Western Digital Corp. easily topped analysts’ revenue and profit estimates for its fiscal second quarter today, and it even raised guidance for the current quarter and full year thanks to strong demand spurred by data center growth.

But it wasn’t enough for shareholders, who clearly expected a better growth story from the giant maker of storage devices. They sent the stock price down nearly 5 percent in initial after-hours trading, though shares recovered most of that ground on optimistic statements during the company’s earnings call with analysts. Update: In Friday morning trading, shares were down less than 1 percent.

Quarterly revenue rose 9 percent, to $5.34 billion, from a year ago, narrowly beatig consensus estimates of $5.3 billion. Earnings per share of $3.95 came in much better than the $3.44 consensus. The company said that on a generally accepted accounting principles basis, it achieved record operating income of $1.4 billion while paying down debt and strengthening its cash flow.

“We once again generated strong operating cash flow, reflecting continued healthy demand in our end markets, most notably for our capacity enterprise hard drives and flash-based products,” Chief Executive Steve Milligan said in a prepared statement. “Our data center business grew a little less than we had expected, but the client business grew strongly,” he added during a call with analysts. “We saw significant growth from capacity-based enterprise hard drives, which was offset by a decline in performance-based hard drives” as that business moves to flash memory-based drives.

Executives predicted strong demand in 2018, with total capacity shipments growing 50 percent. “Acceleration of data center build-outs has created a surge in demand for high-capacity disk drives,” said Chief Financial Officer Mark Long. Persistent shortages that drove NAND flash prices higher through much of 2017 have eased and customers’ transition to the new generation of flash called 3D NAND is expected to go more smoothly than earlier migrations.

In fact, Milligan said last year’s shortages actually helped stabilize the market. “To some degree it was healthy because it opened new markets and increased demand in some mature markets,” he said.

No Toshiba ‘overhang’

This was the first reporting period since Western Digital and Toshiba Corp. settled a long-running dispute over Toshiba’s efforts to sell its memory business to Bain Capital. Western Digital had hoped to buy Toshiba’s NAND flash memory business at a discount and attempted to block the sale of the business to Bain. Western Digital said the settlement the two companies reached last month gave it guaranteed access to the memory chips, which have been in demand thanks to exploding demand for flash-based storage.

Settlement of the Toshiba suit frees Western Digital to move ahead with what it expects to be an aggressive rollout schedule in 2018. “There is no longer a Toshiba overhang,” Milligan said.

“With the Toshiba saga and uncertain tax rate in the rearview mirror, we expect investors to gradually appreciate WD’s attractive valuation, although valuation may not reset immediately until NAND pricing falls further,” Barclays analyst Mark Moskowitz wrote in a note to clients.

The company also said deployment of its 64-layer 3D technology is on target and that 96-layer technology will be added later this year. It also confirmed that it’s on schedule to deliver samples of its microwave-assisted magnetic recording technology in the second half of 2018. MAMR can squeeze up to 4 terabytes into each square inch of disk space, about four times the average areal density of today’s most advanced drives.

Long said the company paid down another $500 million of debt in the second quarter, leaving total debt at $5.8 billion. The company’s debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) is now below 50 percent. “This gives us strong capability from a capital investment standpoint,” he said.

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