to $807 million and 29% quarter over quarter, thanks to weak demand for enterprise SSDs and capacity enterprise hard drives.
Considering revenues by product group, HDD revenues (48% of total revenues) declined 20% from the year-ago quarter’s level. Weakness in capacity enterprise offset higher demand from increased PC, notebooks and smart video sales. However, HDD revenues increased 4% on a sequential basis to $1.909 billion.
Flash revenues (52%) rose 11% from the year-ago quarter’s figure to $2.034 billion. Sequentially, flash revenues declined 2%.
Going ahead, robust demand for its high-capacity drives and ramping production of 16- and 18-terabyte energy assisted drives are expected to drive the top line. Notably, the company achieved qualifications for its energy-assisted drives at three out the four major cloud titans in the United States in second-quarter fiscal 2021. The company expects demand in enterprise markets to gather pace in third quarter of fiscal 2021.
Key Metrics
The company shipped 25.7 million HDDs at an average selling price (ASP) of $73. The reported shipments were lower than the year-ago quarter’s figure by 12%.
On a quarter-over-quarter basis, HDD Exabytes sales improved 2%. Flash exabytes sales increased 7%. Total exabytes sales (excluding non-memory products) were up 3% sequentially.
ASP/Gigabytes (excluding non-memory products) declined 9% sequentially.
Margins
Non-GAAP gross margin of 26.4% expanded 50 basis points (bps) on a year-over-year basis.
Notably, non-GAAP flash gross margin was 27.1%, up 760 bps from the year-ago quarter’s levels. The upside was driven by cost-reduction measures as well as strong seasonality. Meanwhile, non-GAAP HDD gross margin contracted 520 bps year over year to 25.6% due to increases in costs associated with the ramping up of next generation energy assisted hard drives and higher COVID-19 related costs.
Non-GAAP operating expenses declined 9% from the year-ago quarter’s level to $696 million. Management is focused on undertaking strict spending measures.
Non-GAAP operating income came in at $343 million, which soared 3% year over year. As a percentage of revenues, non-GAAP operating margin of 8.7% expanded 80 bps on a year-over-year basis.
Balance Sheet & Cash Flow
As of Jan 1, 2021, cash and cash equivalents were $2.956 billion compared with $2.995 billion reported as of Oct 2, 2020.
Long-term debt (including current portion) was $9.133 billion as of Jan 1, 2021, compared with $9.372 billion as of Oct 2, 2020. The company paid down debt of $248 million in the fiscal first quarter.
Western Digital generated $425 million in cash from operations compared with $363 million reported in the previous quarter.
Free cash flow came in at $149 million compared with $196 million in the prior quarter.
During the quarter, the company did not pay out any dividends. On Apr 30, Western Digital suspended its dividend policy to strengthen reinvestment in innovation and growth as well as to facilitate ongoing deleveraging efforts.
Guidance
For third-quarter fiscal 2021, revenues are expected in the range of $3.85-$4.05 billion.
Management projects non-GAAP earnings between 55 cents and 75 cents per share.
For third-quarter fiscal 2021, non-GAAP gross margin is anticipated in the range of 25.5-27.5%. Flash gross margin are expected to increase on a sequential basis, driven by reduction in flash prices. Hard drive gross margin is anticipated to decline sequentially in the fiscal third quarter due to higher volumes of 16 TB drives and projected cut back in production volume.
Non-GAAP operating expenses are expected between $705 million and $725 million. Interest and other expenses are estimated to be $70 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 29.67% due to these changes.
VGM Scores
Currently, Western Digital has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, Western Digital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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