STX Seagate Technology Holdings PLC

Western Digital Corp. (WDC) is scheduled to announce its first quarter 2013 results after the close of trading on October 22, 2012. In the run up to the earnings release, we witness some revisions in analysts’ estimates.

Fourth Quarter Overview

The company reported fourth quarter 2012 earnings per share (EPS) of $3.35, comprehensively beating the Zacks Consensus Estimate of $2.46.

Revenues during the quarter increased 97.8% year over year to $4.75 billion. Hard drive shipments were 157 million units during the quarter, thus bringing the total shipments for the year to 599 million units, aided by higher demand.

Gross margin in the reported quarter was 30.9% versus 19.5% in the year-ago quarter. Gross margin exceeded the company’s estimate on the back of lower-than-expected price declines and better-than-expected shipments.

Management Expectation

Considering the ongoing muted PC demand, the company was compelled to cut its sales and total available market (TAM) forecast for fiscal first quarter.

Currently, the company expects revenues to be in the range of $3.9 billion to $4.0 billion, which is substantially down from the previous revenue estimate of $4.2 billion to $4.3 billion.

Agreement of Analysts

Analysts are positive about the expected production ramp up, market share gains and an improved mix from the addition of products from Hitachi’s Global Storage Technology business.

Moreover, analysts are quite optimistic about the strategy adopted by the  company and is focused on three main areas -- public/private clouds (around 44% market share), mobile client (around 47% market share) and personal cloud (around 45% market share).

Moreover, the company will be introducing more high capacity offerings for the cloud, which includes the new 7 platter helium drive as well as the SAS enterprise SSDs along with the yet-to-be-announced PCIe.

Moreover, Western Digital is also coming up with a host of hardware and software solutions, which are particularly designed to make storage easier and more readily available. The analysts are optimistic about these products and believe that they will find many takers. On the other hand, the downward movement in PC demand may affect the business of the company negatively.

Therefore, out of the 19 estimates for the first quarter, 3 moved downward and none went up over the last thirty days. Out of the 20 estimates for fiscal 2013, 2 estimates moved down and one estimate moved up over the last thirty days. Again for fiscal 2014, 2 analysts made upward revision in last 30 days, while only 1 analyst made a downward revision.

Magnitude of Estimate Revisions

Over the past 90 days, the Zacks Consensus Estimates for the first quarter 2013 plunged 8 cents and for the last 30 days it moved down by 6 cents to $2.31. Again, for fiscal 2013, estimates over the last 90 days moved up by 85 cents, while over the last 30 days it moved down by 12 cents to $8.91. For fiscal 2014, estimates over the last 90 days moved up by $1.79, while the same over the last 30 days moved up by 1 cent.

Our Recommendation

We believe that the weakness in PC demand will have a significant impact on the overall market for hard disks. The company has also forecasted quarterly shipment to drop to 140 million units from 157 million guided previously. We expect improved mix from the addition of Hitachi’s Global Storage Technology business to have a positive impact on the gross margin.

Though we are concerned about some oversupply in the short run, but we believe that Western Digital’s growth prospects remain intact. The company’s decision to buy back additional shares worth $1.5 billion and launch new drives will act as catalysts.

The company’s international business and the overall demand for its products are gradually improving, owing to which, revenue is expected to improve going forward. Moreover a tough competition from Seagate Technologies (STX) may also have an impact on the demand of the company.

Currently, Western Digital has a Zacks #3 Rank, implying a short-term Hold rating.

 
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