Western Digital CEO Retires, Stock Slumps 16%


Oct. 31 2019, Published 5:39 p.m. ET

Today, Western Digital stock (WDC) slumped as much as 16.25% after CEO Steve Milligan announced his sudden retirement. Moreover, WDC’s fiscal 2020 first-quarter earnings and guidance missed estimates.

The strong slump in WDC stock made it the top decliner of the S&P 500 today. The 16% decline eroded $10 from yesterday’s close of $62.16, which is close to its 52-week high of $65.31. The decline also lowered WDC’s year-to-date performance to 43.7% from 71.4% as of yesterday.

The 16% decline comes after WDC stock rallied 7.8% from October 23 to 30 on strong earnings from equipment suppliers Lam Research (LRCX), Teradyne (TER), and KLA Corporation (KLAC), which drove their stocks to new 52-week highs. Lam expected NAND inventory to normalize in the first half of 2020.

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Even Western Digital reported an uptick in demand. But the rate of growth came in below expectations. Western Digital’s weak earnings pulled rival Micron’s and Seagate’s (STX) stock down as much as 2.6% and 2.2%, respectively, in today’s trading. The results also pulled LRCX, TER, and KLAC stocks down 2.5%.

WDC stock’s 16% decline might seem like an overreaction to the earnings and guidance miss. More than weak guidance, I think it was the CEO retirement news that shocked investors and put them into sell mode.

Western Digital CEO retires

Western Digital CEO Steve Milligan started the fiscal 2020 first-quarter earnings call by announcing his retirement. He said, “I have informed our Board that I plan to retire as CEO. I will continue to serve as CEO until the Board has identified and appointed a successor. … Once my successor is on board, I will remain with the company in an advisory role until September 2020 to ensure a smooth transition.”

Milligan is a Western Digital veteran. He has spent 17 years at the company—and the last seven years as CEO, from fiscal 2013 to 2019.

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Steve Milligan’s contributions to Western Digital

During his tenure as Western Digital CEO, Steve Milligan transformed WDC from a storage component provider to a diversified data infrastructure solutions provider. He completed the SanDisk acquisition in 2016, adding Flash SSD (solid-state drives) to the firm’s offerings. This deal made Western Digital the third-largest NAND (negative AND) chipmaker after Samsung and Toshiba, according to DRAMeXchange Q2 2019 report.

During Steve Milligan’s tenure, WDC stock crossed the $100 mark twice, the first time in December 2014, when it overtook Seagate in the HDD (hard disk drive) market, and the second time in March 2018, when the NAND market was at its peak.

It was also during his tenure that Western Digital started paying a dividend. The firm doubled its dividend per share from $1.0 in fiscal 2013 to $2.0 in fiscal 2016. However, it maintained the same dividend rate since 2016 as it was hit by a declining HDD market and huge debt due to the SanDisk merger.

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Steve Milligan also saw the worst of Western Digital

Since fiscal 2016, Western Digital’s returns have been low. Its leverage increased to 2.95 from 1.65 in fiscal 2015. Fiscal 2019, which ended in June, was the worst year for the company. It faced several headwinds such as the NAND market downturn, declining HDD market, and overall semiconductor demand weakness. These headwinds reduced its fiscal 2019 revenue by 19.6% and non-GAAP (generally accepted accounting principles) EPS by 67%. At the end of fiscal 2019, it had a net debt of $6.75 billion, with $10.2 billion long-term debt and a $3.45 billion cash reserve.

In fiscal 2019, WDC’s RoE (return on equity) and ROI (return on investment) fell to -7.0% and -2.1 from 5.9% and 4.8% last year. RoE and RoI tell us the management’s ability to generate net income from the invested capital. RoI includes both debt and equity capital and is influenced by the cost of capital. RoE excludes debt and only looks at the company’s returns from equity.

The worst is over for Western Digital, and it’s seeing early signs of cyclical upturn. However, Steve Milligan’s retirement makes investors wary. WDC stock will see strong momentum when the company announces new CEO. It’s currently head-hunting for a successor to Steve Milligan.


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