Western Digital Corporation (WDC) reported third quarter fiscal 2011 earnings per share (EPS) of 66 cents, which exceeded the Zacks Consensus Estimate of 65 cents. Revenues of $2.25 billion also bettered the Zacks Consensus Estimate of $2.24 billion.
Revenues
Third quarter fiscal 2011 revenue of $2.25 billion declined 14.8% year over year and 9.0% sequentially. The downfall was due to a $6.0 year over year and $2.0 sequential decline in average hard drive selling price, to $45 per unit. Moreover, total Hard Disc Drive (HDD) units shipped during the third quarter were 50.0 million, down from 51.0 million in the year-ago period.
Revenue from sales of the company’s flagship products, including WD TV and WD LiveWire products was down 6.0% from the year-ago quarter and 19.0% from the prior quarter.
In the airline enterprise market, the company sold 5.6 million units, up from 5.2 million units sold in the year-ago period and 5.4 million units in the previous quarter. This increase can be attributed to the expansion of cloud computing, which is expected to see further upside. The traditional enterprise market increased to 8.3 million units from 7.4 million units in the year-ago quarter, but remained flat on a sequential basis. This reflected continued strength in the commercial market.
Operating Results
The company’s third quarter gross margin was 18.2%, down from 25.2% in the prior-year quarter, and 19.2% in the prior quarter. The company reported a 100 basis point sequential decline in gross margin resulting from a seasonal decline in its branded products business and some costs associated with the under utilization of its manufacturing assets.
Consolidated research and development (R&D) as well as selling, general and administrative (SG&A) spending stood at $252.0 million, or 11.2% of revenues in the third quarter. This compares with $224.0 million or 8.5% of revenues during the year-ago quarter. As a result, operating income came in at $158.0 million or 7.0% of revenues in the third quarter compared to $319.0 million or 16.7% of revenues in the year-ago quarter.
Net income decreased to $146.0 million, or 62 cents per share, compared to $400.0 million, or $1.71 in the year-ago quarter and $265.0 million, or $1.13 in the previous quarter. Excluding the impact of stock-based compensation, the adjusted net income for the quarter was $156.0 million or 66 cents per share, compared to $400.0 million or $1.71 per share in the year-ago quarter.
Cash Position
The company generated $390.0 million of cash from operations in the quarter, down from $505.0 million in the previous quarter. Cash and cash equivalents were $3.20 billion, down from $3.08 billion reported in the previous quarter. Capital expenditures were $175.0 million, while depreciation and amortization totaled $151.0 million. The company made $25.0 million of debt repayment during the third quarter, thereby reducing the debt balance to $325.0 million.
Guidance
For the fourth quarter of fiscal 2011, the company expects revenues in the range of $2.20 billion to $2.25 billion, total R&D and SG&A expense of approximately $245.0 million, a tax rate between 6.0% and 9.0%, and non-GAAP EPS of 60 to 65 cents.
Our Take
Western Digital’s third quarter 2011 results exceeded our expectations although sales and net profit declined on a year-over-year basis. The company is trying to lower its interest expense by reducing its debt burden. Although Western Digital is cash rich, its cash generation ability suffered because of the difficult pricing environment.
Moreover, the company recently disclosed its intention to acquire Hitachi Global Storage Technologies (HIT), which should strengthen its grip on the data storage business. However, while we are encouraged by the company’s recent performance, intense competition in the hard disk manufacturing space and within its distribution channel remains a concern.
Currently, Western Digital has a Zacks #3 Rank, implying a short-term Hold rating.
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