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Can Western Digital Improve Its Profit Margins in 2017?

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Increase in profitability

Western Digital’s (WDC) non-GAAP[1. generally accepted accounting principles] operating expenses in fiscal 3Q17[2. fiscal 3Q17 ended March 31, 2017] were $811 million, or 17.6% of total revenues.

While WDC’s revenues rose 65% YoY (year-over-year) in fiscal 3Q17, its earnings per share (or EPS) rose more than 100% YoY to $0.83. This indicates a successful integration of the SanDisk acquisition. Its gross margin was 32.8% in fiscal 3Q17, a significant improvement compared to 26.7% in fiscal 3Q16.

Western Digital’s operating margin rose to 11.3% in fiscal 3Q17 from 3.1% in fiscal 3Q16. WDC’s R&D (research and development) expenses rose 70% YoY to $613 million, whereas its SG&A[3. selling, general, and administrative] expenses rose 108% YoY to $346 million in fiscal 3Q17.

In the nine months ended fiscal 2017, Western Digital’s gross margin rose to 30.8% from 27.5%. Its operating margin rose to 9.1% from 7% in the first nine months of fiscal 2016.

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Cost and revenue synergy

Western Digital (WDC) expects to realize savings of $800 million on an annualized run-rate basis due to the integration of HGST by the end of fiscal 2017. WDC had estimated its savings to be $650 million.

The company also expects to save $300 million in operating expenses in fiscal 2017 and additional savings of $150 million by the end of fiscal 2Q18.

In fiscal 2017, WDC expects to reduce its cost of goods expenses by $175 million. Among its peers, NetApp (NTAP), IBM (IBM), and Seagate (STX) are also looking to cut costs and improve profit margins.

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