Western Digital(NASDAQ:WDC) Reports Q2 Sales Numbers In Line With Estimates But Stock Drops 14.7% On Weak Guidance

Radek Strnad /
2022/01/27 4:11 pm EST

Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 22.5% year on year to $4.83 billion. However, management provided guidance for the next quarter with revenues at $4.55 billion at the midpoint, or 3.85% below analyst estimates. Western Digital Corporation made a GAAP profit of $564 million, improving on its profit of $62 million, in the same quarter last year.

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Western Digital Corporation (WDC) Q2 FY2022 Highlights:

  • Revenue: $4.83 billion vs analyst estimates of $4.81 billion (small beat)
  • EPS (non-GAAP): $2.30 vs analyst estimates of $2.12 (8.27% beat)
  • Revenue guidance for Q3 2022 is $4.55 billion at the midpoint, below analyst estimates of $4.73 billion
  • Free cash flow of $407 million, up 81.6% from previous quarter
  • Inventory Days Outstanding: 102, up from 95 previous quarter
  • Gross Margin (GAAP): 32.7%, up from 24.3% same quarter last year

“I’m proud of the Western Digital team for delivering another quarter of strong results that exceeded guidance, even in the midst of ongoing supply chain disruptions and COVID-related challenges,” said David Goeckeler, Western Digital CEO.

Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.

Sales Growth

Western Digital Corporation's revenue growth over the last three years has been slow, averaging 0.97% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $3.94 billion to $4.83 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Western Digital Corporation Total Revenue

This was a decent quarter for Western Digital Corporation as revenues grew 22.5%, topping analyst estimates by 0.35%. This marks 3 straight quarters of revenue growth, implying we are mid-cycle for Western Digital Corporation, as a typical upcycle tends to last 8-10 quarters.

Western Digital Corporation believes the growth is set to continue, and is guiding for revenue to grow 15.3% YoY next quarter, and Wall St analysts are estimating growth 6.85% over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Western Digital Corporation Inventory Days Outstanding

This quarter, Western Digital Corporation’s inventory days came in at 102, 14 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Western Digital Corporation's Q2 Results

With a market capitalization of $17 billion, more than $2.53 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the strong improvements in Western Digital Corporation’s gross margin this quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, this quarter's results were mixed. The market was likely expecting more and the company is down 14.7% on the results and currently trades at $45.85 per share.

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The author has no position in any of the stocks mentioned.