10-QPeriod: Q3 FY2016

WESTERN DIGITAL CORP Quarterly Report for Q3 Ended Apr 1, 2016

Filed May 9, 2016For Securities:WDC

Summary

Western Digital Corporation (WDC) reported net revenue of $2.8 billion for the third quarter ended April 1, 2016, a significant decrease of 21% compared to the same period last year, primarily driven by a softer demand environment and a 21% decrease in Hard Disk Drive (HDD) unit shipments. This decline in revenue and shipments led to a reduced gross margin of 26.7% and a substantial drop in operating income to $88 million from $421 million in the prior year quarter. The company ended the quarter with a strong cash position of $5.9 billion. A major strategic development during this period was the ongoing process for the planned merger with SanDisk Corporation, announced in October 2015. While the company is facing revenue challenges in its core HDD business, the strategic rationale for the SanDisk merger, focusing on NAND flash technology and vertical integration, remains a key forward-looking event for investors to monitor. The company also initiated a restructuring plan associated with integrating its HGST and WD subsidiaries, expecting significant cost savings but also incurring substantial pre-tax charges.

Key Highlights

  • 1Net revenue declined 21% year-over-year to $2.8 billion, attributed to a softer demand environment and reduced HDD shipments.
  • 2Hard Disk Drive (HDD) unit shipments decreased by 21% to 43.1 million units compared to the prior year.
  • 3Gross margin contracted to 26.7% from 29.1% in the prior year quarter, impacted by product mix and lower sales volume.
  • 4Operating income significantly decreased to $88 million from $421 million year-over-year.
  • 5The company maintained a strong liquidity position with $5.9 billion in cash and cash equivalents.
  • 6A planned merger with SanDisk Corporation was in progress, aimed at enhancing non-volatile memory expertise and vertical integration into NAND.
  • 7Western Digital initiated a restructuring plan to integrate HGST and WD subsidiaries, anticipating significant cost savings but also incurring substantial charges.

Frequently Asked Questions

The primary driver for the revenue decline was a softer demand environment in the hard disk drive (HDD) market, leading to a 21% decrease in HDD unit shipments and a 21% year-over-year drop in net revenue.

The merger with SanDisk was a significant ongoing event. The company had obtained necessary shareholder approvals and regulatory clearances in several jurisdictions. The merger was intended to deepen expertise in non-volatile memory and enable vertical integration into NAND technology. Financing for the merger involved substantial new debt facilities.

Western Digital initiated a restructuring plan to integrate its HGST and WD subsidiaries. This plan involves asset and footprint reduction, product roadmap consolidation, and organization rationalization, with an expectation of significant cost savings by the end of calendar year 2017. This initiative is expected to incur substantial pre-tax charges.

Profitability metrics saw a significant decrease. Gross margin declined to 26.7% from 29.1%, and operating income fell sharply to $88 million from $421 million in the prior year quarter. Net income also decreased substantially to $74 million from $384 million.