Western Digital (WDC) Stock Falls Despite Q4 Earnings Beat

Shares of Western Digital Corp. (NASDAQ:WDC) went down 6.3% in after-hours trading yesterday due to a tepid first-quarter earnings guidance.

The company reported fourth-quarter fiscal 2016 non-GAAP earnings per share (excluding amortization of intangibles and other one-time items) of 79 cents, which beat the Zacks Consensus Estimate of 72 cents per share. However, earnings were down from $1.51 per share reported in the year-ago quarter.

Quarter Details

Western Digital’s revenues of $3.495 billion for the fourth quarter not only increased 9.5% year over year but also surpassed the Zacks Consensus Estimate of $3.437 billion. Reported revenues also surpassed the guided range of $2.6 to $2.7 billion. The year-over-year increase was primarily due to the SanDisk acquisition.

During the quarter, Western Digital shipped 40.1 million hard disk drives (HDDs) at an average selling price (ASP) of $63. ASP was up from $60 reported in the last quarter and the year-ago quarter. However reported shipments were down from 48.5 million in the year-ago quarter and 43.1 million HDDs shipped in the previous quarter.

Western Digital’s market share in the total addressable market (TAM) came in at 40.7% compared with 42.9% in the previous quarter. Market share also declined from 43.7% reported in the year-ago quarter.

Western Digital’s non-GAAP gross profit increased 13.9% on a year-over-year basis to $1.08 billion. Non-GAAP gross margin also increased 122 basis points (bps) to 31%.

Non-GAAP operating expenses were up 23.4% year over year, primarily due to higher selling, general and administrative and research and development expenses. Non-GAAP income from operations came in at $393 million, which increased from $391 million reported in the year-ago period. Operating margin however decreased 101 bps on a year-over-year basis to 11.2%. The decrease in margin was primarily due to higher operating expenses as a percentage of revenues (up 222 bps on a year-over-year basis).

Non-GAAP net income came in at $208 million or 79 cents per share compared with $356 million or $1.51 per share in the year-ago quarter.

Cash and cash equivalents were $8.15 billion compared with $5.89 billion in the previous quarter. Long-term debt during the quarter was $13.67 billion.

During the quarter, Western Digital generated $355 million in cash from operations compared with $485 million in the previous quarter. The company declared a cash dividend of 50 cents during the quarter.

Guidance

For the first quarter of fiscal 2017, revenues are expected in a range of $4.4 billion to $4.5 billion. The Zacks Consensus Estimate is pegged at $4.32 billion.

Non-GAAP gross margin is expected to be 32%. Total operating expenses (research and development, and selling, general and administrative) are expected to be approximately $875 million. Management expects non-GAAP earnings per share to be between 85 cents and 90 cents for the first quarter. The Zacks Consensus Estimate is pegged at 93 cents per share.

WESTERN DIGITAL Price, Consensus and EPS Surprise

WESTERN DIGITAL Price, Consensus and EPS Surprise | WESTERN DIGITAL Quote

Our Take

Western Digital reported better-than-expected fourth-quarter fiscal 2016 results, wherein both the top-and bottom lines surpassed the Zacks Consensus Estimate. Also, revenues increased on a year-over-year basis. The company however provided a tepid earnings guidance for the first quarter citing seasonal factors.

Nonetheless, the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the long-term positives. Additionally, higher demand for storage is expected to lead to a positive earnings surprise in the ongoing quarter.

We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Continued investments in product innovation could result in flattish margins in the near term.

Also, Western Digital’s entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are expected to be growth catalysts, going forward.

It is worth mentioning that Western Digital recently completed the acquisition of SanDisk Corp. The two companies had entered into a definitive agreement on Oct 21, 2015.

The SanDisk acquisition will open growth avenues for Western Digital and help it to gain market traction in advanced storage technology and the Solid State Drive (SSD) segment. The merger will lead to economies of scale, lower costs, increase market reach and improve product breadth, among other things. The company will also be able to offer competitive solutions in cloud-based computing, which has taken the digital storage solution space by storm over the past couple of years.

Similar strategic acquisitions are expected to expand its offerings in the SSD segment and place Western Digital in a better position compared to its peers such as Seagate Technology (NASDAQ:STX) .

Western Digital currently carries a Zacks Rank #3 (Hold).

Box, Inc. (NYSE:BOX) and Facebook, Inc. (NASDAQ:FB) are a couple of better-ranked stocks in the technology space, carrying a Zacks Rank #1 (Strong Buy).