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Western Digital (WDC -11%) is heading lower today despite reporting big EPS upside for Q4 (Jun) last night. Revenue jumped 40.9% yr/yr to $3.76 bln, which was in-line. We think the main problem was the Q1 (Sep) guidance as the mid-point of EPS guidance was below analyst expectations. Perhaps more troubling was the revenue guidance of $4.00-4.20 bln, which was below expectations.

• As a quick housekeeping matter, WDC has previously announced it is separating its flash and HDD businesses. WDC expects to complete the separation at the end of calendar year 2024. As part of the ongoing preparation for the separation, WDC expects it will begin to incur separation dis-synergy costs in the second half of the calendar year.
• WDC talked about how the AI Data Cycle is increasing the need for storage and creating new demand drivers across both flash and HDD. AI systems process and analyze existing data, generate new data and require substantial data storage. Data storage systems must deliver the capacity and performance necessary to support the computational demands of large sophisticated models. WDC believes the AI Data Cycle will be a significant incremental growth driver for the storage industry.
• In terms of its business segments, starting with flash, growth was driven by the recovery in cloud and a shift of client mix to gaming and mobile, partially offset by a decline in consumer. Throughout JunQ, its products mix was dynamic as WDC proactively mixed bits between end markets in response to softness in more transactional markets such as consumer and channel. The goal was to identify the most profitable approach to allocating bits.
• Turning to HDD, WDC said that revenue growth was driven by strength in nearline demand and improved pricing. WDC also surpassed its target gross margin range, underscoring its commitment to improve profitability. WDC noted that its HDD business has undergone a remarkable transformation in recent quarters. Its HDD business has increased profitability meaningfully by restructuring its manufacturing footprint and optimizing its cost structure.

Overall, we are a bit surprised to see such a negative reaction. Granted, the guidance was disappointing following upside guidance with its last earnings report. However, it sounds like the company is focusing on more profitable sales and HDD margins were quite strong. We suspect the imminent separation of its flash and HDD units might cause some disruptions. WDC may have factored that into guidance. It did say it expects separation dis-synergy costs in SepQ and DecQ.

Furthermore, the stock had already pulled back from around $80 in early July to $67 at yesterday's close. Our sense is that investors are also disappointed that WDC did not measure up to peer Seagate's (STX) results last week, which had much better guidance.