Western Digital's Third Quarter FY 2011 Earnings Take a Hit

Western Digital [NYSE: WDC] Reported their 3Q earnings on April 20th, 2011 for their fiscal year 2011 which reflected this calendar year 1Q earnings. This earnings report was marked by both a decrease in revenue and a decrease in profit. WDC reported revenue of $2.25B which is below their previous quarter's $2.45B and down from the same quarter a year ago which was $2.64B. On top of that, the company reported a net income of $146M ($0.62 Per Share) which is down from $225M a quarter ago and down from $400M from the same quarter a year ago. While these numbers appear to be fairly poor, there is a silver lining in the fact that the majority of this poor performance is the result of extra costs incurred during the acquisition of Hitachi's hard drive business.

Intel's Sandy Bridge recall actually had an impact on Western Digital's numbers as their CEO stated in their earnings call. "The March quarter in the hard drive industry was impacted by two significant developments-the delayed supply of industry CPUs to PC makers and the tragic events in Japan," said John Coyne, president and chief executive officer. "While demand for hard drives in the quarter got off to a slow start, it later picked up as availability of CPUs improved and as fears took hold of component shortages related to the events in Japan. In relation to our planned acquisition of Hitachi GST, we are in the approval process with all required regulatory agencies, our integration planning is well underway and we have successfully syndicated the loan financing associated with the transaction."

Even so, Western Digital was able to ship 49.8M units which shows a decrease of 4.6% from the previous quarter and a decrease of 2.5% from the same period a year ago. Although these numbers may look unfavorable, one must realize that the entire market shrunk by 4.8% from the previous quarter and 2.3% from a year ago. So, WDC's shrinkage is in line with the market's shrinking due to a lack of demand during January and part of February. These figures also mean that Western Digital was able to maintain their market share as thier business shrunk almost evenly with the market itself. This is likely due to the ODMs quick ramp in production of Sandy Bridge based systems after the recall had passed and their extremely quick response to get their products onto the market. This rapid response from ODMs resulted in a higher demand for Western Digital's hard drives, more so than they had actually suspected.

Western Digital's outlook for 4Q 2011 appears to be conservative but optimistic in the sense that they expect approximately the same performace as in previous years, but they believe there to be a likelihood that ODMs could begin to ramp up demand as they struggle to fill consumer demand which will likely drive up drive prices and improve WDs bottom line. Needless to say, the situation in Japan and the Sandy Bridge issues have caused issues for Western Digital last quarter and their outlook for this quarter appears to be sunnier. At the moment, Western Digital's stock is trading at $41.24 which reflects a 1.45% jump on the 21st after the earnings on the 20th. Also, we expect their stock to continue to move upward as companies like JPMorgan Chase raise their price targets for WDC.