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Western Digital Corp (NASDAQ: WDC) announced its second-quarter fiscal 2016 financial results after the market closed on Thursday. -
The data storage solutions company reported earnings of $1.60 per share, $0.07 above the Street’s consensus, on revenue of $3.317 billion, slightly below estimates of $3.358 billion.
Strong Results, Weak Guide
Analysts were mostly pleased with the results, but guidance for HDD TAM of 100 million units seemed a little light. However, the conservatism “was not entirely unexpected following Nidec’s 100M commentary,” Needham analysts stated. In fact, the feebleness was already being factored into forecasts, Stifel added.
Having said this, management stated they expect the current quarter to be the bottom. Going forward, they anticipate a sequential increase in the HDD segment, driven, among other things, by higher data center capacity demand.
Related Link: Why Is SanDisk Trading So Far Off Its Western Digital Merger Price?
Despite the faint TAM, “secular trend of data growth and drives capacity increase continue to manifest as WDC’s overall Dec Q Exabyte shipped growth of 69 EB was 9 percent higher sequentially and 4 percent higher on a Y/Y basis, while average capacity of drives expanded 27 percent Y/Y from 1.1 TB to 1.4TB,” analysts at Brean Capital explained.
The Hitachi Integration
The savings from the Hitachi integration were larger than expected. This helped offset much of the TAM weakness in the company’s model.
Western Digital’s management said they believe they can trim COGS by $250 million and Opex by $400. They expect to realize about 50 percent of all savings by the end of the year, and the rest by the end of 2017. “The company expects to incur cash restructuring charges of ~$800 million, 75 percent of which will hit by the end of CY’16,” a JP Morgan report explained.
Analysts at Stifel added that investors will likely “continue to gauge conservatism in the timing these synergies could materialize – WD has a strong track record of effectively managing their variable cost structure.”
The SanDisk Deal
The SanDisk Corporation (NASDAQ: SNDK) deal is going as planned, analysts explicated. However, Unis are “still a wildcard (but a separate matter vs. SanDisk),” Needham added.
The SSD Growth
According to JPMorgan analysts, the SSD growth seen in the quarter (44 percent year-over-year) is “unsustainable.” Management also acknowledged that SSD revenue will probably soften in the current quarter.
The Bottom Line
As per Needham analysts, Western Digital’s stock is a Strong Buy. The resilience and cash generation capabilities of its HDD business and the recent decline seen in the stock provide investors with plenty of upside potential, they assured, setting a $90.00 price target for the shares.