Western Digital Earnings Preview: Consumer Electronics Storage Products Key

Western Digital (NASDAQ:WDC) is scheduled to announce its Q2 FY 2015 earnings on Tuesday, January 27. The hard drive manufacturer reported a 4% year-on-year growth in net revenues to $3.94 billion in its first fiscal quarter, corresponding to a rise in shipment volumes during the quarter. Overall unit shipments rose by 4% y-o-y to 65 million in Q1’15, with the average selling price per unit staying flat over the prior year quarter at $58 per drive. ^[1] The average capacity per drive crossed the 1 terabyte (1 terabyte = 1000 gigabytes) mark for the first time in history. A similar capacity gain was reported by competing hard drive manufacturer Seagate (NASDAQ:STX) in its quarterly report in October 2014.

We have a $100 price estimate for WDC’s stock, which is slightly lower than the current market price.Western Digital’s stock price has risen by almost 15% since the company reported its Q1’15 results in late October.

See our full analysis of Western Digital here

Branded And Consumer Electronics Storage To Sustain Growth

Western Digital’s consumer electronics division, which includes hard drives for TVs, DVRs, gaming consoles and other media devices, had a solid performance during the quarter, shipping 10.5 million units. Comparatively, the company sold just about 8.5 million storage units in the prior year quarter. ^[2] The company witnessed double digit growth in consumer electronics storage units through the first three quarters of the calendar year. Much of the growth in this division is attributable to storage drives for gaming products driven by strong sales of gaming consoles by Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. ^[3] Demand for these storage units could remain high through the end of the year as sales of the Xbox and Playstation 4 consoles are expected to be boosted by gaming companies releasing major titles around the calendar-year end (see The year 2014 In Review: Electronic Arts).

Western Digital’s branded storage segment, which includes external storage drives and personal storage bays, also grew by almost 10% over the prior year quarter to 6.8 million units shipped in the September quarter. This highlighted the strong performance of the company’s My Cloud personal cloud drives this year with the introduction of 5TB and 6TB models (1 terabyte = 1,000 gigabytes) to its WD Green range of products and 6TB drives to its WD Red product line. Additionally, the company launched the My Book Live Duo drive in June to address the growing demand in the consumer network-attached storage (NAS). ^[4] Furthermore, the company expanded its My Passport range of products with the launch of its wireless drive in September. The My Passport Wireless drive targets small setups – such as a family or a small team – in which up to eight devices can simultaneously access data from the drive. ^[5] At the end of Q1’15, management mentioned that branded product sales have been impressive in 2014 and the company expects the growth to continue in the coming quarters. We currently forecast Western Digital to end the calendar year at over 66 million consumer electronics and branded units shipped. We further expect unit shipments to rise to over 80 million units through the end of our forecast period.

Enterprise Storage Sales Stagnate

Enterprise storage units sold by Western Digital include both solid state drive (SSD) and non-SSD products. In the first calendar year quarter, the number of units shipped by this division was 1% lower than the prior year period at 7.1 million units, while it declined sharply by over 10% y-o-y to just over 7 million units shipped during the June quarter. Although shipments rose sequentially in the quarter ending September to 7.8 million units, it was still a 2% decline over the year-ago period. ^[6] A similar trend was observed by Seagate, with enterprise shipment units declining by 4% annually to 15.1 million units in the first half of 2014. However, Seagate was able to increase shipments in the most recent quarter, with enterprise unit shipments rising by almost 9% y-o-y to 8.8 million units. ^[7]

Back in September, Western Digital launched the Ultrastar He10 helium-filled hard drive with a 10TB capacity to target enterprise-storage customers. The drive was an upgrade on He6, the 6TB helium drive that it launched in November 2013. The company expects strong demand in the enterprise market in the first half of 2015, while figures could remain unimpressive in the December quarter.

Impact On Margins

Western Digital’s net revenues in Q1’15 were slightly higher than the guidance of $3.85 billion given by the company at the end of fiscal Q4 2014. A favorable mix of high-margin hard drives led Western Digital’s non-GAAP gross margin to improve by 25 basis points over the prior year quarter to 30.1%, which was also higher than the company’s guidance of about 29%. Similarly, margins improved in the first half of the calendar year as well, owing to a favorable product mix and reduction in production costs. The company has given revenue guidance of about $3.8 billion for Q2 FY 2015 and expects margins to stay at around 30% through the end of the calendar year.

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1. Western Digital Q1 FY 2015 Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
2. Western Digital Q1 FY 2015 Supplemental Information, Western Digital Investor Relations, October 2014 [↩]
3. PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]
4. WD’s My Book® Duo Offers Superior Performance, High Capacity, and Comprehensive Data Protection, Western Digital Press Release, June 2014 [↩]
5. New WD® Portable Storage Drive Wirelessly Connects to Smartphones, Tablets, Cameras and More, Western Digital Press Release, September 2014 [↩]
6. Western Digital Q1 FY 2015 Supplemental Information, Western Digital Investor Relations, October 2014 [↩]
7. Seagate Q4 FY 2014 Supplemental Information, Seagate Investor Relations, October 2014 [↩]