10-QPeriod: Q3 FY2021

WESTERN DIGITAL CORP Quarterly Report for Q2 Ended Jan 1, 2021

Filed February 9, 2021For Securities:WDC

Summary

Western Digital Corporation (WDC) reported a net income of $62 million for the three months ended January 1, 2021, a significant improvement from a net loss of $139 million in the prior year's comparable quarter. This turnaround was driven by a 7% decrease in revenue to $3,943 million, but a more substantial 10% decrease in the cost of revenue, leading to a 3% increase in gross margin to 24.3%. The company experienced strong growth in its Client Devices segment, up 19%, attributed to increased demand for consumer electronics amid work-from-home trends. However, the Data Center Devices and Solutions segment saw a substantial 46% decline, influenced by ongoing cloud digestion and China shipment restrictions. The company maintained compliance with its financial covenants and ended the period with $2,956 million in cash and cash equivalents.

Financial Highlights

56 data points
Beta

Revenue

$4.14B

26.4% Gross Margin

Net Income

$197.00M

4.8% Net Margin

EPS (Diluted)

$0.63

Total Assets

$25.41B

Cash & Equivalents

$2.73B

Free Cash Flow

-$128.00M

Financial Statements
Beta
Revenue$4.14B
Cost of Revenue$3.05B
Gross Profit$1.09B
SG&A Expenses$287.00M
Operating Expenses$774.00M
Operating Income$317.00M
Interest Expense$81.00M
Net Income$197.00M
EPS (Basic)$0.64
EPS (Diluted)$0.63
Shares Outstanding (Basic)306.00M
Shares Outstanding (Diluted)313.00M

Key Highlights

  • 1Reported a net income of $62 million for the quarter, compared to a net loss of $139 million in the prior year's comparable quarter.
  • 2Revenue decreased by 7% to $3,943 million, primarily due to lower pricing per gigabyte and reduced HDD exabyte volume in Data Center segments.
  • 3Gross profit increased by $25 million, and gross margin improved by approximately 3 percentage points to 24.3%, aided by lower cost of revenue and insurance recovery related to a past power outage incident.
  • 4Client Devices revenue saw strong growth of 19%, driven by increased demand for flash-based SSDs for PC applications due to remote work and learning trends.
  • 5Data Center Devices and Solutions revenue declined significantly by 46%, attributed to cloud storage digestion and shipment restrictions in China.
  • 6Operating expenses decreased by 9% due to lower R&D and SG&A costs, partly influenced by COVID-19 related travel restrictions and event cancellations.
  • 7Maintained compliance with financial covenants and ended the period with $2,956 million in cash and cash equivalents, down from $3,048 million at the start of the fiscal year.

Frequently Asked Questions

The net income improvement was primarily driven by a more significant reduction in the cost of revenue (down 10%) compared to the decrease in net revenue (down 7%). This led to improved gross profit and margins. Additionally, operating expenses were lower year-over-year due to cost-saving measures and reduced activity related to the COVID-19 pandemic. Favorable insurance recoveries related to a past power outage incident also contributed positively.

The company noted that 'cloud digestion is abating' and they are 'seeing stabilization of OEM demand'. They anticipate that revenue for capacity enterprise hard drives may have bottomed in the second quarter and expect a rebound in the third quarter. For enterprise SSDs, they began shipping a second-generation product to a major cloud customer in the third quarter.

No, the company suspended its quarterly cash dividend in April 2020. They plan to reevaluate the dividend policy as their leverage ratio improves. During the reported period, there were no dividends paid to shareholders.

Flash Ventures operates flash-based memory wafer manufacturing facilities in Japan. The company has significant financial obligations related to these ventures, including funding capital investments and paying for wafer supply. While the company is transitioning to a new two-business-unit structure (flash and HDD), Flash Ventures remains a key part of their flash-based product operations. The company recovered $75 million from insurance related to a 2019 power outage incident at Flash Ventures' facility. They also committed to prepay $360 million over three years for a new fabrication facility (K1) and expect to invest in a new facility (Y7) in due course.