Western Digital Corporation (NASDAQ:WDC) is scheduled to announce its Q3 FY 2014 earnings on April 30. The hard disk manufacturer witnessed 4% year-over-year (y-o-y) growth in its revenues in the second fiscal quarter due to increased product sales of its enterprise and consumer electronic units. Non-PC hard disk units shipped by the company increased by 17% y-o-y during the last quarter due to a 36% increase in consumer electronics units and a 17% increase in enterprise units. 
The company’s gross margins improved by over a percentage point to 28.7% compared to the prior year quarter due the high profitability of enterprise storage units.  Going forward, the company has given a full year gross margin guidance range of around 27%-32%. Management mentioned that it is witnessing some seasonality in its quarterly results, which had been somewhat masked previously due to events in the past few years such as the Thailand floods and the Japan earthquake, which affected the company’s manufacturing and sales. For the March quarter, the company expects net revenues to sequentially decline by about 7% to $3.7 billion. However, margins could improve with the growing demand for enterprise storage products and solid state drives (SSDs).
We have a $93 price estimate for WDC’s stock, which is about 5% higher than the current market price.
Consumer Electronics Could Counter Seasonality
Western Digital typically sells fewer consumer electronics products in the December and March quarters. Although more customers prefer the holiday season (the December quarter) for buying in the U.S. and Europe, more than 55% of the revenues are generated by sales in Asia-Pacific, where consumer trends are different. Contrary to this seasonal trend, Western Digital witnessed a surge in sales in the consumer electronics segment in the last quarter, which it partially attributed to recently launched fast-selling gaming consoles by Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks.  Since Microsoft and Sony refreshed their product lines with these new consoles after 7-8 years, it is likely that the Xbox One and the PS4 continue to sell strongly in the coming quarters, boosting WDC’s consumer electronics channel.
The company also witnessed strong demand for its My Cloud personal cloud range of drives. Although sales of these drives are likely to be seasonally lower than the previous quarter, the strong customer response for the personal cloud could be a strong positive in the long run (see WDC Launches Personal Cloud).
Enterprise Storage To Continue Growth
Western Digital sold 24 million enterprise storage units in 2012, which grew to over 30 million units in the calendar year 2013. Moreover, the enterprise storage unit was boosted by $457 million of enterprise SSD sales in 2013, up from only $224 million in 2012. Given the growing demand for enterprise SSD storage units, we expect the surge in enterprise units to continue in 2014, albeit at a slower rate than the 2013 run rate. The increasing mix of high-margin SSDs in enterprise storage is also likely to help the company further improve its margins.
- Western Digital Quarterly Metrics, Western Digital Investor Relations, January 2014
- Western Digital Q2 2014 Earnings Call Transcript, Seeking Alpha, January 2014
- PS4 Selling Faster Than Xbox One, Forbes, January 2014
Disclosure: No positions