The Future of Western Digital after Merger with SanDisk

SanDisk and Western Digital: Contrasting Earnings, Merger Hopes

(Continued from Prior Part)

Update on the SNDK-WDC merger

So far, we’ve seen that SanDisk (SNDK) and Western Digital (WDC) posted contrasting earnings in the March 2016 quarter. SanDisk hasn’t yet posted guidance for the June 2016 quarter since the company is expected to be merged with WDC by then. In the meantime, WDC has posted stand-alone guidance for fiscal 4Q16 ending June 2016 and will update it after the merger is complete.

WDC’s fiscal 4Q16 guidance

For fiscal 4Q16, WDC expects to report revenue of $2.7 billion at the mid-point of the range. That’s lower than fiscal 3Q16 revenue of $2.8 billion. This is because the company expects demand from PC (personal computer) makers and companies to slow further. Even Intel (INTC) has lowered its guidance due to continued weakness in the PC space.

WDC expects its fiscal 4Q16 non-GAAP (generally accepted accounting principles) gross margin to be 29.5% at the mid-point of the range, which is higher than the fiscal 3Q16 margin of 28.1%. The company expects to improve its profitability by optimizing its product portfolio and generating cost benefits from the integration of its HGST and other Western Digital subsidiaries. HGST, previoiusly Hitachi Global Storage Technologies, which Western Digital acquired in March 2012, provides storage solutions to companies and data centers.

WDC expects to report a non-GAAP operating margin of 19% and slightly reduce its operating expenses to ~$475 million in fiscal 4Q16. It expects to earn a non-GAAP EPS (earnings per share) of $1.05 in fiscal 4Q16, which is lower than fiscal 3Q16 EPS of $1.21.

WDC’s strategy behind the SanDisk merger

According to DRAMeXchange, the HDD (hard disk drive) adoption rate in laptops is expected to decrease from 74% in 2015 to 59% in 2017. Laptop makers are increasingly switching to SSDs (solid state drives). MarketsandMarkets forecasts the SSD market to grow at a CAGR (compounded annual growth rate) of 9.5% to $25.3 billion by 2022, from $13.3 billion in 2015.

The increasing demand for SSD would also boost global NAND (negative-AND) flash bit demand by 44% YoY (year-over-year) in 2016, according to TrendForce.

Western Digital is looking to tap these opportunities by becoming a “broad-based provider of media-agnostic storage solutions,” said WDC chief executive officer Stephen Milligan at the fiscal 3Q16 earnings call. The SanDisk merger will enable WDC to capitalize on these opportunities. However, it could face competition from Intel and Micron Technology (MU), which are also ramping up production to tap the growth areas of SSD and 3D NAND.

In the last part of the series, we’ll look at investor reaction to the earnings and merger. The iShares Russell 1000 Value ETF (IWD) has investments in large-cap US equities across various sectors, including technology. It has 0.15% exposure in SNDK.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - SanDisk’s Fiscal 1Q16 Results: What a Surprise!

• Part 2 - Why SanDisk Returned to Growth after a Year of Revenue Declines

• Part 3 - Western Digital’s Fiscal 3Q16 Earnings Miss Analyst Estimates