Factors to Note Ahead of Western Digital's (WDC) Q1 Earnings

Zacks Equity Research
·6-min read

Western Digital WDC is scheduled to report first-quarter fiscal 2021 results on Oct 28.

For first-quarter fiscal 2021, The company projects non-GAAP earnings between 45 cents and 65 cents per share. The consensus mark for earnings is pegged at 54 cents per share that suggests an improvement of 58.8% from the year-ago quarter’s reported figure. Notably, the estimates have been stable in the past 30 days.

Western Digital expects revenues in the range of $3.7-$3.9 billion in the fiscal first quarter. The Zacks Consensus Estimate for revenues is currently pegged at $3.83 billion that indicates a decline of 5.1% from the year-ago quarter’s reported figure.

In fourth-quarter conference call, management noted that it expects relaxing of shelter-in-place guidelines and increase in curbside pickup facilities to facilitate improvement in demand at the brick and mortar locations.

Western Digital Corporation Price and EPS Surprise

 

Western Digital Corporation Price and EPS Surprise
Western Digital Corporation Price and EPS Surprise

Western Digital Corporation price-eps-surprise | Western Digital Corporation Quote

 

However, management stated that it expects to face disruptions in supply chain owing to coronavirus crisis. Also, production at manufacturing facilities might be negatively impacted due to the pandemic.

Notably, the company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, while missing the same once. It has a trailing four-quarter earnings surprise of 7.39%, on average.

Let’s see how things have shaped up prior to this announcement.

Factors Likely to Have Influenced Q1

Increasing PC shipments triggered by coronavirus crisis induced work-from-home wave and online schooling wave is likely to have benefited Western Digital’s fiscal first-quarter performance. Per Gartner’s preliminary data, PC shipments in third-quarter of calendar 2020 improved 3.6% year over year to 71.4 million units.

Rising PC shipments might have driven sales of the company’s solid state drives (SSDs) on improving demand from notebooks and video game consoles. Also, incremental adoption of latest high-capacity hard disk drives (HDDs) products with robust storage capabilities is likely to have had positively impacted Client Devices’ segment’s fiscal first-quarter performance.

Notably, the Zacks Consensus Estimate for Client Devices revenues for the fiscal first quarter is currently pegged at $1.697 billion, which suggests growth of 5% from the year-ago quarter’s reported figure.

Cloud and hyperscale customers have been witnessing solid demand driven by surge in data consumption as people are increasingly working and studying from home due to the ongoing coronavirus pandemic.

This has led to a spike in bandwidth and latency issues, which created the need for efficient storage infrastructure at the edge. This, in turn, is anticipated to have bolstered demand for Western Digital data center solutions’ portfolio, which bodes well for fiscal first quarter top line. This includes products like NVMe SSDs, Ultrastar DC SN340 and Ultrastar DC SN640.

Additionally, growing demand for the company’s high capacity drives and 16 and 18-terabyte energy assisted drives is anticipated to have benefited the to-be-reported quarter’s performance.

However, weakness in capacity enterprise HDD sales is estimated to have negatively impacted the top-line growth. Further, HDD business is expected to stay under pressured due to ongoing transition to SSDs. The Zacks Consensus Estimate for HDD revenues for the fiscal first quarter is pegged at $1.801 billion that implies a decline of 25.2% on a year-over-year basis.

Also, coronavirus induced weakness across small and medium businesses is likely to have limited growth. Also, higher expenditure on product innovation, amid stiff competition from Seagate STX, is likely to have exerted pressure on margins during the quarter under review.

The consensus for revenues from Data Center Devices Solutions stands at $1.359 billion that indicates a decline of 11.3% from the year-ago quarter’s reported figure.

Furthermore, the Zacks Consensus Estimate for Client Solutions revenues for the to-be-reported quarter is currently pegged at $758 million, which suggests deterioration of 15% from the prior-year quarter’s reported figure.

Markedly, incremental adoption of latest flash solutions ahead of the upcoming launches of Xbox Series X and PlayStation 5 gaming consoles over the holiday season is expected to have contributed to the Flash revenue numbers. Also, continued momentum in demand for Enterprise SSDs is expected to have contributed to top-line growth for Flash portfolio in the to-be-reported quarter.

The Zacks Consensus estimate for Flash revenues for the fiscal first quarter stands at $2.049 billion, representing an improvement of 25.6% over the prior year quarter figure.

Key Developments in Q1

In the fiscal first quarter of 2021, Western Digital expanded its HDD technology capabilities for data center solutions. The company’s WD Gold offerings featured 16TB and 18TB CMR HDD capacities. It also launched Ultrastar JBOD platforms as well as a new Ultrastar hybrid storage server featuring Ultrastar 16TB and 18TB CMR HDDs.

The company rolled out next-generation WD brand My Passport SSD, and added two new portable SSDs pertaining to its SanDisk portfolio –– SanDisk Extreme and SanDisk Extreme PRO.

It also introduced two new storage solutions — 18TB surveillance HDD and 1 TB SC QD101 microSD card — under its WD Purple storage solutions banner.

The company also announced splitting of its flash and HDD business in two separate segments as a part of its diversification strategy to streamline operations and unlock shareholders’ value. Management is anticipated to divulge more details on the split in the upcoming earnings conference.

What the Zacks Model Unveils

Our proven model doesn’t conclusively predict an earnings beat for Western Digital this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here.

Western Digital has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold), which makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some stocks you may consider as our proven model shows that these have the right mix of elements to beat estimates this time:

Avnet AVT has an Earnings ESP of +39.13% and currently sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Activision Blizzard ATVI currently has an Earnings ESP of +3.29% and a Zacks Rank of 2.

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