Leading data storage manufacturer Western Digital (NASDAQ: WDC) beat analysts' expectations in Q4 FY2023, with revenue down 41% year on year to $2.67 billion. However, next quarter's revenue guidance of $2.65 billion was less impressive, coming in 4.01% below analysts' estimates. Western Digital made a GAAP loss of $715 million, down from its profit of $301 million in the same quarter last year.
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Western Digital (WDC) Q4 FY2023 Highlights:
- Revenue: $2.67 billion vs analyst estimates of $2.52 billion (5.97% beat)
- EPS (non-GAAP): -$1.98 vs analyst estimates of -$2.02
- Revenue guidance for Q1 2024 is $2.65 billion at the midpoint, below analyst estimates of $2.76 billion
- Free cash flow was -$219 million compared to -$527 million in the previous quarter
- Inventory Days Outstanding: 130, down from 144 in the previous quarter
- Gross Margin (GAAP): 3.44%, down from 23.5% in the same quarter last year
“Throughout the fiscal fourth quarter and fiscal year, Western Digital continued to optimize our operations and successfully execute our innovative product roadmap, priming ourselves for greater profitability when demand rebounds across hard drives and flash. As a result of these efforts, we delivered revenue above our expectation and delivered a range of industry-leading products to our customers,” 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.
Western Digital's revenue has been declining over the last three years, dropping by 7.12% on average per year. This quarter, its revenue declined from $4.53 billion in the same quarter last year to $2.67 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).
Even though Western Digital surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 41% year on year. This could mean that the current downcycle is deepening.
Western Digital's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 29.1% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Consensus estimates call for 5.73% growth over the next 12 months.
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Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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.
This quarter, Western Digital's DIO came in at 130, which is 26 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Key Takeaways from Western Digital's Q4 ResultsAlthough Western Digital, which has a market capitalization of $13.4 billion, has been burning cash over the last 12 months, its more than $2.02 billion in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We were impressed by Western Digital's strong improvement in inventory levels. We were also excited that its revenue growth outperformed Wall Street's expectations despite decreasing year on year. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its operating margin declined. Overall, this was a mixed quarter for Western Digital. The company is down 1.86% on the results and currently trades at $41.78 per share.
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The author has no position in any of the stocks mentioned in this report.