Western Digital (WDC -11%) is experiencing a decline today despite reporting a significant EPS upside for Q4 (Jun) last night. Revenue surged 40.9% year-over-year to $3.76 billion, which was in line with expectations. However, the main issue seems to be the Q1 (Sep) guidance, as the mid-point of EPS guidance fell below analyst expectations. Additionally, the revenue guidance of $4.00-4.20 billion was also below expectations.
- WDC has announced it is separating its flash and HDD businesses, expecting to complete this by the end of 2024. The company will begin to incur separation dis-synergy costs in the second half of the calendar year.
- The AI Data Cycle is driving new demand for storage, increasing the need for both flash and HDD. AI systems require substantial data storage to process, analyze, and generate new data, necessitating high-capacity and high-performance storage systems. WDC believes this will be a significant growth driver for the storage industry.
- In the flash segment, growth was fueled by a recovery in cloud services and a shift in client mix to gaming and mobile, partially offset by a decline in consumer demand. WDC proactively adjusted its product mix to respond to market softness, aiming to allocate resources most profitably.
- For the HDD segment, revenue growth was driven by strong nearline demand and improved pricing. WDC surpassed its target gross margin range, highlighting its commitment to profitability. The HDD business has seen a remarkable transformation, increasing profitability through restructuring its manufacturing footprint and optimizing its cost structure.
Overall, the negative market reaction is somewhat surprising. While the guidance was disappointing following the previous quarter's upside, the company appears to be focusing on more profitable sales, and HDD margins were strong. The upcoming separation of its flash and HDD units might cause some disruptions, which WDC may have factored into its guidance. The company expects separation dis-synergy costs in SepQ and DecQ.
Additionally, the stock had already declined from around $80 in early July to $67 at yesterday's close. Investors might also be disappointed that WDC did not match the better guidance reported by its peer Seagate (STX, Financial) last week.
