10-QPeriod: Q1 FY2023

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 30, 2022

Filed November 2, 2022For Securities:WDC

Summary

Western Digital Corporation (WDC) reported a significant decline in revenue and net income for the quarter ended September 30, 2022, compared to the prior year. Revenue fell by 26% year-over-year to $3.74 billion, primarily due to a substantial decrease in average selling prices and lower shipment volumes in both the Flash and HDD segments. This resulted in a sharp drop in net income to $27 million from $610 million in the prior year quarter, with diluted EPS decreasing to $0.08. The company cited macroeconomic headwinds, including inflation and recession concerns, leading to softened demand and customers adjusting inventory levels, which negatively impacted pricing, particularly in Flash. Despite the challenging environment, WDC is actively exploring strategic alternatives, including potential separation of its Flash and HDD business units, and is engaged in resolving a significant historical tax matter with the IRS. The company maintains compliance with its leverage ratio financial covenant but is facing increased capital expenditure expectations for the upcoming year. Investors should closely monitor the impact of continued macroeconomic pressures on demand and pricing, the progress of the strategic review, and the resolution of the outstanding tax issues. The company's ability to manage inventory, control costs, and navigate pricing pressures will be critical for future performance.

Financial Highlights

50 data points
Beta

Revenue

$3.74B

26.3% Gross Margin

Net Income

$47.00M

1.3% Net Margin

EPS (Diluted)

$0.08

Total Assets

$25.69B

Cash & Equivalents

$2.05B

Free Cash Flow

-$314.00M

Financial Statements
Beta
Revenue$3.74B
Cost of Revenue$2.75B
Gross Profit$981.00M
SG&A Expenses$247.00M
Operating Expenses$823.00M
Operating Income$158.00M
Interest Expense$70.00M
Net Income$47.00M
EPS (Basic)$0.09
EPS (Diluted)$0.08
Shares Outstanding (Basic)316.00M
Shares Outstanding (Diluted)319.00M

Key Highlights

  • 1Revenue declined significantly by 26% year-over-year to $3.74 billion, driven by lower average selling prices and reduced shipment volumes in both Flash and HDD segments.
  • 2Net income plummeted to $27 million from $610 million in the prior year quarter, a decrease of 96%.
  • 3Diluted Earnings Per Share (EPS) fell to $0.08 from $1.93 year-over-year.
  • 4Gross margin decreased to 26.3% from 33.0% in the prior year quarter, reflecting lower average selling prices.
  • 5The company is actively reviewing strategic alternatives, including the potential separation of its Flash and HDD business units.
  • 6Macroeconomic factors such as inflation and recession concerns are negatively impacting demand and pricing, particularly in the Flash segment.
  • 7The company anticipates higher capital expenditures for the upcoming year, totaling $2.7 billion for the company and its share of Flash Ventures.

Frequently Asked Questions

The significant decrease in revenue was primarily driven by a 31% decline in Flash revenue and a 21% decline in HDD revenue. This was caused by lower average selling prices (ASPs) due to macroeconomic headwinds, inflation, recession concerns, and customers adjusting their inventory levels. These factors led to reduced demand and pricing pressure, particularly in the Flash segment, which in turn severely impacted net income.

Western Digital announced in June 2022 that it is reviewing potential strategic alternatives to optimize long-term value, including options for separating its Flash and HDD business units. This review process is overseen by the Board of Directors' Executive Committee and the company is actively working with financial advisors. As of the filing date, the process was ongoing.

The company noted that macroeconomic factors such as inflation, higher interest rates, and recession concerns have softened demand for its products. This has resulted in customers reducing purchases to manage inventories, leading to a supply-demand imbalance that negatively impacted pricing, especially in the Flash segment. The company expects this to result in reduced shipments and increased absorption charges in HDD in future quarters.

As of September 30, 2022, Western Digital had $2.05 billion in cash and cash equivalents. The company reported a decrease in cash and cash equivalents by $278 million during the quarter, mainly due to operating activities generating minimal cash ($6 million) and significant investing activities. It has $2.25 billion available under its revolving credit facility. The company believes its cash on hand, cash generated from operations, and credit facilities will be sufficient to meet its obligations for at least the next twelve months, including an expected payment for a tentative IRS tax settlement.