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January 24, 2012
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Western Digital Corp. (WDC) reported second quarter 2012 earnings per share (EPS) of $1.51, comprehensively exceeding the Zacks Consensus Estimate of 72 cents.
The company also announced that it has made significant progress to restore its manufacturing capacity following the recent flooding in Thailand. The company has increased its HDD production in Thailand and recently started the production of Slider, which had been suspended since end of 2011. The company expects to resume to its normal operations soon.
Revenues
The quarter’s revenues moved down 19.4% year over year to $1.99 billion. Western Digital shipped a total of 28.5 million hard drives as compared with 52.2 million in the year-ago quarter.
Revenue from sales of the branded products was $328.0 million, down 40.0% from the year-ago quarter and 33.0% from the September quarter.
Considering different sales channels, OEM sales represented 59.0% of revenues, up from 45.0% in the prior year. Distribution channel sales represented 25.0% of revenues, down from 33.0% in the prior year. Retail sales as a percent of revenues were 16.0%, down from prior year's 22.0%. Average selling price was approximately $69.0 per unit, up $22.0 from the year-ago quarter and up $23.0 sequentially.
Operating Results
Gross margin in the reported quarter was 32.5% versus 19.2% in the year-ago quarter. Higher ASPs, which is partially offset by higher cost per unit, contributed for the increased gross margin. On average, per unit costs were approximately $10.0 higher than in the previous quarter, due to low production volume, increased use of airfreight, a higher mix of externally procured heads and a higher cost for other components that was impacted by the flood and subsequently affected the company’s supply-chain partners.
Total operating margin for the quarter was 8.1%, down from 9.7% reported in the year-ago quarter. Total operating expense increased by 19.6% (excluding expenses related to flooding), which surpassed the growth in revenues, resulting in lower operating profit margin.
Net income for the quarter was $145.0 million or 61 cents per share, down from $225.0 million or 96 cents in the year-ago quarter. Excluding charges and expenses related to the Thailand flooding and the planned acquisition of Hitachi Ltd.’s (HIT) Global Storage Technologies (HGST), non-GAAP net income was $358 million or $1.51 per share as compared with $225 million or 96 cents per share in the year-ago quarter.
Cash Position
The company generated $378.0 million of cash from operations in the quarter, up from $352.0 million in the previous quarter. Cash and cash equivalents were $3.92 billion, up from $3.67 billion reported in the previous quarter. Capital spending for the December quarter totaled $120 million.The company made a debt repayment of $31.0 million during the December quarter, which reduced its debt balance to $231.0 million. WDC’s cash conversion cycle for the December quarter was a positive 5 days
Third Quarter Guidance
The company expects third quarter revenue to be in the range of $2.0 billion to $2.15 billion; R&D and SG&A spending will be approximately $275.0 million, excluding acquisition and flood-related expenses. Moreover, the company also expects tax rate to be in the middle of 6.0% to 9.0%, with share count at approximately 239 million. The non-GAAP earnings per share will expectedly range between $1.15 and $1.45 for the March quarter, which excludes acquisition and flood-related expenses.
Conclusion
Though sales dipped on a year-over-year basis, Western Digital’s second quarter 2012 results handily exceeded our expectations. The company is trying to lower its interest expense by reducing debt burden.
The company witnessed a substantial improvement in gross margin as a result of higher ASP’s, partially offset by higher cost. Western Digital is cash rich, and has good cash generation ability. Moreover, the company also announced it has made significant progress to restore its manufacturing capacity following the recent flooding in Thailand.
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.
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