Western Digital to Offload IntelliFlash Business to DDN

Zacks Equity Research

Western Digital WDC has inked a deal with DDN, a supplier of big data storage worldwide, to divest its IntelliFlash business in a bid to optimize Data Center Systems portfolio. Per the deal, both the companies have agreed on a multi-year strategic partnership wherein DDN will buy Western Digital’s HDD and SSD storage devices.

The move is considered appropriate as the company’s Client devices and Client Solutions business has been performing poorly for a while. Let’s analyze this latest development and its impact on the company.

Terms of the Deal

The financial details of the agreement have kept under wraps. However, the transaction, which is expected to close before the end of the calendar year, is subject to certain customary closing conditions.

The to-be-divested product line comprises of the IntelliFlash and ActiveScale businesses, which is part of the company’s storage system. We believe that the sale of this unit will help the company in focusing more on core Storage Platforms business, which comprises the OpenFlex platform and fabric-attached storage know-how.

The company also updated non-GAAP earnings guidance for fiscal 2020 to reflect the divestiture. The company expects the same to be around 20 cents per share.

Price Performance

Shares of Western Digitalhave gained 69.5% on a year-to-date basis, outperforming the industry’s rally of 20.9%.

Balance Sheet

Notably, the company had total cash and cash equivalents of $3.455 billion, and debt burden of $10.52 billion, as of Jun 28, 2019. The deal is anticipated to help Western Digital simplify the business structure by focusing on core operating areas. The latest move can result in lower capital requirements and boost shareholders’ value.

More Into the Headlines

Western Digital’s IntelliFlash systems offer robust performance for broad based enterprise workloads. Further, the company’s ActiveScale storage system helps customers to store petabytes (PB) of data, consequently improving data center space efficiency.

Notably in the last reported quarter (fourth-quarter 2019), revenuesof $3.634 billion declined 28.9% year over year and 1.1% sequentially.

Uncertain macroeconomic environment and softness in NAND flash pricing trends adversely impacted results. Moreover, decline in the client HDD and flash mobile applications affected revenues.

Consequently, the company is likely to manage business better by shifting focus to Client Data Center Systems, finding strategic options for its ActiveScale storage-system business and selling IntelliFlash business.

According to Mike Cordano, Western Digital president and chief operating officer, "With DDN's resources, technical expertise and focus on solving customers' end-to-end data and information management challenges, we believe IntelliFlash will be well equipped to enable new levels of efficiency for customers.”

Bottom Line

Anticipating a potential acceleration in cloud deployments, Western Digital is also investing heavily on high-capacity storage devices that will support expansion of cloud infrastructure and cloud applications.

Western Digital is making every effort to ensure its products deliver high quality storage solutions across all emerging data-driven technologies. We believe this ongoing expansion of product portfolio bodes well for the top line.

Western Digital is also focusing more on the enterprise side, which is the key growth area in the information technology sector.

Zacks Rank and Other Stocks to Consider

Western Digital sports a Zacks Rank #1 (Strong Buy).

Some other top-ranked stocks in the broader technology sector are Alibaba Group Holding Limited BABA, Chegg CHGG and Anixter International AXE. All three stocks flaunt a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here

Long-term earnings growth rate for Alibaba, Chegg and Anixter is currently pegged at 28%, 30% and 8%, respectively.

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