Western Digital (WDC) Down 8.1% Since Last Earnings Report: Can It Recover?

A month has passed since Western Digital’s (WDC) last earnings report. The stock lost about 8.1% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Western Digital due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the company’s most recent earnings report in order to better understand the important catalysts.

Western Digital’s fourth-quarter earnings and revenues exceeded estimates

Western digitality for the fourth quarter of fiscal 2021, it saw non-GAAP earnings of $2.16 per share, surpassing the Zacks Consensus Estimate by 48%. The financial result increased by 76% year-on-year and 112% quarter-on-quarter.

Revenues of $4.92 billion surpassed the Zacks Consensus Estimate by 9%. Revenues grew 15% year over year and 19% sequentially. The results were influenced by higher demand from customers using cloud services and the recovery in corporate markets.

Quarter in detail

Client devicesRevenue (44% of total revenue) increased 13% year-over-year and 8% quarter-over-quarter to $2.166 billion. The continued growth of flash memory, desktop hard drive (HDD) and notebook demand, as well as the growth of new game consoles, contributed to the top performance. Demand for the WD Black product line was strong due to gamers’ preference for more personalized solutions.

Solutions for customersRevenue (20%) increased 42% year-over-year and 10% sequentially to $977 million, driven by strong positions in both HDD and flash solutions across all key product categories.

Devices and solutions for data centersRevenue (36%) increased 6% year-over-year and 44% sequentially to $1.777 billion. The dynamics of the development of energy-assisted drives (especially 18 terabyte drives) and solid-state drives (SSD) for enterprises improved the segment’s results in the analyzed quarter.

Taking into account revenues by product groups, hard drive revenue (50.8% of total revenue) increased 22% year-over-year and then 28% to $2.501 billion. Hard drive revenue was primarily driven by demand for 18TB power-powered drives as well as continued demand from cloud customers.

Flash revenue (49.2%) increased 8% compared to the same quarter last year to $2.419 billion. As a result, flash revenues increased by 11%.

Going forward, the company’s revenues are expected to be driven by strong demand for high-capacity drives and growing production of 18-terabyte power-assisted drives and second-generation enterprise NVMe SSDs.

Key indicators

The company shipped 25.4 million hard drives at an average selling price (ASP) of $97. Recorded deliveries were lower by 10% compared to the previous year’s quarter.

Quarter-over-quarter sales of Exabytes HDD drives increased by 34%. Sales of exabytes of flash memory increased by 4%. Total exabyte sales (excluding non-memory products) increased 30% sequentially.

ASP/gigabytes (excluding non-memory products) improved 7% sequentially.

Margins

Non-GAAP gross margin of 32.9% increased 400 basis points (bps) year-over-year.

Non-GAAP gross margin was 35.5%, an increase of 500 basis points from the prior-year level. Non-GAAP hard drive gross margin increased 310 basis points year-over-year to 30.3%.

Non-GAAP operating expenses increased 10.8% from year-ago levels to $790 million.

Non-GAAP operating income was $828 million, up 57% year-over-year. As a percentage of revenue, non-GAAP operating margin of 16.8% increased 450 basis points year-over-year.

Balance sheet and cash flow

As of July 2, 2021, cash and cash equivalents were $3.37 billion compared to $2.734 billion as of April 2, 2021.

Long-term debt (including the current portion) was $8.725 billion as of July 2, 2021, compared to $8.929 billion as of April 2, 2021. During the fiscal fourth quarter, the company repaid $213 million in debt.

Western Digital generated $994 million in cash from operations, compared to $116 million reported in the prior-year quarter.

Free cash flow was $792 million, up from $11 million in the prior quarter.

The company did not pay any dividend during the quarter. On April 30, 2020, Western Digital suspended its dividend policy to enhance reinvestment in innovation and growth and facilitate ongoing deleveraging efforts.

First quarter guidance

For the first quarter of fiscal 2022, non-GAAP revenues are expected to be between $4.9 billion and $5.1 billion.

Management forecasts non-GAAP earnings of 2.25 cents to $2.55 per share.

Non-GAAP gross margin is forecast in the range of 33-35%. Hard drive gross margin is expected to remain relatively flat, while flash drive gross margin is expected to improve quarter over quarter.

Non-GAAP operating costs are expected to range from $755 million to $785 million.

How have estimates changed since then?

It turns out that new estimates have been trending upwards over the past month. As a result of these changes, the consensus estimate moved by 20.95%.

VGM results

At this point, Western Digital has a strong Growth Score of A, although it lags slightly behind its Momentum Score of B. Plotting a somewhat similar path, the stock is rated an A on the value side, meaning it’s in the top quintile for this investment strategy.

Overall, the company’s Total VGM Score is A. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for the stock are trending upwards, and the scale of these revisions looks promising. Notably, Western Digital carries a Zacks Rank of #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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