3 Takeaways From Western Digital's 2018 Analyst Day

On Dec. 4, computer storage specialist Western Digital (WDC 0.69%) hosted its 2018 analyst day. These events, broadly speaking, are designed to give investors insight into a company's overall strategy and financial goals, and other information that should be relevant to investors.

Another way to think of an analyst day is as a marketing pitch designed to answer the simple question: "Why should investors buy Company X's stock?"

Western Digital wants you to know it is shifting away from hard disk drives like these. Image source: Getty Images.

Here are three things from Western Digital's investor presentation that I think you should know.

1. There's been a significant shift in its business mix

Western Digital talked about how the mix of its storage revenue has changed since its fiscal year 2013. The company said that in fiscal year 2013, it generated $15.4 billion in revenue from hard disk drives. That revenue was split as follows: 

Source: Western Digital presentation.

Over the last 12 months, however, the company's revenue profile looks significantly different. In fiscal year 2013, Western Digital was all about hard disk drives. In late 2015, the company announced that it had reached a deal to purchase SanDisk, which builds its own flash-based products and owned a significant stake in a NAND-flash manufacturing joint venture. (NAND flash is the physical medium that's the core of a solid-state storage drive.)

That deal was costly, with Western Digital paying $19 billion -- nearly twice its market capitalization as of this writing. But in return, the storage specialist was able to broaden its revenue base beyond hard disk drives. 

Indeed, Western Digital says that over the last 12 months, it has generated $10.6 billion in revenue from hard disk drives -- down more than 31% from fiscal 2013 levels. But this was more than offset by the fact that the company's revenue from flash-based products was $9.9 billion over the last 12 months. 

Additionally, Western Digital's segment-level mix within hard disk drives has shifted dramatically. Here's the breakdown that the company gave for the last 12 months:

Source: Western Digital presentation. TTM = trailing 12 months.

For good measure, here's the per-segment mix within Western Digital's NAND flash business:

Source: Western Digital presentation.

Over time, it's clear that Western Digital's hard disk drive business has become increasingly dependent on data center revenue and less so on client devices (no surprise since client devices are increasingly shifting away from slower hard disk drives toward faster flash-based drives). Western Digital's flash-based business is heavily reliant on client devices -- also not surprising considering SanDisk's heritage as a consumer-based flash drive maker.

2. Its key financial goals

Western Digital also provided some insight into its aspirations for its long-term financial model (LTFM). In revenue, the company is aiming for a compound annual growth rate (CAGR) of 4% to 8%. The storage specialist says it's targeting gross margin on a non-GAAP basis of 35% to 40%, and non-GAAP operating margin between 20% and 25%. 

The company was frank in saying that although it exceeded its LTFM during fiscal year 2017 and 2018, "the current industry environment will pressure our near-term financial profile below the LTFM."

Indeed, since a large portion of the company's revenue is now levered to the NAND flash market, it will be subject to the ebb and flow of the overall NAND flash market. If you tuned in to memory specialist Micron's (MU +4.80%) most recent earnings call, you'll remember that CEO Sanjay Mehrotra said that he expects "NAND industry supply growth will exceed industry demand growth in the coming calendar year." 

You don't need to be an economics major to know that when supply exceeds demand, pricing comes under pressure.

3. The size of its total addressable market

Another thing that the company discussed is its total addressable market (TAM). Western Digital says that by fiscal year 2023, its TAM within its core business -- in other words, hard disk drives and flash-based drives for a range of segments -- will collectively hit $111 billion. 

According to the company's presentation, most of the TAM in fiscal year 2018 was in flash-based products. And by fiscal year 2023, Western Digital is calling for most of the TAM growth in its core business to come from flash. For some perspective, the company says that in client devices, the hard disk drive TAM will actually drop at a 13% CAGR from fiscal year 2018 to fiscal year 2023, while the flash TAM will rise at an 8% CAGR. Overall, it's expecting the client devices TAM to grow at a 4% CAGR through that time. 

In client solutions, the company seems pessimistic, calling for the overall TAM to decline at a 2% compound annual rate. Hard disk drive solutions will apparently lead the decline with a negative-4% CAGR, while the flash-based TAM will suffer only a negative-1% CAGR. 

Lastly, the sub-segment within its core business that Western Digital seems most optimistic about is data center devices. The company claims that the TAM for enterprise hard-disk drives will grow at a 14% CAGR through fiscal year 2023, and the enterprise flash TAM will rise at a 12% CAGR, for a combined CAGR of 13%. 

Beyond the core business, Western Digital has also been talking up its data center solutions, which the company says consist of data center systems and platforms as well as related software and solutions. 

The TAM for that business segment was, by the company's estimate, $28.8 billion in fiscal 2018 and is set to grow to $35.4 billion by fiscal 2023, for a CAGR of 4%. It'll be interesting to see how much of this TAM Western Digital can ultimately capture.