10-QPeriod: Q1 FY2024

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 29, 2023

Filed November 7, 2023For Securities:WDC

Summary

Western Digital Corporation (WDC) reported a significant decline in revenue for the quarter ended September 28, 2023, with a net revenue of $2.75 billion, a decrease of 26% compared to $3.74 billion in the prior year's quarter. This decline is attributed to macroeconomic pressures, including inflation and higher interest rates, leading to reduced demand and pricing, particularly in the Flash segment. The company reported an operating loss of $596 million and a net loss of $685 million. Despite revenue challenges, the company announced a strategic plan to separate its HDD and Flash business units into two independent companies, targeting completion in the second half of calendar year 2024. This separation aims to unlock each business's potential and operate with distinct capital structures. Financially, the company drew $600 million on its Delayed Draw Term Loan and issued $1.6 billion in convertible senior notes to manage its debt obligations and repurchase existing notes. WDC also completed a sale-leaseback of its Milpitas, California facility, generating $191 million in proceeds and an $85 million gain. The company highlighted $183 million in remaining tax liabilities related to IRS settlements, expected to be paid within the next twelve months. Management believes current liquidity and available credit facilities are sufficient to meet obligations during the market downturn.

Financial Highlights

50 data points
Beta

Revenue

$1.19B

20.4% Gross Margin

Net Income

-$685.00M

-57.4% Net Margin

EPS (Diluted)

$-2.17

Total Assets

$24.00B

Cash & Equivalents

$2.03B

Free Cash Flow

-$750.00M

Financial Statements
Beta
Revenue$1.19B
Cost of Revenue$2.65B
Gross Profit$244.00M
SG&A Expenses$207.00M
Operating Expenses$695.00M
Operating Income-$596.00M
Interest Expense$98.00M
Net Income-$685.00M
EPS (Basic)$-2.17
EPS (Diluted)$-2.17
Shares Outstanding (Basic)323.00M
Shares Outstanding (Diluted)323.00M

Key Highlights

  • 1Revenue decreased by 26% year-over-year to $2.75 billion, driven by declining average selling prices and lower shipments, particularly in the HDD segment.
  • 2The company reported a significant operating loss of $596 million and a net loss of $685 million, a sharp contrast to the prior year's modest profit.
  • 3Western Digital announced a plan to separate its HDD and Flash business units into two independent public companies, targeting completion in the second half of 2024.
  • 4Gross profit margin significantly compressed from 26.3% to 3.6%, impacted by lower pricing, manufacturing underutilization charges, and inventory write-downs.
  • 5The company drew $600 million from its Delayed Draw Term Loan and issued $1.6 billion in convertible senior notes, while also repurchasing existing convertible notes.
  • 6A gain of $85 million was recognized from the sale-leaseback of the Milpitas, California facility.
  • 7Remaining tax liabilities related to IRS settlements stand at $183 million, with payment expected within the next twelve months.

Frequently Asked Questions

The primary drivers for the decline in revenue and profitability were macroeconomic pressures, including inflation and higher interest rates, which have softened demand for storage products. This has led to a supply-demand imbalance, reduced shipments, and, consequently, lower average selling prices, especially in the Flash segment. Additionally, the company incurred charges for manufacturing underutilization and asset impairments, further impacting profitability.

The separation is intended to create two independent, publicly traded companies, each focused on its respective technology and market. Western Digital believes this will allow each business to better execute its growth strategies, operate more efficiently with distinct capital structures, and unlock its full standalone long-term potential. The target completion date is the second half of calendar year 2024, subject to board approval and other customary conditions.

The company has taken steps to manage its financial position, including drawing $600 million on its Delayed Draw Term Loan and issuing $1.6 billion in new convertible senior notes. These actions, along with a sale-leaseback transaction that generated $191 million in proceeds, are intended to provide liquidity, manage debt obligations, and cover tax liabilities. Management believes its current cash, credit facilities, and financing activities are sufficient to meet its needs for the foreseeable future.

Western Digital has reached a final agreement with the IRS for tax years 2008-2012 and tentatively resolved proposed adjustments for 2013-2015. The company made significant payments during the quarter and has a remaining liability of $183 million related to these settlements, which is expected to be paid within the next twelve months. The company also anticipates realizing tax savings in future years from these settlements.