Western Digital Corporation (NASDAQ:WDC) reported fiscal third-quarter results that exceeded Wall Street expectations, but its shares fell more than 7% in premarket trading on Friday.
The stock had closed 5.27% higher on Thursday and had surged over 60% over the past month, driven by growing investor optimism.
Elevated Expectations Weigh on Market Reaction
With data storage stocks rallying on the back of AI-driven demand and tighter supply conditions, expectations heading into the earnings release were notably high, setting a challenging benchmark for the company.
Earnings and Revenue Outperform Forecasts
Western Digital posted adjusted earnings per share of $2.72, beating the consensus estimate of $2.36 by $0.36. Revenue reached $3.34 billion, representing a 45% year-over-year increase and surpassing the $3.23 billion forecast.
The strong performance was supported by broad-based demand across end markets, particularly from AI-related workloads that require long-term data storage on hard disk drives.
Margins Expand on Strong Demand
Gross margins improved by 436 basis points quarter-on-quarter to 50.5%, while incremental gross margins reached 73% year over year and approximately 92% compared to the prior 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.
“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.”
Outlook Points to Continued Strength
For the fourth quarter, the company guided to earnings between $3.10 and $3.40 per share on revenue of $3.55 billion to $3.75 billion. The midpoint of $3.25 per share is well above the $2.75 consensus estimate, while the revenue midpoint of $3.65 billion also exceeds expectations of $3.47 billion.
Western Digital projected adjusted gross margins of 51% to 52% for the quarter. Analysts at Bank of America noted that this “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.
Cash Flow Strength and Dividend Increase
Operating cash flow reached $1.12 billion during the quarter, with free cash flow totaling $978 million. The company also announced a 20% increase in its quarterly dividend, raising it to $0.15 per share.