Weak tech spending hits Western Digital outlook, shares down

Reuters News
Posted: Oct 22, 2012 4:22 PM
Weak tech spending hits Western Digital outlook, shares down

By Himank Sharma

(Reuters) - Western Digital Corp's first-quarter profit topped lowered Wall Street expectations but the company said slowing PC sales and falling IT spending would hurt current-quarter sales and eat into margins.

The company's shares, which rose after the quarterly beat, reversed course and were trading down 5 percent as the forecast came in well below analysts' expectations.

The dismal outlook underscores a slowdown in sales of storage devices to data centers and enterprise customers. Strong growth in this high-margin business, which accounts for a third of the company's sales, has so far outweighed a slump in sales to PC makers.

Western Digital signaled weakness in its enterprise business last month when it lowered its revenue outlook, spooking investors and prompting a slew of estimate revisions from analysts.

Outgoing Chief Executive John Coyne, who has been at the helm for five years, said economic uncertainty was taking a toll on IT spending.

"We have got elections, we have got changes in government, we have got fiscal cliff ... lots of different things that undoubtedly are impacting spending at a corporate and a consumer level," Coyne said on a conference call.

Tablets have been cannibalizing PC sales and Intel Corp's lackluster outlook last week dispelled lingering hopes for a revival by year-end.

Windows 8, Microsoft's latest operating system scheduled to be launched this Friday, was expected to boost PC sales but some analysts have raised doubts after Intel's outlook.

"Western Digital's report shows that it's another data point indicating that ... the windows 8 effect is not going to be as strong as what some of the bulls were hopping for," said FBN Securities analyst Shebly Seyrafi.

Western Digital said it expects second-quarter adjusted earnings of $1.65 to $1.85 a share on sales of between $3.55 billion and $3.7 billion.

Analysts on average had expected a profit of $2.40 on revenue of $4.08 billion, according to Thomson Reuters I/B/E/S.

The company expects second-quarter adjusted gross margins of 28 percent, below its long-term target of 30 percent.

First-quarter net profit more than doubled to $519 million, or $2.06 per share, boosted by the company's acquisition of Hitachi's hard-disk drive business earlier this year.

Excluding items, the company earned $2.36 per share. Analysts on average were expecting $2.29, according to Thomson Reuters I/B/E/S.

Revenue rose 50 percent to $4.04 billion.

(Reporting by Himank Sharma in Bangalore; Editing by Saumyadeb Chakrabarty)