Western Digital [Stock Ticker: WDC] today reported their earnings for their 1Q 2011 fiscal year [calendar: 3Q 2010]. The company reported a profit of $197M on $2.4B of revenue earning $0.84 per share.

Western Digital still managed to increase their amount of shipped drives from 49.7M in fiscal 4Q 2010 [2Q 2010 Calendar] to 50.7 million units this quarter and up 15% a year ago. Gross margin stood at 18% as well; this was mostly due to their uncharacteristically low ASP [Average Selling Price] as a result of the sudden increase of inventory and the need to liquidate it. The gross margin was down 4.3% from the previous quarter which is what reflects the flat revenue and lower profit.

Company’s CEO, John Coyne, reported that WD would be constantly working towards the low cost model and broadening the company?s product offerings as the market broadens. Furthermore, Western Digital is working harder to control their inventory as demand unexpectedly dropped during the quarter and as a result of that, Western Digital was forced to price more competitively in order to clear extra inventory. This type of issue, in the future, will be handled more appropriately by the recently appointed COO as stated during the earnings call.

Losing share in 2.5" segment: Notebooks gains, desktop losses
Because of this, Western Digital was still able to hold their market share in the 3.5? market but lost approximately 1% in the 2.5? segment. But nevertheless, WDC expects their margins on desktop drives to decrease but notebook margins to increase balancing each other out. Either way, notebook sales are ever increasing and as a result of that, notebook sales will continue to be a growing segment for WD and they are likely to see it compensate for their decreases in desktop drives.

Western Digital Livewire Powerline AV Network KitWestern Digital also plans to expand their CE offerings such as the WD TV and WD Elements offering. Furthermore, WD also has the WD Livewire Powerline AV network kit. This expansion and maturing of WD?s complimentary offerings to their drives is beginning to get more competition from other manufacturers which explains the 22% decrease in sales of the WD TV from the previous quarter.

Expectation: Good Holiday Season ahead
Western Digital saw significantly more demand in the last week of the quarter than the average of the previous 12 weeks. This could be a good sign, or a sign that OEMs have made the majority of their orders for calendar 4Q 2010 already. They expect Revenue to be 2.3-2.4B with an EPS of $0.50 to $0.60 which means that WDC expects their profit to decrease even more in the 2Q 2011 [4Q 2010 calendar]. The expected decrease in gross margin [16%] and profits expectations are mostly due in part to the preparation of a new facility in Asia and a slight decrease in prices.

From what it appears, Western Digital is likely to start to see improvements once demand outstrips supply so their gross margins improve. They will continue to work off extra inventory through the quarter and they will likely only see a normalization in 2011 even though early 2011 is a traditionally slower than late 2010.