Western Digital (WDC +2.51%) recently named David Goeckeler, the head of Cisco's (CSCO +0.85%) networking and security business, as its new CEO. Goeckler will succeed Steve Milligan, who led the company since 2013 and announced his retirement last October, on March 9.
Milligan led WD's evolution from a traditional HDD (hard disk drive) maker into a flash memory and SSD (solid state drive) titan through its acquisition of SanDisk and other companies. Milligan also nearly sold 15% of WD to China's Tsinghua Unigroup before regulatory pressures killed the deal in 2016, and dealt with a cyclical decline in NAND prices since 2018.
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Under Milligan, WD's stock hit record highs in late 2014, but gradually gave up those gains. WD delivered a total return of 54% after Milligan took the helm, but that gain failed to match Seagate's (STX +0.00%) total return of 123% during the same period.
Will Goeckeler, who worked at Cisco for seven and a half years, fare better than his predecessor? To gauge his chances, investors should examine the four key challenges Goeckeler should immediately address as Western Digital's new CEO.
1. Addressing the coronavirus crisis
Western Digital posted its last quarterly report in late January, before the coronavirus crisis in China escalated into a global pandemic. As a result, the company barely mentioned China during its conference call.
WD's upcoming third-quarter report in late April should shed more light on the situation. Last year, WD's revenue from mainland China fell 12% to $3.9 billion, or 23% of its top line, due to soft demand for HDDs and low NAND prices. The coronavirus crisis could exacerbate that decline throughout the rest of fiscal 2020.
The coronavirus crisis could also reduce demand for its HDDs, SSDs, and flash memory products across multiple industries across the world. Sales of PCs and servers could also stagnate and end WD's delicate rebound in sequential revenue growth.
2. Bracing for unstable NAND prices
Last October, Milligan declared NAND prices had passed a "cyclical trough" and were poised to rebound in 2020. TrendForce recently noted the main foundries for NAND chips hadn't been affected by the coronavirus outbreak yet, and that market prices should continue rising throughout the year.
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That's an encouraging sign for WD, which generated 43% of its revenue from NAND-based SSDs and flash memory chips last quarter. Its recovery relies on two tailwinds: steady supplies from manufacturers, and stable orders from OEMs.
But investors should take those forecasts with a grain of salt. Major NAND chipmakers like WD, Samsung, and Micron could produce more chips in anticipation of higher prices -- but macro challenges (like the coronavirus and slower enterprise spending) could cause OEMs to purchase fewer chips and postpone product launches.
Meanwhile, China's state-backed chipmakers started producing homegrown NAND chips in late 2019 to reduce the country's dependence on foreign technologies. Those factors could all cause another supply glut in NAND chips and hurt WD's flash business.
3. Proving the critics wrong
Goeckeler's appointment as WD's CEO raised a few eyebrows, since it marked the first time over the past two decades that a person without any prior experience with hard drives was appointed as the leader of a major HDD manufacturer.
WD's HDD business still generates most of its revenue and faces intense pressure from Seagate, which mainly sells higher-capacity HDDs to enterprise customers instead of SSDs. Rising NAND prices might strengthen WD's flash business and buy Goeckeler more time to retaliate against Seagate, but his lack of experience in the heavily commoditized market could be a liability.
4. Preserving its dividend
Western Digital currently pays a forward yield of 3.4%, but it's funding its dividend out of its own pockets instead of its declining profits. WD paid out a whopping 291% of its free cash flow as dividends over the past 12 months, and hasn't raised its payout since 2015.
By comparison, Seagate spent just 58% of its FCF on its dividend during the same period, raised its payout last year, and currently pays a higher forward yield of 5.2%. Goeckler could face tough questions about WD's dividend if the coronavirus outbreak, the unresolved trade war, and macro challenges prevent its HDD and SSD units from recovering.
The bottom line
Goeckeler did a solid job as Cisco's networking and security chief, but WD is arguably in a more precarious position than the networking giant. It's too early to tell if Goeckeler will succeed as WD's new CEO, but he'll immediately face tough decisions which could dictate the data storage giant's future.
