Western Digital: Shipments by capacity slightly below expectations; pricing and margins drive earnings beat

Where did the September quarter beat expectations most?

Western Digital reported revenue of 4.381 billion dollars for the September quarter, up 55% year over year. That exceeded the FactSet market consensus of 4.144 billion dollars and the midpoint of the company’s previous guidance of 4.1 billion dollars. Earnings per share were 4.64 dollars, above the consensus of 4.11 dollars and the guidance midpoint of 4 dollars.
Shipped capacity was 248 EB, up 21.5% year over year but slightly below the Visible Alpha market estimate of 249 EB. Over the same period, prices rose approximately 27% year over year. The revenue beat was not accompanied by a shipped-capacity beat, making pricing an important clue to understanding the quarter’s growth.
The profitability beat was more pronounced: gross margin was 58.1%, up 14.2 percentage points year over year and above the market estimate of 55.7%; operating margin was 49.1%, also above the estimate of 46.4%. Revenue growth and margin expansion occurred together, resulting in stronger earnings per share.

For the second quarter of fiscal 2027, the quarter ending in December, the company guided revenue to 5.1 billion dollars, plus or minus 100 million dollars. The midpoint is approximately 11.7% above the market consensus of 4.567 billion dollars and approximately 16.4% above actual revenue for the September quarter.
Gross margin guidance was 60%–61%, higher still than the 58.1% recorded in the September quarter and above the market estimate of 57.2%. Earnings-per-share guidance was 5.80 dollars, plus or minus 0.20 dollars, with the midpoint approximately 20.3% above the consensus of 4.82 dollars.
The guidance raised both expected revenue and profitability per unit of revenue, so earnings expectations increased by more than revenue expectations. Citi expects the share price to rise following the quarter’s results.

Citi’s assessment rests on strong recent execution, high demand visibility and a robust, durable supply-demand balance for hard disk drives, which can continue to support pricing and margins. Its bullish thesis therefore depends on both demand and the balance between supply and demand.
Citi has a Buy rating and a price target of 740 dollars, based on 20 times its fiscal 2028 earnings-per-share forecast, in line with peer multiples. The target rests on future earnings and the durability of supply and demand conditions, rather than a valuation multiple above peers.

On the demand side, Citi identifies the downside risk that macroeconomic factors could weaken cloud and enterprise demand again, reducing storage spending and disrupting the current supply-demand balance. How long AI can continue to drive hard drive demand is another key question the bank plans to raise on the earnings call.
On supply and costs, Citi is watching whether component conditions affect output and whether further gross-margin improvement is sustainable; its risk assessment also includes impediments to improving the cost structure. Alongside higher prices, output and costs also constrain earnings potential.
On the technology side, if Western Digital’s heat-assisted magnetic recording (HAMR) roadmap stalls, Seagate’s high-capacity HAMR hard drives, which it began developing earlier, could threaten Western Digital’s enterprise business. Certification of new hyperscale cloud customers and progress on the technology transition are also on Citi’s agenda for the call.