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Western Digital Corp. (NASDAQ:WDC) is scheduled to announce its second quarter 2012 results on April 26, 2012 after market close, and we witness modest variation in analysts' estimates at this point.

Second Quarter Overview

Revenues in the second quarter of 2012 moved down 19.4% year over year to $1.99 billion. Western Digital 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%. The average selling price was approximately $69.0 per unit, up $22.0 from the year-ago quarter and up $23.0 sequentially.

Gross margin in the reported quarter was 32.5% versus 19.2% in the year-ago quarter. Higher ASPs, partially offset by higher cost per unit, contributed to 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.

The company expects third quarter revenue to be in the range of $2.0 billion to $2.15 billion; and R&D and SG&A spending excluding acquisition and flood-related expenses of approximately $275.0 million. The company also expects the tax rate to be between 6.0% to 9.0%, with the share count at approximately 239 million. The non-GAAP earnings per share is expected to be between $1.15 and $1.45 for the March quarter, which excludes acquisition and flood-related expenses.

Agreement of Analysts

Out of the 14 analysts providing estimates for the third quarter, three analysts raised estimates upward over the last thirty days. Two analysts raised estimates for fiscal 2012, while there was just one upward revision for 2013, in the last 30 days.

Analysts remain positive about Western Digital's HDD pricing. Drive prices have declined slightly since the channel issues have alleviated somewhat, but they are still significantly higher than what they were before the flood.

Moreover, the analysts also expect the total shipments of WDC to grow substantially on a sequential basis in the March quarter. Whereas shipments to distributors are expected to come down during the same period.

Other analysts are of the opinion that the acquisition of HGST by WDC is an important event in the HDD history, in spite of the regulatory issues faced by the company, and should drive record profitability for both the companies. Moreover, the analysts also expect the combined entity to operate rationally and within profitability metrics consistent with the history of Western Digital.

Magnitude of Estimate Revisions

Over the past 30 days, the Zacks Consensus Estimate for the third quarter moved up by a penny to 7 cents per share. For fiscal year 2012 and 2013, the analysts' estimates have moved up by 14 cents and 20 cents, respectively, to $6.62 and $8.98, respectively.

Our Recommendation

Western Digital rolled out decent second quarter 2012 results, exceeding our expectations with a substantial improvement in sales from the year-ago period. The company is trying to lower its interest expense by reducing the debt burden and is also trying to improve its shipment, whereas the improvement in pricing environment is also good compared to the pre-flood period. On the other hand, the difficult business environment in Europe may hamper the growth prospects of the company.

Moreover, the Hitachi deal is expected to strengthen its foothold in the data storage business in spite of some regulatory issues. Although the company has been able to handle competition efficiently, bigger players like Fujitsu Ltd (OTCPK:FJTSY), Samsung (OTC:SSNLF) and Toshiba (OTCPK:TOSBF) pose a considerable challenge.

Currently, Western Digital has a Zacks #1 Rank, implying a short-term Strong Buy rating.

Source: Western Digital Corp: Earnings Preview