Western Digital Corp. (NYSE: WDC) on Thursday, provided an update on its financial outlook for the December quarter and the progress to date of its recovery effort in Thailand. Barclays Capital raised its price target on shares of Western Digital to $40 from $35, while reiterating its overweight rating.
According to Western Digital, the company has restarted production ahead of schedule at one its buildings in Bang Pa-In and removed submerged slider manufacturing equipment from the Bang Pa-In facilities for assessment and decontamination.
In addition, the company now plans to resume head slider production in Thailand much faster than expected during the March quarter (fiscal third quarter of 2012) as well as begin production in a new slider fab in Malaysia and finally complete the pumping of water within its Navanakorn facility within 10 days.
In terms of its fiscal December outlook, Western Digital now expects significant upside with revenue of at least $1.8 billion with gross margins above the high end of its business model of 18 percent to 23 percent, implying unit shipments of about 34 million.
This outlook compares to original guidance in October of only 22 million to 26 million units and revenue of $1.05 billion to $1.25 billion. Western Digital is planning for operating expenses of $265 million compared to original expectations of $230 million.
The company also stated that it intends to file insurance claims in excess of $50 million, offsetting-flood related charges of $225 million to $275 million. The company also noted that it intends to vigorously contest the arbitration decision in favor of Seagate for $525 million.
Western Digital continues to work toward satisfying the remedy provision included in the European Commission's approval for its acquisition of Hitachi Global Storage Technologies. However the company now expects the deal to close by March 2012, extending its deadline from December 2011.
We believe that Toshiba may emerge as a buyer for the capacity, given Western Digital is still willing to put a date on the closing (implying a buyer is out there), said Ben Reitzes, an analyst at Barclays Capital.
Western Digital also modestly increased its expectations for December quarter industry demand, stating that end demand was now between 170 million to 180 million, up from original expectations of 170 million provided in October. The company still believes that there will be significant supply constraints into the March quarter and beyond.
Western Digital's financial update is very positive given the situation in Thailand is improving at a rapid rate. Last week, Reitzes stated that the area was drying out faster than expected but this rate of progress far exceeded his expectations.
More importantly, the company's main bottleneck (head sliders) was expected to cause at least 9 months of production delays and Western Digital now expects to recover some slider production in March, two quarters ahead of street expectations.
Western Digital's announcement also implies pricing is much stronger than Reitzes expected, gross margins could be up 400 basis points quarter-over-quarter versus initial guidance for negative gross margins.
To that end, Reitzes still believes that Western Digital will be able to recover lost share from Seagate much faster than expected and could see earnings power in the $6.00-plus range following the close of the Hitachi Global Storage Technologies acquisition versus $5.00 previously.
The brokerage raised its 2012 adjusted per share estimate for Western Digital to profit of $3.82 from a loss of $0.97 and its 2013 EPS estimate to $4.95 from $4.00. The brokerage also increased its 2012 pro-forma EPS estimate to $4.33 from $0.67 and its 2013 estimate to $6.15 from $5.00.
Western Digital stock closed Friday's regular trading up 7.49 percent at $31.44 on the NYSE.