Western Digital Corporation — Fiscal Q1 2024 Form 10-Q Summary
Business context and reporting period
Western Digital develops and sells data-storage products using NAND flash and hard-disk-drive technologies across Cloud, Client, and Consumer markets. The filing covers the unaudited 13-week quarter ended September 29, 2023, compared with the quarter ended September 30, 2022. Reportable segments are Flash and HDD.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $2.750 billion | $3.736 billion | Down 26% |
| Gross profit | $99 million | $981 million | Down $882 million |
| Gross margin | 3.6% | 26.3% | Down 22.7 percentage points |
| Operating income (loss) | $(596) million | $158 million | Declined $754 million |
| Net income (loss) | $(685) million | $27 million | Declined $712 million |
| Loss attributable to common shareholders | $(700) million | $27 million | $(2.17) vs. $0.09 diluted EPS |
| Cash flow from operations | $(626) million | $6 million | Declined $632 million |
- Flash revenue was $1.556 billion, down 10%; gross margin was negative 10.3% versus 24.5%. Flash pricing declined sharply, including a 39% decrease in average selling price per gigabyte.
- HDD revenue was $1.194 billion, down 41%; gross margin was 22.9% versus 28.5%. HDD exabytes shipped declined 42%, primarily because of lower Cloud shipments.
- Cloud revenue fell 52% to $872 million; Client revenue fell 7% to $1.147 billion; Consumer revenue rose 8% to $731 million.
- Operating expenses were $695 million, down 16%, reflecting lower research and development and SG&A spending, partially offset by higher restructuring and impairment charges.
- Consolidated gross profit included approximately $225 million of manufacturing underutilization and related charges, including $142 million in Flash and $83 million in HDD, as well as a Flash inventory write-down.
- Cash and cash equivalents were $2.032 billion at September 29, 2023, compared with $2.023 billion at June 30, 2023. Accounts receivable were $1.451 billion and inventories were $3.497 billion.
- Total debt was $7.700 billion, including $1.850 billion classified as current debt. The Company drew a $600 million variable-rate term loan due June 28, 2024. It reported $2.25 billion of availability under its revolving credit facility through January 2027 and compliance with applicable financial covenants.
- Investing cash flow was positive $84 million, including $193 million of proceeds from asset sales and $124 million of capital expenditures. Financing cash flow was positive $554 million, primarily from the $600 million term-loan draw.
Material changes versus the prior comparable period
- Revenue declined $986 million, driven by lower demand, pricing pressure, and reduced Cloud purchases as customers adjusted production and inventories.
- Gross margin contracted substantially because of lower Flash pricing, manufacturing underutilization, inventory-related charges, and lower HDD volumes.
- Research and development expense decreased $121 million and SG&A expense decreased $40 million as the Company reduced headcount, variable compensation, and other spending.
- Interest expense increased $28 million to $98 million because of higher interest rates and additional borrowing.
- The Company paid $523 million during the quarter for IRS tax and interest matters relating principally to 2008–2012. The remaining liability for the broader 2008–2015 matter was $183 million at quarter-end.
- The Company completed a Milpitas, California facility sale-leaseback, receiving $191 million of net cash proceeds and recognizing an $85 million gain. It also recorded $94 million of asset impairments and $29 million of contract-termination costs related to canceled Penang capacity projects.
Guidance, outlook, risks, and unusual items
- No specific numerical revenue, earnings, or margin guidance is provided in the filing. Management expects capital expenditures for fiscal 2024 to be below fiscal 2023 levels.
- Management stated that macroeconomic pressures, inflation, higher interest rates, recession concerns, supply-demand imbalance, lower pricing, and customer inventory reductions continue to affect results. Conditions showed signs of stabilization in Client and Consumer, but the market remained dynamic.
- The Company expects near-term results to remain pressured by manufacturing underutilization, restructuring actions, and related charges, while positioning the business for longer-term growth as digital transformation increases storage demand.
- Management believes available cash, financing proceeds, the revolving facility, and expected cash generation are sufficient for working capital, debt, and capital expenditure needs for at least the next twelve months and the foreseeable future. This assessment assumes a return to profitable operations and positive cash flows as the market normalizes.
- Flash Ventures commitments are significant. The Company’s maximum reasonably estimable loss exposure was $3.882 billion, including $1.590 billion of guaranteed lease obligations. The Company incurred $141 million of Flash Ventures underutilization costs during the quarter.
- The Company announced after quarter-end that it intends to pursue separation of its HDD and Flash businesses into two independent public companies, targeted for the second half of calendar 2024. Completion remains subject to conditions, including Board approval, definitive documentation, tax opinions or rulings, financing, and regulatory requirements.
- On November 3, 2023, after quarter-end, the Company issued $1.60 billion of 3.00% convertible notes due 2028, used approximately $155 million for capped-call transactions, and repurchased approximately $508 million of 2024 convertible notes. The filing states that remaining proceeds were intended primarily to settle the remaining 2024 notes.
- Key risks include demand and pricing volatility, customer and supplier concentration, supply-chain disruption, cybersecurity incidents, technology and product execution, foreign exchange exposure, debt and refinancing needs, Flash Ventures obligations, tax liabilities, and execution or failure of the proposed separation.
Important facts investors should verify
- Whether Flash and HDD demand, pricing, utilization, and gross margins recover, particularly in the Cloud market.
- The timing, structure, financing, tax treatment, and potential stranded costs or covenant effects of the proposed business separation.
- The Company’s ability to refinance or repay the $1.850 billion current debt balance and remaining 2024 convertible notes.
- Cash-flow recovery after the $626 million quarterly operating cash outflow and the timing of remaining IRS-related payments.
- The scale and duration of Flash Ventures commitments, guarantees, underutilization costs, and future capital funding requirements.
- Whether additional inventory write-downs, capacity impairments, restructuring charges, or manufacturing underutilization costs arise.
- The effect of required R&D tax capitalization on future cash taxes and effective tax rates.