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Western Digital Reports Fiscal Second Quarter 2023 Financial Results

News Summary

  • Second quarter revenue was $3.11 billion, at the high end of the guidance range.
  • Second quarter GAAP earnings per share (EPS) was $(1.40) and Non-GAAP EPS was $(0.42), which includes $100 million of underutilization related charges in HDD.
  • Second quarter GAAP operating loss was $321 million and Non-GAAP operating loss was $119 million.
  • Expect fiscal third quarter 2023 revenue to be in the range of $2.60 billion to $2.80 billion.
  • Expect Non-GAAP EPS in the range of $(1.70) to $(1.40) which includes underutilization charges in flash and HDD totaling $250 million, with flash driven by a 30% reduction in wafer starts beginning in January.

Western Digital Corp. (Nasdaq: WDC) today reported fiscal second quarter 2023 financial results.

“The Western Digital team delivered revenue at the high end of our guidance range, despite a challenging flash price environment and continued cloud inventory digestion,” said David Goeckeler, Western Digital CEO. “We continue to take action to reset the business in response to the post-pandemic environment by optimizing our cost structure and strengthening our liquidity. These actions, including strategically reducing our capital expenditures across both flash and HDD and our operating expenses, as well as amending our financial covenants and securing recent financings, will give us the financial flexibility and optionality to weather this cycle, while also positioning us to continue executing our product roadmap and furthering our technical leadership over the long term.”

Q2 2023 Financial Highlights

 

 

 

GAAP

 

Non-GAAP

 

 

 

 

 

 

 

 

 

 

 

Q2 2023

Q1 2023

Q/Q

 

Q2 2023

Q1 2023

Q/Q

Revenue ($M)

 

$

3,107

 

$

3,736

 

down 17%

 

$

3,107

 

$

3,736

 

down 17%

Gross Margin

 

 

17.0

%

 

26.3

%

down 9.3 ppt

 

 

17.4

%

 

26.7

%

down 9.3 ppt

Operating Expenses ($M)

 

$

849

 

$

823

 

up 3%

 

$

659

 

$

689

 

down 4%

Operating Income (Loss) ($M)

 

$

(321

)

$

158

 

*

 

$

(119

)

$

307

 

*

Net Income (Loss) ($M)

 

$

(446

)

$

27

 

*

 

$

(135

)

$

64

 

*

Earnings Per Share

 

$

(1.40

)

$

0.08

 

*

 

$

(0.42

)

$

0.20

 

*

* not a meaningful figure

 

 

GAAP

 

Non-GAAP

 

 

 

 

 

 

 

 

 

 

 

Q2 2023

Q2 2022

Y/Y

 

Q2 2023

Q2 2022

Y/Y

Revenue ($M)

 

$

3,107

 

$

4,833

 

down 36%

 

$

3,107

 

$

4,833

 

down 36%

Gross Margin

 

 

17.0

%

 

32.8

%

down 15.8 ppt

 

 

17.4

%

 

33.6

%

down 16.2 ppt

Operating Expenses ($M)

 

$

849

 

$

856

 

down 1%

 

$

659

 

$

741

 

down 11%

Operating Income (Loss) ($M)

 

$

(321

)

$

727

 

*

 

$

(119

)

$

882

 

*

Net Income (Loss) ($M)

 

$

(446

)

$

564

 

*

 

$

(135

)

$

724

 

*

Earnings Per Share

 

$

(1.40

)

$

1.79

 

*

 

$

(0.42

)

$

2.30

 

*

* not a meaningful figure

The company generated $35 million in cash flow from operations and ended the quarter with $1.87 billion of total cash and cash equivalents.

Additional details can be found within the company’s earnings presentation, which is accessible online at investor.wdc.com.

End Market Summary

 

Revenue ($M)

Q2 2023

Q1 2023

Q/Q

Q2 2022

Y/Y

Cloud

$

1,224

$

1,829

down 33%

$

1,920

down 36%

Client

 

1,089

 

1,229

down 11%

 

1,854

down 41%

Consumer

 

794

 

678

up 17%

 

1,059

down 25%

Total Revenue

$

3,107

$

3,736

down 17%

$

4,833

down 36%

In the fiscal second quarter:

  • Cloud represented 39% of total revenue. Sequentially, declines in both capacity enterprise drives sold to Cloud customers and smart video customers were partly offset by an increase in flash shipments. The year-over-year decline was primarily due to inventory digestion in hard drives.
  • Client represented 35% of total revenue. Sequentially, the decline was driven by pricing pressure across our flash products, which was partly offset by an increase in hard drive shipments. The year-over-year decline was also due to pricing pressure in flash as well as lower client SSD shipments for PC applications.
  • Consumer represented 26% of revenue. Sequentially, the increase was driven by a seasonal uptick in both retail hard drives and flash. The year-over-year decline was driven by lower retail hard drive shipments and pricing pressure in flash.

Business Outlook for Fiscal Third Quarter of 2023

 

 

 

Three Months Ending

March 31, 2023

 

GAAP(1)

 

Non-GAAP(1)

Revenue ($B)

$2.60 - $2.80

 

$2.60 - $2.80

Gross margin

8.4% - 10.5%

 

9.0% - 11.0%

Operating expenses ($M)

$710 - $730

 

$600 - $620

Interest and other expense, net ($M)

~$90

 

~$90

Tax expense ($M)(2)

N/A

 

$60 - $70

Diluted earnings per share

N/A

 

$(1.70) - $(1.40)

Diluted shares outstanding (in millions)

~319

 

~319

(1) Non-GAAP gross margin guidance excludes stock-based compensation expense of approximately $10 million to $15 million. The company’s Non-GAAP operating expenses guidance excludes amortization of acquired intangible assets and stock-based compensation expense, totaling approximately $100 million to $120 million. In the aggregate, Non-GAAP diluted earnings per share guidance excludes these items totaling $110 million to $135 million. The timing and amount of these charges excluded from Non-GAAP gross margin, Non-GAAP operating expenses, and Non-GAAP diluted earnings per share cannot be further allocated or quantified with certainty. Additionally, the timing and amount of additional charges the company excludes from its Non-GAAP tax expense and Non-GAAP diluted earnings per share are dependent on the timing and determination of certain actions and cannot be reasonably predicted. Accordingly, full reconciliations of Non-GAAP gross margin, Non-GAAP operating expenses, Non-GAAP tax expense and Non-GAAP diluted earnings per share to the most directly comparable GAAP financial measures (income tax expense and diluted earnings per share, respectively) are not available without unreasonable effort.

(2) Due to differences in the tax treatment of items excluded from our Non-GAAP net income and because our GAAP taxes recorded in any interim period are dependent on the timing and determination of certain GAAP operating expenses, our estimated Non-GAAP tax dollars may differ from our GAAP tax dollars.

Investor Communications

The investment community conference call to discuss these results and the company’s business outlook for the fiscal third quarter of 2023 will be broadcast live online today at 1:30 p.m. Pacific/4:30 p.m. Eastern. The live and archived conference call/webcast and the earnings presentation can be accessed online at investor.wdc.com.

About Western Digital

Western Digital is on a mission to unlock the potential of data by harnessing the possibility to use it. With Flash and HDD franchises, underpinned by advancements in memory technologies, we create breakthrough innovations and powerful data storage solutions that enable the world to actualize its aspirations. Core to our values, we recognize the urgency to combat climate change and have committed to ambitious carbon reduction goals approved by the Science Based Targets initiative. Learn more about Western Digital and the Western Digital®, SanDisk® and WD® brands at www.westerndigital.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of federal securities laws, including statements regarding expectations for the company’s business outlook and financial performance for both fiscal third quarter of 2023 and longer term; demand trends; market conditions; product innovations; market access; and cost reductions. These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The preliminary financial results for the company’s fiscal second quarter ended December 30, 2022 included in this press release represent the most current information available to management. The company’s actual results when disclosed in its Form 10-Q may differ from these preliminary results as a result of the completion of the company’s financial closing procedures; final adjustments; completion of the review by the company’s independent registered accounting firm; and other developments that may arise between now and the disclosure of the final results. Other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: volatility in global economic conditions; future responses to and effects of the COVID-19 pandemic or other similar global health crises; impact of business and market conditions; the outcome and impact of our ongoing strategic review, including with respect to customer and supplier relationships, regulatory and contractual restrictions, stock price volatility and the diversion of management's attention from ongoing business operations and opportunities; impact of competitive products and pricing; our development and introduction of products based on new technologies and expansion into new data storage markets; risks associated with cost saving initiatives, restructurings, acquisitions, divestitures, mergers, joint ventures and our strategic relationships; difficulties or delays in manufacturing or other supply chain disruptions; hiring and retention of key employees; our level of debt and other financial obligations; changes to our relationships with key customers; disruptions in operations from cybersecurity incidents or other system security risks; actions by competitors; risks associated with compliance with changing legal and regulatory requirements and the outcome of legal proceedings; and other risks and uncertainties listed in the company’s filings with the Securities and Exchange Commission (the “SEC”), including the company’s Form 10-K filed with the SEC on August 25, 2022, to which your attention is directed. You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the company undertakes no obligation to update or revise these forward-looking statements to reflect new information or events, except as required by law.

Western Digital, the Western Digital logo, SanDisk and WD are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the US and/or other countries.

WESTERN DIGITAL CORPORATION

PRELIMINARY CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions; unaudited; on a US GAAP basis)

 

 

December 30,

2022

 

July 1,

2022

 

 

 

 

ASSETS

Current assets:

 

 

 

Cash and cash equivalents

$

1,871

 

$

2,327

Accounts receivable, net

 

1,905

 

 

2,804

Inventories

 

3,773

 

 

3,638

Other current assets

 

832

 

 

684

Total current assets

 

8,381

 

 

9,453

Property, plant and equipment, net

 

3,688

 

 

3,670

Notes receivable and investments in Flash Ventures

 

1,357

 

 

1,396

Goodwill

 

10,041

 

 

10,041

Other intangible assets, net

 

135

 

 

213

Other non-current assets

 

1,445

 

 

1,486

Total assets

$

25,047

 

$

26,259

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

 

 

 

Accounts payable

$

1,193

 

$

1,902

Accounts payable to related parties

 

368

 

 

320

Accrued expenses

 

1,410

 

 

1,636

Income taxes payable

 

1,025

 

 

869

Accrued compensation

 

348

 

 

510

Current portion of long-term debt

 

38

 

 

Total current liabilities

 

4,382

 

 

5,237

Long-term debt

 

7,033

 

 

7,022

Other liabilities

 

1,517

 

 

1,779

Total liabilities

 

12,932

 

 

14,038

Total shareholders’ equity

 

12,115

 

 

12,221

Total liabilities and shareholders’ equity

$

25,047

 

$

26,259

WESTERN DIGITAL CORPORATION

PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts; unaudited; on a US GAAP basis)

 

Three Months Ended

 

Six Months Ended

 

December 30,

2022

 

December 31,

2021

 

December 30,

2022

 

December 31,

2021

Revenue, net

$

3,107

 

 

$

4,833

 

 

$

6,843

 

 

$

9,884

 

Cost of revenue

 

2,579

 

 

 

3,250

 

 

 

5,334

 

 

 

6,636

 

Gross profit

 

528

 

 

 

1,583

 

 

 

1,509

 

 

 

3,248

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

523

 

 

 

575

 

 

 

1,075

 

 

 

1,153

 

Selling, general and administrative

 

250

 

 

 

279

 

 

 

497

 

 

 

570

 

Employee termination, asset impairment and other charges

 

76

 

 

 

2

 

 

 

100

 

 

 

20

 

Total operating expenses

 

849

 

 

 

856

 

 

 

1,672

 

 

 

1,743

 

Operating income (loss)

 

(321

)

 

 

727

 

 

 

(163

)

 

 

1,505

 

Interest and other expense, net

 

(64

)

 

 

(81

)

 

 

(138

)

 

 

(155

)

Income (loss) before taxes

 

(385

)

 

 

646

 

 

 

(301

)

 

 

1,350

 

Income tax expense

 

61

 

 

 

82

 

 

 

118

 

 

 

176

 

Net income (loss)

$

(446

)

 

$

564

 

 

$

(419

)

 

$

1,174

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

Basic

$

(1.40

)

 

$

1.81

 

 

$

(1.32

)

 

$

3.77

 

Diluted

$

(1.40

)

 

$

1.79

 

 

$

(1.32

)

 

$

3.73

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

318

 

 

 

312

 

 

 

317

 

 

 

311

 

Diluted

 

318

 

 

 

315

 

 

 

317

 

 

 

315

 

WESTERN DIGITAL CORPORATION

PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited; on a US GAAP basis)

 

 

Three Months Ended

 

Six Months Ended

 

December 30,

2022

 

December 31,

2021

 

December 30,

2022

 

December 31,

2021

Operating Activities

 

 

 

 

 

 

 

Net income (loss)

$

(446

)

 

$

564

 

 

$

(419

)

 

$

1,174

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

214

 

 

 

242

 

 

 

430

 

 

 

492

 

Stock-based compensation

 

86

 

 

 

87

 

 

 

172

 

 

 

163

 

Deferred income taxes

 

67

 

 

 

11

 

 

 

25

 

 

 

38

 

Non-cash portion of asset impairment

 

15

 

 

 

 

 

 

15

 

 

 

 

Loss on disposal of assets

 

 

 

 

1

 

 

 

1

 

 

 

1

 

Amortization of debt issuance costs and discounts

 

2

 

 

 

11

 

 

 

5

 

 

 

21

 

Other non-cash operating activities, net

 

25

 

 

 

25

 

 

 

69

 

 

 

13

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

517

 

 

 

(298

)

 

 

899

 

 

 

(486

)

Inventories

 

89

 

 

 

(103

)

 

 

(135

)

 

 

(30

)

Accounts payable

 

(396

)

 

 

137

 

 

 

(521

)

 

 

96

 

Accounts payable to related parties

 

74

 

 

 

11

 

 

 

49

 

 

 

(9

)

Accrued expenses

 

(182

)

 

 

82

 

 

 

(226

)

 

 

81

 

Income taxes payable

 

39

 

 

 

1

 

 

 

156

 

 

 

(34

)

Accrued compensation

 

(58

)

 

 

1

 

 

 

(162

)

 

 

(66

)

Other assets and liabilities, net

 

(11

)

 

 

(106

)

 

 

(317

)

 

 

(267

)

Net cash provided by operating activities

 

35

 

 

 

666

 

 

 

41

 

 

 

1,187

 

Investing Activities

 

 

 

 

 

 

 

Purchases of property, plant and equipment, net

 

(258

)

 

 

(294

)

 

 

(578

)

 

 

(539

)

Activity related to Flash Ventures, net

 

(17

)

 

 

35

 

 

 

82

 

 

 

(17

)

Strategic Investments and other, net

 

17

 

 

 

2

 

 

 

14

 

 

 

(13

)

Net cash used in investing activities

 

(258

)

 

 

(257

)

 

 

(482

)

 

 

(569

)

Financing Activities

 

 

 

 

 

 

 

Employee stock plans, net

 

43

 

 

 

56

 

 

 

(7

)

 

 

(20

)

Repayment of debt and revolving credit facility, net

 

 

 

 

(1,214

)

 

 

 

 

 

(1,427

)

Debt issuance costs

 

(5

)

 

 

(9

)

 

 

(5

)

 

 

(9

)

Net cash provided by (used in) financing activities

 

38

 

 

 

(1,167

)

 

 

(12

)

 

 

(1,456

)

Effect of exchange rate changes on cash

 

7

 

 

 

(1

)

 

 

(3

)

 

 

(1

)

Net decrease in cash and cash equivalents

 

(178

)

 

 

(759

)

 

 

(456

)

 

 

(839

)

Cash and cash equivalents, beginning of period

 

2,049

 

 

 

3,290

 

 

 

2,327

 

 

 

3,370

 

Cash and cash equivalents, end of period

$

1,871

 

 

$

2,531

 

 

$

1,871

 

 

$

2,531

 

WESTERN DIGITAL CORPORATION

Supplemental Operating Segment Results

(in millions; except percentages; unaudited)

 

Three Months Ended

 

Six Months Ended

 

December 30,

2022

 

December 31,

2021

 

December 30,

2022

 

December 31,

2021

 

 

 

 

Net revenue:

 

 

 

 

 

 

 

Flash

$

1,657

 

 

$

2,620

 

 

$

3,379

 

 

$

5,110

 

HDD

 

1,450

 

 

 

2,213

 

 

 

3,464

 

 

 

4,774

 

Total net revenue

$

3,107

 

 

$

4,833

 

 

$

6,843

 

 

$

9,884

 

Gross profit:

 

 

 

 

 

 

 

Flash

$

240

 

 

$

946

 

 

$

662

 

 

$

1,867

 

HDD

 

300

 

 

 

677

 

 

 

874

 

 

 

1,469

 

Total gross profit for segments

 

540

 

 

 

1,623

 

 

 

1,536

 

 

 

3,336

 

Unallocated corporate items:

 

 

 

 

 

 

 

Stock-based compensation expense

 

(12

)

 

 

(14

)

 

 

(26

)

 

 

(23

)

Amortization of acquired intangible assets

 

 

 

 

(26

)

 

 

(1

)

 

 

(65

)

Total unallocated corporate items

 

(12

)

 

 

(40

)

 

 

(27

)

 

 

(88

)

Consolidated gross profit

$

528

 

 

$

1,583

 

 

$

1,509

 

 

$

3,248

 

Gross margin:

 

 

 

 

 

 

 

Flash

 

14.5

%

 

 

36.1

%

 

 

19.6

%

 

 

36.5

%

HDD

 

20.7

%

 

 

30.6

%

 

 

25.2

%

 

 

30.8

%

Total gross margin for segments

 

17.4

%

 

 

33.6

%

 

 

22.4

%

 

 

33.8

%

Consolidated gross margin

 

17.0

%

 

 

32.8

%

 

 

22.1

%

 

 

32.9

%

The Company manages and reports under two reportable segments: flash-based products (“Flash”) and hard disk drives (“HDD”). In the table above, total gross profit for segments and total gross margin for segments are Non-GAAP financial measures, which are also referred to herein as Non-GAAP gross profit and Non-GAAP gross margin, respectively.

WESTERN DIGITAL CORPORATION

PRELIMINARY RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in millions; unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

December 30,

2022

 

September 30,

2022

 

December 31,

2021

 

December 30,

2022

 

December 31,

2021

GAAP cost of revenue

$

2,579

 

 

$

2,755

 

 

$

3,250

 

 

$

5,334

 

 

$

6,636

 

Stock-based compensation expense

 

(12

)

 

 

(14

)

 

 

(14

)

 

 

(26

)

 

 

(23

)

Amortization of acquired intangible assets

 

 

 

 

(1

)

 

 

(26

)

 

 

(1

)

 

 

(65

)

Non-GAAP cost of revenue

$

2,567

 

 

$

2,740

 

 

$

3,210

 

 

$

5,307

 

 

$

6,548

 

 

 

 

 

 

 

 

 

 

 

GAAP gross profit

$

528

 

 

$

981

 

 

$

1,583

 

 

$

1,509

 

 

$

3,248

 

Stock-based compensation expense

 

12

 

 

 

14

 

 

 

14

 

 

 

26

 

 

 

23

 

Amortization of acquired intangible assets

 

 

 

 

1

 

 

 

26

 

 

 

1

 

 

 

65

 

Non-GAAP gross profit

$

540

 

 

$

996

 

 

$

1,623

 

 

$

1,536

 

 

$

3,336

 

 

 

 

 

 

 

 

 

 

 

GAAP operating expenses

$

849

 

 

$

823

 

 

$

856

 

 

$

1,672

 

 

$

1,743

 

Stock-based compensation expense

 

(74

)

 

 

(72

)

 

 

(73

)

 

 

(146

)

 

 

(140

)

Amortization of acquired intangible assets

 

(39

)

 

 

(38

)

 

 

(38

)

 

 

(77

)

 

 

(77

)

Employee termination, asset impairment and other charges

 

(76

)

 

 

(24

)

 

 

(2

)

 

 

(100

)

 

 

(20

)

Other

 

(1

)

 

 

 

 

 

(2

)

 

 

(1

)

 

 

(4

)

Non-GAAP operating expenses

$

659

 

 

$

689

 

 

$

741

 

 

$

1,348

 

 

$

1,502

 

 

 

 

 

 

 

 

 

 

 

GAAP operating income (loss)

$

(321

)

 

$

158

 

 

$

727

 

 

$

(163

)

 

$

1,505

 

Cost of revenue adjustments

 

12

 

 

 

15

 

 

 

40

 

 

 

27

 

 

 

88

 

Operating expense adjustments

 

190

 

 

 

134

 

 

 

115

 

 

 

324

 

 

 

241

 

Non-GAAP operating income (loss)

$

(119

)

 

$

307

 

 

$

882

 

 

$

188

 

 

$

1,834

 

 

 

 

 

 

 

 

 

 

 

GAAP interest and other expense, net

$

(64

)

 

$

(74

)

 

$

(81

)

 

$

(138

)

 

$

(155

)

Non-cash economic interest and Other

 

 

 

 

(1

)

 

 

13

 

 

 

(1

)

 

 

19

 

Non-GAAP interest and other expense, net

$

(64

)

 

$

(75

)

 

$

(68

)

 

$

(139

)

 

$

(136

)

 

 

 

 

 

 

 

 

 

 

GAAP income tax expense

$

61

 

 

$

57

 

 

$

82

 

 

$

118

 

 

$

176

 

Income tax adjustments

 

(109

)

 

 

111

 

 

 

8

 

 

 

2

 

 

 

11

 

Non-GAAP income tax expense

$

(48

)

 

$

168

 

 

$

90

 

 

$

120

 

 

$

187

 

WESTERN DIGITAL CORPORATION

PRELIMINARY RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in millions, except per share amounts; unaudited)

 

Three Months Ended

 

Six Months Ended

 

December 30,

2022

 

September 30,

2022

 

December 31,

2021

 

December 30,

2022

 

December 31,

2021

GAAP Net income (loss)

$

(446

)

 

$

27

 

 

$

564

 

 

$

(419

)

 

$

1,174

 

Stock-based compensation expense

 

86

 

 

 

86

 

 

 

87

 

 

 

172

 

 

 

163

 

Amortization of acquired intangible assets

 

39

 

 

 

39

 

 

 

64

 

 

 

78

 

 

 

142

 

Employee termination, asset impairment and other charges

 

76

 

 

 

24

 

 

 

2

 

 

 

100

 

 

 

20

 

Non-cash economic interest and Other

 

1

 

 

 

(1

)

 

 

15

 

 

 

 

 

 

23

 

Income tax adjustments

 

109

 

 

 

(111

)

 

 

(8

)

 

 

(2

)

 

 

(11

)

Non-GAAP net income (loss)

$

(135

)

 

$

64

 

 

$

724

 

 

$

(71

)

 

$

1,511

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per common share

 

 

 

 

 

 

 

 

 

GAAP

$

(1.40

)

 

$

0.08

 

 

$

1.79

 

 

$

(1.32

)

 

$

3.73

 

Non-GAAP

$

(0.42

)

 

$

0.20

 

 

$

2.30

 

 

$

(0.22

)

 

$

4.80

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

GAAP

 

318

 

 

 

319

 

 

 

315

 

 

 

317

 

 

 

315

 

Non-GAAP

 

318

 

 

 

319

 

 

 

315

 

 

 

317

 

 

 

315

 

 

 

 

 

 

 

 

 

 

 

Cash flows

 

 

 

 

 

 

 

 

 

Cash flow provided by operating activities

$

35

 

 

$

6

 

 

$

666

 

 

$

41

 

 

$

1,187

 

Purchases of property, plant and equipment, net

 

(258

)

 

 

(320

)

 

 

(294

)

 

 

(578

)

 

 

(539

)

Activity related to Flash Ventures, net

 

(17

)

 

 

99

 

 

 

35

 

 

 

82

 

 

 

(17

)

Free cash flow

$

(240

)

 

$

(215

)

 

$

407

 

 

$

(455

)

 

$

631

 

To supplement the condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”), the table above sets forth Non-GAAP cost of revenue; Non-GAAP gross profit; Non-GAAP gross margin; Non-GAAP operating expenses; Non-GAAP operating income and loss; Non-GAAP interest and other expense, net; Non-GAAP income tax expense; Non-GAAP net income and loss; Non-GAAP diluted income and loss per common share and free cash flow (“Non-GAAP measures”). These Non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP and may be different from Non-GAAP measures used by other companies. The company believes the presentation of these Non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors for measuring the company’s earnings performance and comparing it against prior periods. Specifically, the company believes these Non-GAAP measures provide useful information to both management and investors as they exclude certain expenses, gains and losses that the company believes are not indicative of its core operating results or because they are consistent with the financial models and estimates published by many analysts who follow the company and its peers. As discussed further below, these Non-GAAP measures exclude, as applicable, stock-based compensation expense, amortization of acquired intangible assets, employee termination, asset impairment and other charges, non-cash economic interest, other adjustments, and income tax adjustments, and the company believes these measures along with the related reconciliations to the GAAP measures provide additional detail and comparability for assessing the company's results. These Non-GAAP measures are some of the primary indicators management uses for assessing the company's performance and planning and forecasting future periods. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

As described above, the company excludes the following items from its Non-GAAP measures:

Stock-based compensation expense. Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, the subjective assumptions involved in those determinations, and the volatility in valuations that can be driven by market conditions outside the company's control, the company believes excluding stock-based compensation expense enhances the ability of management and investors to understand and assess the underlying performance of its business over time and compare it against the company's peers, a majority of whom also exclude stock-based compensation expense from their Non-GAAP results.

Amortization of acquired intangible assets. The company incurs expenses from the amortization of acquired intangible assets over their economic lives. Such charges are significantly impacted by the timing and magnitude of the company's acquisitions and any related impairment charges.

Employee termination, asset impairment and other charges. From time-to-time, in order to realign the company's operations with anticipated market demand or to achieve cost synergies from the integration of acquisitions, the company may terminate employees and/or restructure its operations. From time-to-time, the company may also incur charges from the impairment of intangible assets and other long-lived assets. In addition, the company may record credits related to gains upon sale of property due to restructuring or reversals of charges recorded in prior periods. These charges or credits are inconsistent in amount and frequency, and the company believes they are not indicative of the underlying performance of its business.

Non-cash economic interest. The company excludes non-cash economic interest expense associated with its convertible notes. These charges do not reflect the company's operating results, and the company believes they are not indicative of the underlying performance of its business.

Other adjustments. From time-to-time, the company incurs charges or gains that the company believes are not a part of the ongoing operation of its business. The resulting expense or benefit is inconsistent in amount and frequency.

Income tax adjustments. Income tax adjustments include the difference between income taxes based on a forecasted annual Non-GAAP tax rate and a forecasted annual GAAP tax rate as a result of the timing of certain Non-GAAP pre-tax adjustments. The income tax adjustments also include adjustments to estimates related to the current status of the rules and regulations governing the transition to the Tax Cuts and Jobs Act and the re-measurement of certain unrecognized tax benefits primarily related to tax positions taken in prior quarters, including interest. These adjustments are excluded because the company believes that they are not indicative of the underlying performance of its ongoing business.

Additionally, free cash flow is defined as cash flows provided by operating activities less purchases of property, plant and equipment, net, and the activity related to Flash Ventures, net. The company considers free cash flow generated in any period to be a useful indicator of cash that is available for strategic opportunities including, among others, investing in the company's business, making strategic acquisitions, repaying debt and strengthening the balance sheet.

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