10-QPeriod: Q3 FY2020

WESTERN DIGITAL CORP Quarterly Report for Q3 Ended Apr 3, 2020

Filed May 8, 2020For Securities:WDC

Summary

Western Digital Corporation (WDC) reported its fiscal third-quarter and year-to-date results for the period ending April 3, 2020. The company demonstrated resilience in revenue, showing a notable increase in year-over-year revenue for the quarter, driven by growth in the Data Center Devices & Solutions segment, and a slight increase in the Client Devices segment. Despite a challenging macroeconomic environment, the company managed to improve its gross profit and margin significantly in the quarter compared to the prior year, benefiting from higher revenues and reduced manufacturing underutilization charges. However, the nine-month period showed a revenue decline and a net loss, influenced by lower average selling prices and the ongoing impact of strategic decisions and past charges. Financially, WDC's liquidity appears stable, with sufficient cash generated from operations and available credit facilities expected to cover working capital, debt, and capital expenditure needs for the next twelve months. The company continues to manage its debt effectively, with voluntary prepayments made on its Term Loan B-4. Notably, WDC has suspended its quarterly dividend to reinvest in the business and support deleveraging efforts, signaling a focus on financial strength and strategic reinvestment. The company also provided insights into its joint venture with Kioxia (Flash Ventures), highlighting ongoing investments and potential risks, as well as the ongoing impact of the COVID-19 pandemic, which has led to some operational adjustments but has also seen increased demand in certain segments.

Key Highlights

  • 1Revenue for the third quarter of fiscal year 2020 increased by 14% year-over-year to $4.175 billion, driven by strong performance in Data Center Devices & Solutions and Client Devices segments.
  • 2Gross profit significantly improved in the third quarter, increasing by 74% year-over-year to $1.005 billion, with gross margin expanding by 8 percentage points to 24.1%, largely due to increased revenue and reduced prior-year charges.
  • 3Despite a strong quarter, the nine-month year-to-date revenue decreased by 4% to $12.449 billion, resulting in a net loss of $398 million.
  • 4The company made voluntary prepayments of $725 million on its U.S. Term Loan B-4 during the nine-month period, demonstrating a focus on debt reduction.
  • 5Western Digital has suspended its quarterly cash dividend to reinvest in the business and support deleveraging efforts.
  • 6Cash and cash equivalents held outside the U.S. were $2.14 billion as of April 3, 2020.
  • 7The company continues to manage its joint venture with Kioxia (Flash Ventures), with significant ongoing investments and related commitments and guarantees noted.

Frequently Asked Questions

Western Digital's revenue for the third quarter of fiscal year 2020 increased by 14% year-over-year to $4.175 billion. This growth was primarily driven by higher volumes in both HDD and flash products, with notable strength in the Data Center Devices & Solutions segment (up 22% year-over-year) and the Client Devices segment (up 13% year-over-year).

The company generated $652 million in net cash from operating activities for the first nine months of fiscal year 2020. Management believes that its current cash, cash equivalents, and cash generated from operations, along with available credit facilities, will be sufficient to meet its working capital, debt, and capital expenditure needs for at least the next twelve months. The company has also been actively managing its debt with voluntary prepayments.

Western Digital has been operating as an essential business and has implemented measures to protect employees while continuing to serve customers. While the company experienced some reductions in sales in certain areas like retail due to COVID-19, it saw strong demand for capacity enterprise products in its Data Center segment. The company incurred approximately $13 million in cost of revenue related to under-absorbed overhead and higher logistics costs in the third quarter and expects higher COVID-19 related charges in the fourth quarter, partially offset by increased pricing.

Yes, Western Digital has suspended its quarterly cash dividend. This decision was made to reinvest capital in the business and to support ongoing deleveraging efforts. The company stated that it will reevaluate its dividend policy as its leverage ratio improves.