Zacks_Analysts' Blog : Western Digital: Earnings Preview - Analyst Blog

Western Digital Corp. (WDC) is scheduled to announce its second quarter 2012 results on January 23, 2012 after market close, and we witness modest variation in analysts’ estimates at this point.

First Quarter Overview

Revenues in the first quarter of 2012 inched up 12.4% year over year to $2.69 billion. Revenue from sales of the company’s branded products was $489.0 million, up 15.0% from the year-ago quarter due to the continued strong customer preference for Western Digital’s products.

Branded products revenue was up 28.0% from the prior quarter. There was no customer that comprised 10.0% or more of its total revenue. 

The company shipped 41.2 million units into the computing market in the September quarter as compared to 39.2 million units in the previous quarter and 37.5 million units in the year-ago quarter. Moreover, the company’s market share grew by approximately 30 basis points sequentially and 190 basis points year-on-year. The company witnessed strong consumer activity than what is witnessed seasonally.

Geographically, demand in Asia was particularly strong in the quarter, contributing about 59.0% of the revenue, up from 54.0% in the prior year. Europe generated about 22.0% of revenue, decreasing 100 basis points from the prior year but up from the 20% reported in the June quarter. America with 19.0% of revenue, declined from 23.0% in the year-ago quarter and from 20.0% reported in the June quarter.

Gross margin in the reported quarter was 20.1% versus 18.2% in the year-ago quarter. The year-over-year increase was attributable to the stable pricing environment. Moreover, product mix was favorable. Effective cost management and improved utilization also enabled the company to reach the higher end of the gross margin guidance.

The company generated $352.0 million of cash from operations in the quarter, down from $447.0 million in the previous quarter. Cash and cash equivalents were $3.67 billion, up from $3.49 billion reported in the previous quarter. The company made debt repayment of $31.0 million during the quarter, thereby reducing its debt balance to $263.0 million.

Agreement of Analysts

Out of the 16 analysts providing estimates for the second quarter, one analyst revised its estimates upward over the last thirty days. For fiscal 2012 and 2013, one and two analysts revised their EPS upward over the last 30 days.

As per some analysts, the upward revision in guidance by the hard disk major Seagate (STX) has had a notable impact on sentiments regarding Western Digital. Seagate has made revisions to its sales and gross margins which are significantly higher than prior projections. The analysts expect the December quarter shipments of HDD to be 47 million units, which included 700,000 units manufactured by Samsung, up from the previous guidance of 43 million.

This is expected to result in better component availability. Some analysts believe that Western Digital's recovery may be running somewhat ahead of investor expectations now resulting in a drive TAM of 128 to 132 million units for the December quarter. This is a meaningful improvement from their previous expectation.

Analysts are of the opinion that most of Seagate's drive shipments went to OEMs last quarter, Western Digital being one of the primary supplier influencing the distribution and retail channels. As price increases for some of the hard disk products went up to 100%, WDC raised its sales guidance.

Some analysts believe that Western Digital is the most well managed company in the HDD space, and they expect very attractive free cash flow and ROIC, even amidst limited HDD industry unit growth. Moreover, the analysts also state that the Street doesn’t fully appreciate the long-term benefits of the Hitachi Global Storage (HGST) acquisition. They contend that if the accretion potential of the deal is not fully factored in.

Magnitude of Estimate Revisions

Over the past 30 days, the Zacks Consensus Estimate for the second quarter moved up by a penny to 71 cents. For fiscal year 2012 and 2013, the analysts’ estimates have moved up by 9 cents and 14 cents, respectively, to $4.19 and $5.05, respectively.

Our Take

Western Digital’s first quarter 2012 results exceeded our expectations with total sales improving substantially over the year-ago period. The company is trying to lower its interest expense by reducing the debt burden, whereas the improvement in pricing environment is expected to result in better margin. Although Western Digital is sitting on a cash pile, its cash generation ability has been tempered to an extent by difficult business environment in Europe.

Moreover, the Hitachi deal is expected to strengthen its foothold in the data storage business. Although the company has been able to handle competition efficiently, but bigger players like Fujitsu Ltd, Samsung and Toshiba pose a considerable challenge.

Currently, Western Digital has a Zacks #2 Rank, implying a short-term Buy rating.