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Why Is Western Digital (WDC) Up 16.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Western Digital (WDC). Shares have added about 16.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Western Digital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Western Digital Q1 Earnings Beat

Western Digital reported first-quarter fiscal 2024 non-GAAP loss of $1.76 per share, narrower than the Zacks Consensus Estimate of a loss of $1.88. The company had reported earnings per share (EPS) of 20 cents in the prior-year quarter.

Revenues of $2.750 billion beat the Zacks Consensus Estimate by 3.1%. However, the top line decreased 26% year over year owing to weak performance across Cloud and Client end markets. On a sequential basis, revenues increased 3%.

Quarter in Detail

At the beginning of first-quarter fiscal 2022, Western Digital started reporting revenues under three refined end markets — Cloud (includes products for public or private cloud), Client (includes products sold directly to OEMs or through distribution) and Consumer (includes retail and other end-user products).

Revenues from the Cloud end market (31.7% of total revenues) fell 52% year over year to $872 million owing to lower shipments of both hard drive and flash products. On a sequential basis, cloud revenues were down 12%.

Revenues from the Client end market (41.7% of total revenues) were down 7% year over year to $1,147 million. The downtick was caused by lower flash pricing on a year-over-year basis. Client revenues increased 11% sequentially.

Revenues from the Consumer end market (26.6% of total revenues) were up 8% year over year to $731 million. Revenues increased 14% on a sequential basis. Sequential performance benefited from higher content per unit and unit shipments in flash.

Considering revenues by product group, Flash revenues (56.6% of total revenues) declined 9.7% from the year-ago quarter’s figure to $1.556 billion. Sequentially, flash revenues rose 13%.

Hard disk drive (HDD) revenues (43.4% of total revenues) decreased 40.7% year over year to $1.194 billion. Revenues decreased 7.8% quarter over quarter.

Key Metrics

The company shipped 10.4 million HDDs at an average selling price (ASP) of $112. The reported shipments declined 29.3% from the prior-year quarter’s levels.

On a quarter-over-quarter basis, HDD Exabytes sales decreased 5%. Flash exabytes sales were up 26%. Total exabytes sales (excluding non-memory products) increased 2% sequentially. ASP/Gigabytes (excluding licensing, royalties, and non-memory products) were down 10% sequentially.

Margins

Non-GAAP gross margin was 4.1% compared with 26.7% reported in the year-ago quarter.

HDD’s gross margin contracted 560 bps year over year to 22.9%. Flash gross margin was a negative 10.3% against 24.5% reported in the prior-year quarter.
Non-GAAP operating expenses declined 19.5% from the year-ago quarter’s level to $555 million. Non-GAAP operating loss totaled $443 million against the non-GAAP operating income of $307 million in the prior-year quarter.

Balance Sheet & Cash Flow

As of Sep 29, 2023, cash and cash equivalents were $2.03 billion compared with $2.02 billion reported as of Jun 30, 2023. The long-term debt (including the current portion) was $5.822 billion as of Sep 29.

Western Digital used $626 million in cash from operations against $6 million of cash generated from operations in the previous-year quarter. Free cash outflow amounted to $544 million in the quarter under review compared with the free cash outflow of $215 million reported in the prior-year quarter.

Q2 Guidance

For second-quarter fiscal 2024, the company expects non-GAAP revenues in the range of $2.85-$3.05 billion. The Zacks Consensus Estimate is currently pegged at $2.93 billion.

Management projects a non-GAAP loss per share between $1.05 and $1.35. The Zacks Consensus Estimate is currently pegged at a loss of $1.53 per share. Management expects non-GAAP gross margin in the range of 10-12%. Non-GAAP operating expenses are expected to be between $560 million and $580 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

The consensus estimate has shifted 23.48% due to these changes.

VGM Scores

At this time, Western Digital has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Western Digital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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