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Flash price-drop pops Western Digital's wallet: Surprise revenue fall with worse to come

Firm to curb wafer output starting April '19

Western Digital's revenues are dropping and set to get worse because of poor flash product sales and declines in pricing.

Revenues in the first quarter of fiscal 2019 ended 28 September, were 3 per cent down year-on-year to $5bn. Profits were $511m, down 24 per cent. Operating cash flow was $705m, compared to $1.133bn last year, a 38 per cent drop.

What fouled up was flash. CEO Stephen Milligan said strength in capacity enterprise, surveillance hard drives and embedded flash products, which each grew revenue more than 30 per cent on the year, "was offset by ongoing declines in flash pricing".

Client compute disk drives also performed poorly.

HDD revenues in the quarter were $2.49bn while flash revenues were $2.53bn. A year ago the numbers were $2.6bn and $2.57bn respectively, so both disk and flash revenues fell on the yearly compare.

WD shipped 34.1 million disk drives in the quarter, compared to 42.2 million a year ago. Client compute drives dropped to 16.3 million from 20.9 million. Non-compute (retail and consumer electronics) units fell to 11.2 million from 15.2 million last year, while data centre units were 6.1 million last year and rose to 6.6 million – a bright spot.

Client compute was affected by flash cannibalisation of notebook/PC disk drives. President and COO Mike Cordano said in the earnings call: "We have seen that accelerate. We would expect we exit the year about 60 per cent in terms of SSD versus HDD in the PC space."

WD's big cheese said the "closure of our Kuala Lumpur manufacturing facility anticipated continued decline, particularly in terms of client hard drives".

We don't usually look at quarterly compares but the change in the average selling price/GB for flash from the prior quarter to the first fiscal 2019 quarter dropped double digits. The company's chief financial officer remarked on the wallet-punch: "Our flash-based products had revenue bit growth [actual amount of memory sold] of 28 per cent sequentially, while the average selling price was down 16 per cent."

The CEO mentioned a challenging global business environment and "a more conservative demand outlook for our products", adding: "We are taking immediate actions to align our flash output with projected demand."

The global business environment difficulties and their effects were "trade tensions with China, changes in monetary policy, foreign exchange volatility and the corresponding economic impacts are causing our customers to be more conservative resulting in a demand slowdown for our products".

He added:

This softening demand, in combination with increased flash supply, has led to a market imbalance resulting in a deteriorating near-term flash pricing environment.

We are making an immediate reduction to wafer starts and delaying deployment of capital equipment. These actions will reduce our wafer output beginning in fiscal Q3 2019 [April 2019].

It will take a few quarters to burn off HDD and SSD inventory.

Cordano said: "The magnitude of these actions is a reduction of 10 per cent to 15 per cent of our planned bit output in calendar year 2019."

There's more bad news on the demand front, with Cordano identifying "the widely publicised CPU shortage … [and] a temporary slowdown in data centre capital spending, particularly by large cloud service providers".

He said China was disproportionately affected by these things.

Next quarter's revenue is expected to be between $4.2bn to $4.4bn; $4.3bn at the mid-point and a 19 per cent fall on the year-ago quarter's $5.3bn.

It remains to be seen if WD's flash drive competitors are experiencing the same problems and, if they are, whether they will cut output too or go for price-cutting and market share gains.

Cordano said WD wanted to maintain its market share.

WD's fall in revenues and substantial drop in expectations for the next quarter took analysts by surprise. Wells Fargo senior analyst Aaron Rakers said: "We have clearly misjudged the severity of model downside in WD" – headlining his report on the results "Kitchen Sink Outlook in a 'Risk Averse' Demand Environment".

Milligan said he expects WD's flash supply to be in balance with demand by mid-2019 and the strategy is to "get our own house in order so that we are better positioned to take advantage of, let's call it, the long-term growth opportunities in the market".

Until then, WD faces lousy annual compares on its quarterly results; it's grit-your-teeth time for the storage giant. ®

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