Check out the latest Western Digital earnings call transcript.

On Jan. 23, computer storage specialist Western Digital (WDC -0.68%) reported its latest earnings results. They weren't great. The company's sales for the quarter were down 20.8%, and non-GAAP earnings per share (EPS) came in at $1.45, which was down more than 63%. The company's guidance for the current quarter wasn't stellar, either, with the company calling for sales to be between $3.6 billion and $3.8 billion for the third quarter of its fiscal 2019 and EPS to land between $0.40 and $0.60. In the same period a year ago, the company delivered revenue of $5 billion and non-GAAP EPS of $3.63. 

To better understand what's going on, let's take a closer look at what the company's management had to say on its most recent earnings conference call.

Four hard disk drives.

Image source: Getty Images.

Dividend commitments

One thing that investors might be concerned about is the sustainability of Western Digital's dividend -- in fact, my colleague Timothy Green recently argued that the company's dividend "isn't as safe as it looks."

During Western Digital's most recent earnings call, analyst Aaron Rakers asked about the dividend.

Western Digital CEO Stephen Milligan said in response that "we absolutely remain committed to our dividend. And so it's as simple as that."

My issue with that response is that while this statement could be read as "we're not going to cut the dividend," it could also be interpreted as "we're committed to continuing to pay dividend" without necessarily committing to keeping it at the current $2-per-share per-year level. 

Western Digital should declare its next dividend payment sometime next month, so when that happens, we'll know what Milligan really meant when he said that the company is "committed to our dividend."

Cloud service provider growth returns in second half

According to Western Digital President and COO Mike Cordano, "in terms of the exabytes growth rate for capacity enterprise [hard disk drives], as we've previously stated, we are seeing a moderation in the first half of calendar 2019." The executive, however, claimed that "based on customer discussions, we continue to forecast year-over-year growth to resume in the second half of calendar 2019."

This echoes the trend that chip giant Intel (NASDAQ: INTC) told its investors to expect with respect to its data center CPU business.

Western Digital shareholders should care a lot about the health of Western Digital's enterprise hard disk drive business, because according to the company, the hard disk drive total addressable market (TAM) will increasingly come from the data center market. 

To illustrate this, at the company's investor day back in December, the company said that it expects the client hard disk drive TAM to drop from $7.4 billion in its fiscal year 2018 to just $2 billion by its fiscal year 2023. The enterprise hard disk drive TAM, on the other hand, is expected to grow from $9.9 billion to $18.8 billion over that same time. 

Gross margin problems

For the current quarter, Western Digital's guidance calls for the company's gross margin to be just 28%, significantly lower than the company's target range of between 35% and 40%. On the call, analyst Jim Suva asked management about its plan to get back to that target range as well as potential timing of that return. 

Cordano explained that the company "stands by our long-term financial model with the gross margins of 35% to 40% for the reasons we stated at Investor Day" but conceded that because of the current poor NAND flash market conditions, the company is "below that range." 

Western Digital sells both hard disk drives and products based on NAND flash. 

The executive then explained that "as the flash market normalizes and returns to a balanced state, we will head back toward our target range, but we haven't given a timetable for that." 

Unfortunately for investors, that commentary is hardly reassuring.