Western Digital Corporation (NASDAQ:WDC) Surprises With Q1 Sales But Quarterly Guidance Underwhelms

Kayode Omotosho /
2022/10/27 8:12 am EDT

Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported Q1 FY2023 results topping analyst expectations, with revenue down 26% year on year to $3.73 billion. However, guidance for the next quarter was less impressive, coming in at $3 billion at the midpoint, being 14.2% below analyst estimates. Western Digital made a GAAP profit of $27 million, down on its profit of $610 million, in the same quarter last year.

Is now the time to buy Western Digital Corporation? Access our full analysis of the earnings results here, it's free.

Western Digital (WDC) Q1 FY2023 Highlights:

  • Revenue: $3.73 billion vs analyst estimates of $3.61 billion (3.41% beat)
  • EPS (non-GAAP): $0.20 vs analyst expectations of $0.39 (48.9% miss)
  • Revenue guidance for Q2 2023 is $3 billion at the midpoint, below analyst estimates of $3.49 billion
  • Free cash flow was negative $215 million, compared to negative free cash flow of $97 million in previous quarter
  • Inventory Days Outstanding: 128, up from 107 previous quarter
  • Gross Margin (GAAP): 26.2%, down from 32.9% same quarter last year

“I am pleased to see the Western Digital team work together to deliver revenue at the upper half of the guidance range and operating income at the upper half as implied by the midpoints of our guidance, in the midst of an incredibly dynamic and challenging macroeconomic environment,” 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.

The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.

Sales Growth

Western Digital Corporation's revenue growth over the last three years has been unimpressive, averaging 4.91% annually. Last year the quarterly revenue declined from $5.05 billion to $3.73 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

Despite Western Digital's revenues beating analyst estimates, this was still a slow quarter with a 26.1% revenue decline.

The company is guiding to a 38% year on year decline next quarter, while analysts are estimating a NTM revenue decline of 13.2%.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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 128, 32 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 Q1 Results

Sporting a market capitalization of $11.2 billion, more than $2.04 billion in cash and with positive free cash flow over the last twelve months, we're confident that Western Digital has the resources it needs to pursue a high growth business strategy.

It was good to see Western Digital outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the increase in inventory and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 2.23% on the results and currently trades at $34.5 per share.

Western Digital Corporation may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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