Western Digital: Fiscal 2Q18 Financial Results

(in $ million) 3Q17 3Q18 9 mo. 17 9 mo. 18
Revenue 4,888 5,336 9,602 10,517
Growth 9% 10%
Net income (loss) 235 (823) (131) (142)

Western Digital Corp. reported record revenue of $5.3 billion for its second fiscal quarter ended Dec. 29, 2017.

Operating income was $955 million with a net loss of $823 million, or ($2.78) per share. The GAAP net loss for the period includes a provisional net tax charge of $1.6 billion primarily due to the repatriation tax as a result of the Tax Cuts and Jobs Act. Excluding this charge and after other non-GAAP adjustments, the company achieved record non-GAAP operating income of $1.4 billion and non-GAAP net income of $1.2 billion, or $3.95 per share.

In the year-ago quarter, the company reported revenue of $4.9 billion, operating income of $545 million and net income of $235 million, or $0.80 per share. Non-GAAP operating income in the year-ago quarter was $995 million and non-GAAP net income was $675 million, or $2.30 per share.

The company generated approximately $1.2 billion in cash from operations during the second fiscal quarter of 2018, ending with $6.4 billion of total cash, cash equivalents and available-for-sale securities. On Nov. 1, 2017, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on Jan. 16, 2018.

We continued our strong financial performance in the December quarter, with 9% year-over-year revenue growth, driven by each of our major end-market categories and solid execution by our team,” said Steve Milligan, CEO. “We once again generated strong operating cash flow, reflecting continued healthy demand in our end markets, most notably for our capacity enterprise hard drives and flash-based products.”

He added: “I am very pleased with our technology and product development execution. The deployment of our 64-layer 3D flash technology continued across our product portfolio and we will be ramping our 96-layer technology later this calendar year. We continue to lead the industry with our high-capacity helium HDD platform in 10, 12 and 14TB capacities and we remain on plan to sample our MAMR-based capacity enterprise drives in the second half of calendar 2018. I am also pleased that we resolved our negotiations with our JV partner Toshiba in December and ensured our long-term access to flash.”

Our Comments

Western Digital achieves record quarterly revenue of $5.3 billion, up 3% Q/Q and 9% Y/Y.

The quarter was driven by strong performance in each of company’s end markets. Revenue in data center devices and solutions was $1.4 billion, client devices $2.6 billion and client solutions was $1.3 billion.

In client devices, revenue grew from one year ago quarter driven most notably by demand for embedded flash and client SSD products. WDC began shipments of 3D flash based embedded solutions for the mobile and compute markets including it first UFS offering, allowing to address a broader market opportunity beginning this calendar year. In addition, it saw continued strong demand for our products in areas such as connected home, surveillance, and industrial verticals.

Solid year-over-year revenue increase in client solutions highlighted the continued preference for our G-Tech, SanDisk and WD brands during a strong holiday season. The vendor made further inroads in our engagement with brick-and-mortar and e-tail partners during the December quarter.

In data center devices and solutions, demand for capacity enterprise drives remained strong. There was a recent re-acceleration of demand for high capacity HDDs. Shipments of 10TB helium drives grew further and the transition to the 12TB capacity point accelerated. WDC also began shipments of 14TB drives for hyperscale applications during the December quarter.

All HDD segments saw increased shipping numbers but notebook (-4% Q/Q) and CE (-17%) units.

In terms of exabyte growth in capacity enterprise, calendar 2017 was a slower period for the market primarily due to industry-wide component constraints, with an overall exabyte growth rate of slightly less than 30%. However, the company saw strengthening demand for capacity enterprise drives as we ended 2017. In the first-half of calendar 2018, it estimates that the year-over-year industry exabyte growth rate will exceed 60% as the pent-up demand is fulfilled. For the full calendar 2018, it estimates exabyte growth to exceed 50% as broad deployments of capacity enterprise drives are expected to persist throughout the year.

WDC expect the demand for high and mid-range capacity drives to support the higher rate of exabyte consumption in calendar year 2018, and its long-term annual exabyte growth estimate is unchanged at 40%.

Western Digital has reduced development expenses in product portfolio by eliminating future investments in performance enterprise drives and narrowing its client HDD portfolio. Additional actions include our previously announced closures of manufacturing operations in China and Singapore.

The mix of our 3D flash bit supply approached 70% exiting the December quarter, with BiCS3 constituting more than 90% of company’s 3D flash bits. Additionally, it commenced initial production of 96-layer technology, BiCS4, and began product shipments to retailers in the December quarter. It expects to ramp BiCS4 in the second half of the calendar year. From a fab standpoint, as announced in December, it will begin participation in Fab 6 starting with the second investment tranche. Fab 6 operations are expected to commence in the next few months with initial bit output in the third calendar quarter of 2018.

From a flash industry perspective, WDC estimates bit growth in calendar 2017 was at the low end of the long-term range of 35% to 45% with its growth somewhat higher than the industry, given relative strength in 64-layer 3D flash. In calendar 2018, the vendor estimates industry bit growth to be near the high-end of the long-term range due to improving manufacturing yields and continued transition to 3D flash with firm’s growth consistent with the industry.

Western Digital expects for next three-month period revenue to be down at approximately $4.9 billion (-8% Q/Q), consistent with a seasonally weaker fiscal third quarter, and gross margin to be between 42% and 43%.

While the company expects to see normal seasonality in the second half of fiscal 2018, it continue to see the opportunity to achieve revenue growth at the high end of its long-term model of 4% to 8% for fiscal 2018.

To read the earnings call transcript

Volume and HDD Share

WD’s HDDs

(units in million)

Enterprise Desktop Notebook CE Branded Total HDDs HDD share Exabyte

Shipped

Average

GB/drive

ASP
2Q15 8.0 15.4 21.2 9.3 7.2 61.0 43.4% 66.4 1,087 $60
3Q15 7.5 13.5 18.8 8.6 6.1 54.5 43.6% 61.3 1,123 $61
4Q15 7.2 11.6 15.5 9.1 5.2 48.5 43.7% 56.2 1,159 $60
1Q16 7.2 11.7 15.8 11.5 5.6 51.7 43.6% 63.5 1,228 $60
2Q16 7.0 12.5 15.3 8.5 6.4 49.7 43.2% 69.1 1,390 $61
3Q16 6.4 10.7 13.6 7.3 5.2 43.1 43.2% 63.7 1,443 $60
4Q16 6.0 7.9 11.4 10.0 4.7 40.1 40.7% 66.1 1,648 $63
1Q17 6.5 9.0 14.6 12.3 5.2 47.5 41.9% 80.0 1,684 $61
2Q17 6.4 9.9 14.7 8.3 5.5 44.8 39.9% 77.8 1,737 $62
3Q17 5.8 9.4 11.3 7.7 4.9 39.1 39.6% 74.2 1,898 $63
4Q17 6.2 8.9 10.3 9.6 4.3 39.3 40.8% 81.2 2,066 $63
1Q18 6.1 9.5 11.4 10.3 4.9 42.2 40.5% 87.4 2,071  $61
2Q18 6.8 10.2 10.9 8.6 5.8 42.3 NA 95.3 2,253 $63

Source: Western Digital: Fiscal 2Q18 Financial Results