Western Digital Corporation (NASDAQ: NASDAQ:WDC) has announced its intention to spin off its flash business into two independent public entities, aiming to capitalize on the burgeoning data storage industry. According to the company's first quarter of fiscal 2024 earnings call, the flash business will be spun off tax-free to Western Digital shareholders, while the HDD business will become an independent publicly traded company. The transaction is slated for completion in the second half of 2024.
Key takeaways from the earnings call include:
- Western Digital reported a Q1 revenue of $2.75 billion, surpassing expectations, with the flash business showing sequential revenue growth and the HDD business showing innovation in the nearline market.
- Despite a decline in HDD revenue due to subdued demand from cloud customers and a slower-than-expected recovery in China, demand for consumer and client hard drives remained stable.
- Western Digital announced the qualification of its 28 terabyte ultra-SMR drive and a roadmap for EPMR and ultra-SMR-based innovations up to the 40 terabyte range.
- The company expects a modest bit and ASP improvement in flash, higher nearline HDD shipments, and seasonal consumer demand to drive sequential revenue growth.
- The company's plan to address the convertible debt maturing in February 2024 is expected to be executed by the end of the current calendar year.
- The company has taken measures to prepare for the business units' separation and expects to end up with two well-structured companies.
During the earnings call, company representative Wissam Jabre stated that the strategic change announced does not affect the company's ability to address the convertible debt. The relationship with Kioxia remains strong and is expected to continue. The company also anticipates an improvement in the nearline sector of the cloud as certain customers start to return and provide visibility into orders.
Jabre further highlighted the company's cost reduction efforts and improved revenue on both the flash and HDD sides, which contributed to improved gross margins. The company expects an increase in gross margin in the fiscal second quarter due to lower underutilization charges, cost reduction efforts, improving pricing environments in both the HDD and flash businesses, and a better product mix.
CEO David Goeckeler discussed the ramping of new products in the HDD business, an improving pricing environment, and the expectation of a positive gross margin inflection in the flash business next quarter. He also mentioned the company's openness to considering other strategic options if they become available.
In terms of market demand and supply expectations for NAND exabytes, high-teens demand is projected for fiscal year '24 with production remaining significantly below that level. The company's flash inventory is decreasing, while HDD inventory is increasing. This dynamic adjustment of wafer starts is aimed at maintaining a balance between supply and demand and preventing inventory buildup.
Despite the current downturn in the enterprise SSD market, the company expressed optimism, highlighting its strengths in client SSD and retail. Western Digital also discussed value-based pricing and the positive impact it had on gross margins in the December quarter. The company is looking at value-based pricing across all markets, which is driving better gross margins, particularly in the channel market.
Western Digital believes that the past quarter was the bottom and expects the market to recover going forward. The separation of the business units does not imply any change in strategy for either business, and both will continue to move forward. The company believes it has a market-leading position in both the hard disk drive (HDD) and flash businesses.
InvestingPro Insights
In light of the recent developments at Western Digital Corporation (NASDAQ: WDC), the InvestingPro Tips and real-time data provide some insightful perspectives.
InvestingPro Tips reveals that Western Digital has been grappling with declining revenue and weak gross profit margins. Despite these challenges, the company remains a prominent player in the Technology Hardware, Storage, and peripherals industry. However, it should be noted that the company's stock price movements have been quite volatile, and analysts do not anticipate the company will be profitable this year.
InvestingPro Data supports these insights, with a reported revenue of 12.32B USD for the last twelve months as of Q4 2023, marking a decline of 34.45%. The company's P/E ratio stands at -7.72, reflecting the lack of profitability. Despite these figures, the company's market cap remains substantial at 13.55B USD.
These insights are especially relevant for investors considering Western Digital's recent announcement of its plan to spin off its flash business. With the company's financial health in mind, potential investors should weigh these factors carefully. For more tips and data, consider subscribing to InvestingPro, which offers an additional 5 tips and numerous other metrics for Western Digital.
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