Western Digital (WDC) Down 26.7% Since Last Earnings Report: Can It Rebound?

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Zacks Equity Research

Fri, Feb 28, 2025, 9:30 AM 5 min read

Will the recent negative trend continue leading up to its next earnings release, or is Western Digital due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Western Digital Q2 Earnings Beat Estimates

Western Digital reported second-quarter fiscal 2025 non-GAAP earnings of $1.77 per share, surpassing the Zacks Consensus Estimate of $1.75. The company incurred a loss of 75 cents per share in the prior-year quarter. Management anticipated fiscal second-quarter non-GAAP earnings per share to be between $1.75 and $2.05.

Revenues of $4.29 billion beat the Zacks Consensus Estimate by 0.8%. The top line climbed 41% year over year owing to heightened demand across Cloud end markets. On a sequential basis, revenues increased 5%. For second-quarter fiscal 2025, the company expected non-GAAP revenues in the range of $4.2-$4.4 billion.

With the upcoming split of Western Digital and SanDisk into separate entities, it is well-positioned to capture the artificial intelligence (AI)-driven demand for storage and optimize its Flash business for long-term success. Management expects to witness continued strength in its HDD segment while strategically managing its Flash business. The company’s approach aligns with the New Era of NAND, where AI-driven demand is transforming the storage industry.

Quarter in Detail

Revenues from the Cloud end market (55% of total revenues) skyrocketed 119% year over year to $2,346 million, fueled by strong growth in both HDD and Flash. The cloud segment grew 6% sequentially, primarily due to increased nearline HDD shipments amid declining Flash sales.

Revenues from the Client end market (27%) were up 4% year over year to $1,168 million, powered by increasing flash average selling prices (ASPs) as bit shipments fall, offset by a dip in HDD revenues. Client revenues decreased 3% sequentially, owing to pricing pressure in Flash, despite bit shipment growth. HDD revenues remained flat.

Revenues from the Consumer end market (18%) were down 8% year over year to $771 million. The downtick was due to lower shipments in both Flash and HDD, along with pricing declines in Flash storage products. Revenues increased 14% on a sequential basis, driven by higher Flash and HDD bit shipments. However, pricing challenges persisted.

Considering revenues by product group, Flash revenues (43.8% of total revenues) rose 13% from the year-ago quarter figure to $1.9 billion. It remained flat sequentially. Strong performance in Client and Consumer segments led to higher-than-anticipated bit shipments amid pricing headwinds.

Hard disk drive (HDD) revenues (56.2% of total revenues) surged 76% year over year to $2.4 billion. Revenues were up 9% quarter over quarter. The uptick was driven by higher HDD exabyte shipments owing to healthy growth in the nearline portfolio.

Margins

Non-GAAP gross margin was 35.9% compared with 15.5% in the year-ago quarter.

HDD’s gross margin was 38.6%, up from 24.8% in the prior-year quarter. Flash gross margin came in at 32.5% compared with 7.9% in the prior-year quarter.

Non-GAAP operating expenses increased 20% year over year to $674 million. Non-GAAP operating income totaled $864 million against a non-GAAP operating loss of $91 million in the prior-year quarter.

Balance Sheet & Cash Flow

As of Dec. 27, 2024, cash and cash equivalents were $2.291 billion compared with $1.71 billion as of Sept. 27, 2024.

The long-term debt (including the current portion) was $7.366 billion as of Dec. 27.

Western Digital generated $403 million in cash from operations against $92 million of cash utilized in the prior-year quarter.

Free cash flow amounted to $335 million in the quarter under review against free cash outflow of $176 million reported in the prior-year quarter.

Fiscal Q3 Outlook

The company expects non-GAAP revenues in the range of $3.75-$3.95 billion.

Management projects non-GAAP earnings between 90 cents per share and $1.20.

It expects non-GAAP gross margin in the range of 31.5-33.5%. Non-GAAP operating expenses are expected to be between $700 million and $720 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -24.89% due to these changes.

VGM Scores

At this time, Western Digital has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Western Digital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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This article originally published on Zacks Investment Research (zacks.com).

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