Western Digital: Positive Move To Spin-Off Flash Memory

Core Viewpoint - Western Digital Corporation is planning to spin off its Flash memory business in H2 2024, with the intention to merge this segment with Kioxia to form a new company, aiming to streamline operations and improve profitability [2][6]. Company Structure After Spin-off - The spin-off is driven by supply-demand imbalances and the need for tailored business strategies for both segments [5][6]. - Western Digital will own 50.1% and Kioxia will own 49.9% of the new company formed from the merger of the Flash segments [5]. Market Growth Outlook - The HDD market is projected to grow at a 19% CAGR, driven by increasing capacity needs from cloud data centers, while the NAND Flash market is expected to grow at a lower 11% CAGR [9]. - Western Digital's exposure to the cloud market is significant, with 76% of HDD revenue coming from this sector, compared to only 8% for Flash [9]. Profitability Analysis - The gross margins for HDD are generally higher than those for Flash, with HDD margins improving to 27% in Q3 FY2024 YTD, while Flash margins were at 9% [12]. - The spin-off is expected to enhance overall profitability margins for Western Digital due to the higher margins associated with the HDD segment [12]. Revenue Breakdown - Flash revenues have declined from $10.7 billion in 2018 to $6.1 billion in 2023, while HDD revenues decreased from $9.9 billion to $6.3 billion in the same period [8]. - For Q3 2024 YTD, Flash revenues increased by 5% due to higher average selling prices (ASP) and increased bit shipments, while HDD revenues declined by 13% [8]. Market Positioning - Western Digital maintains a strong market position in the HDD segment with a market share of approximately 37% from 2019 to 2023, while its NAND market share averaged around 15% [8]. - The partnership with Kioxia through Flash Ventures allows Western Digital to secure additional wafer supply, benefiting both companies [8].