A month has gone by since the last earnings report for Western Digital (WDC). Shares have lost about 12% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Western Digital due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Western Digital Reports Loss in Q2, Revenues Beat
Western Digital reported second-quarter fiscal 2023 non-GAAP loss of 42 cents per share, compared unfavorably with the Zacks Consensus Estimate for loss of 8 cents per share. The company had reported earnings of $2.30 per share in the prior-year quarter.
The performance was affected by challenging flash pricing environment and higher-than-expected ACD underutilization charges which pressured margins, noted Western Digital.
However, revenues of $3.107 billion beat the Zacks Consensus Estimate by 3.1%.
The top line decreased 36% year over year. The decline was owing to weak performance across all segments. On a sequential basis, revenues decreased 17%.
Quarter in Detail
Beginning with 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 (39% of total revenues) fell 36% year over year to $1.224 billion owing to inventory digestion in hard drives. On a sequential basis, cloud revenues were down 33%.
Revenues from the Client end market (35% of total revenues) were down 41% year over year and declined 11% sequentially to $1.089 billion. The downtick was caused by lower flash pricing on a year-over-year basis and reduced client SSD shipments for PC applications.
Revenues from the Consumer end market (26% of total revenues) were down 25% year over year but up 17% sequentially to $794 million. Sequential performance was driven by seasonal increase in demand for both retail hard drives and flash.
Considering revenues by product group, HDD revenues (47% of total revenues) decreased 34% year over year to $1.45 billion. The downtick was mainly caused by cloud inventory digestion which offset improvement in demand for retail and client HDD solutions. Revenues declined 28% quarter over quarter.
Flash revenues (53% of total revenues) declined 37% from the year-ago quarter’s figure to $1.657 billion. Sequentially, flash revenues fell 4%
The company shipped 12.9 million HDDs at an average selling price (ASP) of $99. The reported shipments declined 40.3% from the year-ago quarter’s levels.
On a quarter-over-quarter basis, HDD Exabytes sales were down 35%. Flash exabytes sales were up 20%. Total exabytes sales (excluding non-memory products) were down 28% sequentially.
ASP/Gigabytes (excluding licensing, royalties, and non-memory products) were down 20% sequentially.
Non-GAAP gross margin was 17.4% compared with 33.6% reported in the year-ago quarter.
HDD gross margin contracted 990 bps year over year to 20.7%. Flash gross margin was 15%, down from 36% reported in the year-ago quarter.
Non-GAAP operating expenses moved down 11.1% from the year-ago quarter’s level to $659 million.
Non-GAAP operating loss came in at $119 million, compared with non-GAAP operating income of $882 million in the year ago quarter
Balance Sheet & Cash Flow
As of Dec 30, 2022, cash and cash equivalents were $1.871 billion compared with $2.049 billion reported as of Sep 30, 2022.
The long-term debt (including the current portion) was $7.071 billion as of Dec 30, 2022.
Western Digital generated $35 million in cash from operations compared with $666 million reported in the previous-year quarter.
Free cash outflow came in at $240 million compared with free cash flow $407 million reported in the prior-year quarter.
During the quarter, the company did not pay out any dividends. On Apr 30, 2020, Western Digital suspended its dividend policy to strengthen reinvestment in innovation and growth as well as facilitate ongoing deleveraging efforts.
For third-quarter fiscal 2023, the company expects non-GAAP revenues in the range of $2.6-$2.8 billion.
Management projects non-GAAP loss per share to be between $1.40 and $1.70.
WDC expects the non-GAAP gross margin in the range of 9-11%. Non-GAAP operating expenses are expected to be between $600 million and $620 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
The consensus estimate has shifted -195.14% due to these changes.
Currently, Western Digital has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Western Digital has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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