Western Digital (WDC 43.77, -10.24, -18.96%), a data storage company and a large
manufacturer of hard disk drives (HDDs), is trading sharply lower after
reporting 1Q19 (Sep) earnings last night and providing guidance for 2Q19 (Dec)
on the call.
The SepQ results were not bad as non-GAAP EPS fell 15% yr/yr to $3.04, but that was in-line with prior guidance of $3.00-3.10. Revenue fell 3.0% yr/yr to $5.03 bln, which was below prior guidance of $5.10-5.20 bln. WDC said that SepQ results reflected strength in capacity enterprise, surveillance hard drives and embedded flash solutions, with each growing revenue over 30%. However, strength in these end markets was offset by ongoing declines in flash pricing.
The guidance on the call for DecQ was very weak. WDC expects non-GAAP EPS of just $1.45-1.65 and revenue of $4.20-4.40 bln. Both numbers are well below market expectations and the EPS guidance was particularly weak. So what's going on? The main issue is that flash pricing has fallen more quickly than WDC had been expecting.
As for why this is happening, WDC cited trade tensions with China, changes in monetary policy, foreign exchange volatility and the corresponding economic impacts. This is causing WDC's customers to be more conservative resulting in a demand slowdown for its products. This softening demand, in combination with increased flash supply, has led to a deteriorating near-term flash pricing environment.
In response to these conditions, WDC is making an immediate reduction to wafer starts and delaying deployment of capital equipment. These actions will reduce its wafer output beginning in Q3 (Mar). The goal of these actions is to better align output with the projected global demand for flash. The duration of the planned output reduction will depend upon market conditions and will not impact WDC's ability to meet customer commitments. The magnitude of these actions is a reduction of 10-15% of WDC's planned bit output in calendar year 2019. With these adjustments to supply, WDC expects its bit growth in calendar 2019 to be in line with its view of end market demand growth: 36-38%.
Beyond the flash supply dynamic, other challenges include: WDC expects to be negatively impacted by the widely publicized CPU shortage. Industry analysts have estimated the PC unit growth will be constrained between 5% to 10% for the current quarter with the situation potentially lingering into early calendar year 2019. Also, WDC is seeing a temporary slowdown in Data Center capital spending, particularly by large cloud service providers after several quarters of growth above the expected long-term exabyte growth rate of 40% for capacity enterprise. WDC is in the midst of adjusting to a more normal growth rate.
WDC is facing some tough market conditions right now, especially in its flash NAND market as prices are falling faster than expected. WDC said on its JunQ call in July that perhaps investors were overreacting to the flash market and WDC would be buying back stock. It turns out investors were right to be worried.
With the stock under $50, WDC will likely boost its share buyback activity. Seagate (STX) is WDC's closest competitor. That stock is down today (-8%) as well. They report next week (Friday Nov 2 before the open) so investors are likely to be cautious there also. Other stocks to watch include SGH, XLNX, MU.
- OUR VIEW
- LEARNING CENTER