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Western Digital Looks to Cost Cutting to Maintain Profit Margins

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Western Digital’s strategy to deal with falling memory prices

Western Digital (WDC) manufactures NAND (negative AND) Flash storage products that are commoditized, which means NAND prices depend largely on the demand and supply forces. The NAND market is currently in an oversupply situation, which is negatively impacting NAND prices and therefore WDC’s earnings. The US ban on WDC’s relevant customer Huawei is only making the situation worse for the chipmaker by reducing demand.

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WDC cannot control the market environment, but what it can control is its cost and supply. At the Bank of America Global Tech Conference, WDC’s CEO Steve Milligan stated that the company will focus on things it can control to withstand the cyclical and macroeconomic downturn without incurring significant losses. He listed the company’s four priorities: cut costs, monitor cash flows, focus on underserved markets, and adjust production capacity according to demand.

Cost-cutting

As NAND prices fall, memory chipmakers resort to cost-cutting to maintain profit margins, and WDC is doing the same. Steve Milligan stated that the company is committed to cutting its annual cost by $800 million in calendar 2019 with the cost cut equally split between the COGS (cost of goods sold) and operating expense. He stated that the company will review its cost structure in light of the Huawei ban to understand if this cost cut is sufficient or if costs need to be reduced.

Cash flow

At the end of calendar first quarter, WDC had a net debt of $6.6 billion and operating cash flow of $204 million, down 80% YoY. Falling revenue and profits are putting pressure on the cash flows. The steep declines in cash flows raised concerns among investors as to whether the company will be able to pay a dividend. Steve Milligan stated that the company is currently committed to paying dividends, but it will evaluate the NAND prices and make decisions accordingly. This means the dividends are at risk if the falling NAND prices push the company’s cash flows into negative territory.

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