Consumer Electronics Lift Western Digital's Earnings As Enterprise Storage Disappoints

| About: Western Digital (WDC)

Western Digital Corporation (NASDAQ:WDC) announced its Q3 FY 2014 earnings on April 30, reporting a mild 1.5% year-on-year decline in net revenues. The company’s gross margins increased by 44 basis points over the year ago quarter to 28.6%, driven by a 2% reduction in costs. Reported net revenues of $3.7 billion were in line with the company’s guidance, with margins and earnings per share exceeding guidance. Going forward, the company expects its revenues to be around $3.5 billion, which would be a 6% y-o-y decline. However, the company expects gross margins to improve slightly due to an improving product mix. We have a $94 price estimate for WDC’s stock, which is about 5% higher than the current market price.

In line with our expectations, the company’s PC storage and branded product sales declined by about 4% each over the prior year quarter to about 38.4 million units and 6.2 million units, respectively. These declines were offset by a continued surge in consumer electronics unit shipments. Consumer electronics product sales grew by more than 30% year-on-year (y-o-y) to 8.5 million units during the quarter, with the growth mainly coming from storage drives used in gaming consoles. Contrary to our expectations, enterprise units sold by the company were flat over the previous year quarter at 7.1 million units – a disappointing result considering the more than 25% growth in numbers last year.

Consumer Electronics Storage Drives Continue To Surge

Western Digital has sold almost 17.4 million consumer electronics storage drives in the last two quarters combined. Comparatively, the company sold less than 13 million drives in the year ago period. The surge in these product sales was mainly driven by the recently launched fast-selling gaming consoles – Microsoft's (NASDAQ:MSFT) Xbox One and the Sony (NYSE:SNE) PlayStation 4, which use 500 GB 2.5” form-factor storage disks. Both Microsoft and Sony refreshed their product lines with these new consoles after almost eight years, due to which the storage company faced strong demand for the storage drives integrated with the consoles. Going forward, the company expects consumer electronics storage product sales to remain high as it is likely that the Xbox One and the PS4 continue to sell strongly in the coming quarters, boosting WDC’s consumer electronics channel.

Disappointing Numbers For Enterprise Storage And Branded Products

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 segment was boosted by $457 million of enterprise SSD sales in 2013, up from only $224 million in 2012. However, the company managed to sell only 7.1 million enterprise storage units in the quarter – a 1% decline compared to the same period last year. Additionally, the revenue generated by enterprise SSD sales sequentially declined for the first time in the last eight quarters. Although the enterprise SSD revenues grew by over 30% y-o-y to $134 million, they were flat if the contribution of the newly acquired sTec and Virident is excluded. Given the growing demand for enterprise SSD storage units, the company expects growth in enterprise units to pick up in the latter half of 2014.

Western Digital witnessed strong demand for its My Cloud personal cloud range of drives during the quarter, which the company expects to continue in the long run (see WDC Launches Personal Cloud). However, the company’s revenues and units sold for the branded division as a whole were down year-over-year. The company attributed the decline in revenues to an increasing mix of cheaper 2.5″ drives compared to the 3.5″ drives, and lower unit sales with competitor Toshiba grabbing some market share. Unsurprisingly, Western Digital’s major competitor Seagate (NASDAQ:STX) also lost share to Toshiba this quarter, as pointed out by the latter’s management in its earnings call recently.

Disclosure: No positions.