Key insights
- Western Digital beat Q3 estimates and provided strong Q4 guidance, driven by AI-related demand for HDDs. Despite this, the stock fell in premarket trading, possibly due to high expectations and concerns about the pace of gross margin expansion. Overall, the results confirm the positive impact of AI on the data storage sector, but market reaction suggests some caution.
Investing.com -- Western Digital Corporation (NASDAQ:WDC) reported fiscal third quarter results that exceeded Wall Street expectations, yet shares declined more than 7% in Friday premarket trading.
WDC shares closed 5.27% higher Thursday, and were up over 60% over the past month amid heightened investor optimism.
With data storage stocks rallying recently on enthusiasm around AI-driven demand and tighter supply conditions, the bar heading into earnings had risen significantly.
The data storage company posted adjusted earnings per share of $2.72, beating the analyst consensus of $2.36 by $0.36. Revenue reached $3.34 billion, up 45% YoY and above the $3.23 billion estimate. The strong performance was driven by robust demand across all end markets, particularly in AI workloads requiring persistent data storage on hard disk drives.
Gross margins expanded 436 basis points quarter-on-quarter to 50.5%, while incremental gross margins were 73% year-on-year and approximately 92% quarter-on-quarter.
"WD started calendar year 2026 with great execution, driving strong sequential and YoY revenue growth in all our end markets, while expanding gross and operating margins," said Irving Tan, CEO of WD. "The demand drivers are clear: Virtually every AI workload, from training, inference, agentic AI to physical AI, creates data that is stored persistently and cost-efficiently on HDDs."
For the fourth quarter, Western Digital issued guidance of $3.10-$3.40 per share on revenue of $3.55-$3.75 billion. The midpoint of $3.25 per share significantly exceeds the consensus estimate of $2.75, while the revenue midpoint of $3.65 billion tops the $3.47 billion consensus.
The company issued fourth quarter adjusted gross margin guidance of 51%-52%, which Bank of America analysts said "does imply a slower q/q step-up."
"Given the $/TB pricing up 9% y/y, we see a continued path of revenue and GM upside. The broader demand backdrop remains favorable with LTAs now extending into C29," they added.
Operating cash flow reached $1.12 billion in the third quarter with free cash flow of $978 million. Western Digital also announced a 20% increase in its quarterly dividend to $0.15 per share.
Vahid Karaahmetovic contributed to this report.