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Western Digital Plunges Post-Earnings, Takes Micron Lower

TheStreet logo TheStreet 8/6/2020 Eric Jhonsa
a black sign with white text: Western Digital Plunges Post-Earnings, Takes Micron Lower © TheStreet Western Digital Plunges Post-Earnings, Takes Micron Lower

A soft September quarter outlook has left Western Digital's stock trading near its lowest levels since March, and is also weighing on rival Micron's shares.

On Wednesday afternoon, Western reported June quarter (fiscal fourth quarter) revenue of $4.29 billion (up 18% annually) and non-GAAP EPS of $1.23. EPS slightly topped a $1.22 billion FactSet analyst consensus, but revenue missed a $4.34 billion consensus.

More importantly, the hard drive and NAND flash memory giant guided for September quarter revenue of $3.7 billion to $3.9 billion and non-GAAP EPS of $0.45 to $0.65. Those guidance ranges are well below consensus estimates of $4.36 billion and $1.35, while the sales guidance implying a 6% annual decline at its midpoint.

As of the time of this article, Western's stock is down 15.8% in Thursday trading to $37.44, a decline that leaves it down 41% on the year. Micron, which received 31% of its May quarter revenue from NAND sales, is down 3.8%. Hard drive maker Seagate , which plunged post-earnings last week, is down just fractionally.

While discussing Western's guidance in his prepared remarks for the company's earnings call, CFO Bob Eulau only said that Western is "somewhat challenged in the near-term as a result of the uncertainty of the pandemic and being in the midst of a global economic contraction." However, more specifics were shared during the question-and-answer session. Among them:

  1. CEO David Goeckeler said that cloud service providers -- companies that were collectively placing huge orders during the first half of the year, in part due to traffic surges that followed COVID-19 lockdowns -- are "going into a digestion phase." He forecast Western's shipments to them will be "a little bit down for the next quarter or two."
  2. Eulau indicated Western's sales of hard drives going into traditional, on-premise, data center environments will also be lower sequentially in the September quarter.
  3. Goeckeler said that hardware OEMs are "really watching [their] inventory and managing [it] tighter."
  4. Sales to distributors are under pressure, with Goeckeler adding that sales related to video surveillance applications were particularly soft.
  5. Eulau said Western, whose NAND average selling price (ASP) rose 1% sequentially in the June quarter, expects NAND prices to be down sequentially this quarter. He and Goeckeler suggested much of the price pressure involves retail flash sales.

On the bright side, Western said that demand for its retail flash and hard drive products continues improving, after falling sharply following the start of lockdowns. The company also struck an upbeat tone about planned second-half sales ramps with cloud clients for new enterprise SSDs and 18TB hard drives, albeit while noting in each case that the ramps are still in their early stages.

The company also reiterated that the upcoming launch of Microsoft and Sony's next-gen game consoles, each of which rely on SSDs for storage, will be a second-half tailwind.

Western's comments about cloud digestion are particularly noteworthy, given that strong cloud orders have provided a major first-half sales boost to many chip suppliers -- not just memory suppliers such as Western and Micron, but also companies such as Intel , AMD , Nvidia and Broadcom .

The remarks arrived a day after Microchip Technology cautioned that its data center and computing chip sales could cool during the second half of the year, as the benefit derived from work-from-home trends eases. In addition, Samsung (the world's biggest DRAM and NAND supplier) said last week that it thinks inventory levels are high among server memory buyers.

In late June, Micron said that it believed inventories were high among some of its clients as well. However, the company suggested the buildups were among mobile and automotive memory buyers, rather than cloud clients.

In a Wednesday note that followed a call with Micron execs, Mizuho analyst Vijay Rakesh reported Micron is still seeing strong cloud demand, while adding that the company has seen "some inventory builds at customers," and that some "normalization" is expected for data center demand during the back half of the year.

Separately, Western's comments about soft on-premise hard drive and video product sales echo what was shared by Seagate on its July 28 call. Among other things, Seagate noted that municipalities are diverting funds away from "security and smart video installations," and reported seeing "a sharper slowdown in enterprise IT spending," particularly among small and mid-sized businesses.

This article was originally published by TheStreet.

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