The CEO of hard disk maker Western Digital (NASDAQ:WDC), Steve Milligan, presented at the recent Nasdaq Investor Program in London. During the presentation (which consisted of prepared remarks followed by a question-and-answer session), Milligan offered quite a lot of insight into the company's business today as well as its longer-term prospects.
In this article, I'd like to highlight three items from the presentation that stood out to me as I research the company as a potential investment opportunity.
Despite storage growth, industry profits are shrinking; what might reverse this?
Katy Huberty, an analyst with Morgan Stanley, observed that over the past several quarters, total hard disk drive industry profits have shrunk despite continued growth in total shipped hard disk drive capacity and a very consolidated market (there are only two major players in the hard disk drive market -- Western Digital and Seagate (NASDAQ:STX) -- with Toshiba a distant third in terms of market share).
Huberty asked Milligan about his views on what will drive a change from the current situation and ultimately allow the hard disk drive industry to perform better.
Milligan noted that the PC market has performed worse than the company had expected heading into the year, which affected both total industry profits as well as Western Digital's own profitability (it's worth noting that competitor Seagate has also been affected and its stock price is down slightly more year to date than Western Digital's is).
The hard disk drive maker's CEO says the company is optimistic that the decline in the PC market "might begin to abate a bit," which he thinks could "enable a more stable environment from not only a revenue perspective, but also from a profit perspective."
A Western Digital-specific tailwind
In addition to the hard disk drive industry potentially getting healthier should PCs stabilize, Milligan also highlighted another factor that could significantly improve Western Digital's profitability: a recent ruling from the Ministry of Commerce of the Government of the People's Republic of China, or MOFCOM.
By way of background, Western Digital acquired rival hard disk maker Hitachi Global Storage Technologies back in 2012. In order for this deal to pass MOFCOM scrutiny, Western Digital had to agree to essentially run Hitachi Global Storage Solutions as an "independent competitor in the global hard disk drive market."
In complying with these terms, Western Digital has had to deal with substantial duplication of resources (research and development, sales and marketing, and so on), impacting the company's financial efficiency and ultimately profitability.
Recently, however, MOFCOM agreed to allow Western Digital to begin to more tightly integrate the Western Digital and Hitachi Global Storage operations. According to Milligan, the only real "separation" that needs to happen now following the latest MOFCOM ruling is that Western Digital and Hitachi Global Storage need to have two separate sales forces.
All told, the savings that Western Digital expects to realize, per Milligan, on the operating expense side of things works out to $400 million annually that the company expects "to fully fall to the bottom line."
Milligan also says there will be savings that manifest themselves in terms of gross profit margin, but the magnitude of the cost reduction has yet to be publicly quantified.
"We intend to quantify that sometime in the first part of 2016 as to what those savings will look like," Milligan stated.
Comments on the SanDisk acquisition
Western Digital recently announced it would be acquiring flash memory specialist SanDisk (NASDAQ:SNDK) in a bid to bolster its efforts in solid state drives.
Milligan said Western Digital had been "thinking about" either acquiring or investing in SanDisk for a number of years.
"It was not a reaction to any short-term changes in the market that we've been seeing," the executive clarified.
So, why exactly did the company buy SanDisk? Milligan outlined three big-picture reasons.
"It allows us to have the broadest product portfolio in the industry bar none," he said. Western Digital is already a leading vendor of hard disk drives, and with SanDisk under the company's belt it will also be a major vendor of flash-based solutions into both consumer markets as well as enterprise applications.
Milligan also argued that by owning SanDisk, Western Digital will "have access" to flash-based technology (which is known to have a number of significant advantages relative to standard mechanical hard disk drives) both today and going forward.
"The reason why having access to that technology is that we will be able to tune those flash-based solutions or hard-drive based solutions in a way that are [sic] most optimized for these changing customer needs," he said.
Finally, Milligan believes this deal should offer a "very compelling, long-term financial return" for both Western Digital and its stockholders.
Ashraf Eassa owns shares of Seagate Technology. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.