Western Digital (WDC), a data storage company and a large manufacturer of hard disk drives (HDDs), is trading lower after reporting 3Q19 (Mar) earnings last night and providing guidance for 4Q19 (Jun) on the call.
Non-GAAP EPS for MarQ fell sharply yr/yr to just $0.17 from $3.63 in the prior year period. This was well below prior guidance of $0.40-0.60. Revenue fell 26.7% yr/yr to $3.67 bln, also toward the lower end of prior guidance of $3.60-3.80 bln. On the call, WDC said it expects JunQ non-GAAP EPS to come in around $0.10-0.30 with revenue of $3.6-3.8 bln. While the revenue guidance is in-line, the EPS guidance is well below market expectations.
WDC CEO, Steve Milligan, said that while "market conditions have generally been consistent with our expectations, and while the business environment remains soft, there are initial indications of improving trends." He also said, "Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged."
The CEO noted that "sales of hard drives were a bit stronger than expected. Higher demand for capacity enterprise products drove most of the upside and WDC saw a nice rebound at higher capacity points. We are experiencing a very smooth product ramp with our 14-terabyte product. In addition, we also realized a significant expansion of our presence in the mid-range."
Probably the highlight of the call was COO, Michael D. Cordano saying that "if current demand trends continue, we see an opportunity for the category to reach 30% yr/yr growth in exabytes for calendar year 2019. This updated industry forecast is a significant upward revision from our prior estimate that was in the low-20% range." He added, " Our 14-terabyte capacity enterprise drive qualification and adoption have been seamless and we are leading the industry in this transition. We are in the midst of a significant ramp of this product in the current quarter."
The flash side is where the problems have been. Milligan says, "demand for flash-based products was slightly better than expectations; however, prices declined more than anticipated."
WDC has been cutting back on its flash production, it has also been reducing wafer output. Cordano says, " we remain on track to achieve an overall reduction of 10-15% of our bit output in calendar 2019." Looking ahead, JunQ will be the first full quarter to see the benefit of WDC's reduction in wafer starts, which will help to further reduce its flash inventory levels.
In sum, WDC is definitely going through tough times in the flash market. While it sounds like demand is stabilizing, flash pricing keep falling. Reducing supply should help with that but it sounds like it's going to take some time for that flash market to stabilize. The good news is that WDC's hard drive business is helping to buoy the flash business. Finally, with such a huge EPS miss and downside EPS guidance, most stocks would be down more than WDC is getting hit. However, our sense is that there is so much negativity priced in with WDC, that's helping to keep the stock from trading even lower.