Western Digital (WDC 43.61, +3.47, +8.64%), a data storage company and a large
manufacturer of hard disk drives (HDDs), is trading higher after reporting 2Q19 (Dec) earnings last night
and providing guidance for 3Q19 (Mar) on the call.
Non-GAAP EPS for DecQ fell 63% yr/yr to $1.45, at the low end of prior guidance of $1.45-1.65. Revenue fell 20.7% yr/yr to $4.23 bln, also at the lower end of prior guidance of $4.20-4.40 bln. On the call, WDC said it expects MarQ non-GAAP EPS to come in around $0.40-0.60 with revenue of $3.6-3.8 bln. Both guidance results are below expectations and the EPS was quite a bit below market expectations.
Revenue came in at the lower end of the guidance range, primarily due to a decline in flash, offsetting slightly better-than-anticipated hard drive revenue. Flash revenue was $2.2 bln, with a sequential bit growth of 5% and a sequential average selling price per gigabyte decline of 18%. Hard drive revenue was $2 bln. The lion's share of the decline is flash-related as opposed to HDD-related.
Also, margins are a key metric for WDC. Non-GAAP gross margin in the quarter was 31.3%, below the 32-33% guidance range due to a product mix for hard drives that included less capacity enterprise products and lower-than-expected flash pricing.
On the call, WDC said overall demand trends exhibited a negative bias as the quarter progressed. Subsequent commentaries from several companies in its served markets have highlighted continued demand weakness. Geopolitical and macroeconomic conditions have contributed to customers having a more cautious outlook. Additionally, flash industry dynamics remain challenging. That's why the MarQ guidance was significantly weaker than it would otherwise be, given normal seasonality.
The good news is that WDC is taking steps in response to current business conditions. First, and WDC should be commended for this, management has been upfront and transparent about the weak demand conditions. Second, from a product perspective, WDC is entering calendar 2019 with what it sees as the strongest product portfolio in its history.
Third, WDC is taking steps to lower factory production levels to be more in-line with demand. In flash, WDC is working on previously announced changes to its wafer output levels to reduce bit supply growth for calendar 2019. WDC is also reducing capital investment growth in flash in order to align its bit output with market demand. Additionally, WDC has accelerated the closure of its Kuala Lumpur hard drive manufacturing facility by almost three-quarters. And finally, WDC is implementing substantial cost and expense reductions across the company.In total, WDC is targeting $800 mln in annualized reductions in non-GAAP cost and expenses.
In sum, WDC is definitely going through tough times in the flash market. However, the company remains positive on its longer-term outlook as transformative trends such as artificial intelligence, machine learning, autonomous vehicles, mobility, and IoT will continue to drive massive amounts of data that needs to be captured and preserved.
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