Western Digital Corp.’s strategy to diversify product offerings into the corporate sector and cloud has distanced the Irvine-based company from its long-held reliance on a PC market in long-term decline.
Revenue from non-PC business lines is projected to account for more than 50% of annual sales this year, up from 35% five years ago, the company said in a recent conference call.
That would be the first time in the company’s 43-year history.
“We’re becoming less and less of a PC story and more of an overall digital data growth story,” said Chief Executive Steve Milligan, who debuts on this year’s OC 50, a list of the most influential members of the local business community and the subject of this special issue of the Business Journal.
His message is starting to resonate on Wall Street, with a new mix of products raising margins, according to Edward Parker, an analyst at New York-based Lazard Capital Markets.
“Western Digital is doing a great job at diversifying business away from PCs,” he said.
The company’s disk drives go into computers, external storage devices, corporate networks and consumer electronics.
Its shares are up 50% in the past year to a market value of about $14.1 billion.
Western Digital said it sold 60.2 million drive units in the March quarter, up 36.2% from 44.2 million units shipped a year ago. Some of the gains came on a favorable comparison—in the same 2012 quarter the company was knee-deep in recovery efforts after floods engulfed Thailand, severely damaging its main manufacturing hub.
Western Digital handily beat Wall Street’s expectations for the recent quarter, with net income of $514 million on sales of $3.8 billion.
Milligan credited the strong performance to rising sales to corporate customers, a segment that got a boost with last year’s $4.3 billion buy of San Jose-based Hitachi Global Storage Technologies Ltd. The deal, because of Hitachi Global’s longtime strength in the corporate segment, is a key to Western Digital’s beyond-PCs strategy, giving it a solid foothold in the higher-margin lines to go with its traditional strength in the consumer market.
Western Digital saw the biggest jump in the enterprise slice of its corporate business, which accounted for 7.2 million units shipped, up 9% from a year ago. The enterprise line of products includes hard drives for data centers and other large-scale deployments; embedded solid-state drives; and high-performing nearline storage devices geared for businesses—a fast growing market for Western Digital.
Solid State
Solid-state drives, which use chips instead of spinning disks to store data, are expected to gradually replace hard drives in notebooks and desktops, although adoption has been much slower than expected due to higher prices.
Early market share gains in the enterprise segment and on solid-state drives have put Western Digital ahead of Cupertino-based rival Seagate Technologies Inc., according to analyst Mark Moskowitz, who maintained a neutral rating on Western Digital because of longer-term uncertainty but still raised his target on revenue, profits and gross margins for the current quarter.
“One key topic will be whether WD can continue growing its non-PC revenue stream, particularly serving cloud and hyperscale,” the analyst in the San Francisco office of New York-based JPMorgan Chase & Co. wrote in a recent investor note.
Milligan thinks so. He said the company is seeing strong demand for several new products, including its line of 5-millimeter, 2.5-inch hard drives and solid-state hybrid drives for portable devices; its 7-disk, helium-sealed drives geared for data centers; and its expanded solid-state drive offerings for large corporate customers.
“We have established a leadership position in the fastest growing areas of the storage industry,” he said.
That demand has been spurred by big cloud providers, such as Amazon, Facebook and Google, which set up their own internal data storage networks and offer cloud services for consumers and a growing number of businesses.
The growth of Amazon Web Services, the online retailer’s unit aimed at boosting sales of proprietary cloud storage services to big corporate customers, is shifting the IT landscape.
Milwaukee-based Robert W. Baird & Co. estimates that every dollar spent on Amazon Web will translate to a $3 to $4 loss on traditional IT spending.
“We see Seagate and Western Digital as potential winners and HP and Dell as potential losers as consumers and business shift more spending to the cloud,” said Jayson Noland, senior analyst in Baird’s San Francisco office.
Noland said other storage device makers have struggled with the transition, namely Tokyo-based Toshiba Corp., the other major drive maker in the market.
“Toshiba is losing money in the drive business,” he said.
Western Digital still sells a majority of its hard drives—39.9 million in the last quarter—for notebooks and desktops, a segment that just posted its steepest quarterly decline on record.
PC Outlook
Framingham, Mass.-based market researcher International Data Corp. reported global PC sales fell nearly 14% in the first quarter to 76.3 units, compared to the same period a year ago.
The declines hit every major region and marked the fourth straight quarterly drop year-over-year.
IDC had forecast a decline of 7.7% in the boom of tablets and smartphone sales and consumers’ reluctance to upgrade their PCs.
“Clearly, the PC segment continues to be weaker than anyone could have imaged,” said Lazard Capital’s Parker.
