Western Digitial (WDC) reported better than expected results yesterday with a 21% sequential revenue growth to $1.9B and a more than threefold increase in operating income to $209M ($61M in Mar09 qtr).
Source: Gridstone Research
It looks even better when viewed in comparison to its principal competitor, Seagate (STX). While WDC has largely gotten back to its quarterly revenue rate that it had prior to the sharp downswing in fortunes in Sep08-Mar09, Seagate is still way below the revenues achieved in the Dec07-Jun08 period.
Source: Gridstone Research
Even more impressive is the difference in operating margins. While both companies beat market expectations with their Jun09 qtr results, WDC has clearly outperformed Seagate in terms of margins too. Seagate reported a operating loss in the last two quarters while WDC is back to double digit margins in Jun09 quarter.
The better operating margins for both vendors were aided by increased factory utilization and increase in demand. As WDC mentions in its Jun09 earnings call, it was able to ship ~40M units despite keeping its Thailand factory closed in the last quarter. This compares to Seagate's unit shipment of 40.6M.
Source: Gridstone Research
The clear lead in unit volumes that Seagate enjoyed has almost vanished in the last quarter. What has made the biggest difference is how the two companies have managed inventory. While both companies have bought down inventory in absolute dollars and at a DIO (days inventory outstanding) level, WDC has done much better than Seagate in this aspect.
Source: Gridstone Research
However, Seagate does have a better cash conversion cycle but it has never had a consistent lead over WDC in that regard. This could be because WDC sells more branded products (retail sales constitute 18-20% for WDC and only 10% for STX) and therefore has a longer cash conversion cycle. The flip side of this for STX is that demand could be lumpy and therefore WDC will hold up better in such periods thanks to its better retail presence.
Source: Gridstone Research
Looking at the data above, it looks like WDC has outperformed STX on almost all fronts. With both companies talking confidently about a upswing in demand, WDC seems in a better position to leverage the change in industry fortunes.
In terms of stock performance, WDC has outperformed STX over a one year period (based on Jul29 close prices) but not by much as the fundamentals suggest. So will WDC pull ahead of STX in the days ahead? I would think so.
Source: Google Finance
Disclosure: No Positions
