Enterprise Storage, Notebooks Drive Seagate’s Revenue Growth

Seagate Technology (NASDAQ:STX) announced its Q2 FY 2015 earnings on January 26, reporting a 5% year-on-year increase in net revenues to $3.7 billion even though overall shipments stayed nearly flat over the prior year quarter at almost 57 million units. The hard drive manufacturer saw the average selling price (ASP) per hard disk drive sold decrease to $61 in the December quarter, from $62 in the year-ago period. Seagate witnessed strong growth in shipments for storage units in notebook and enterprise drives, which were both up 17% and 24% over the prior year quarter, respectively. The company expects the solid demand for notebook and netbook storage units to continue going forward. ^[1]Seagate shipped nearly 61.3 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the quarter, which was an increase both sequentially (+2%) and annually (+17%).

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Storage Unit Shipments Trends

Seagate’s enterprise storage units rose by 24% y-o-y in the second fiscal quarter to 9.1 million units. It was also a sequential improvement of 3% in terms of units shipped. ^[2] Seagate’s enterprise unit shipments have been lumpy in the last few quarters, which the company attributed to variable demand from 10-15 of its largest enterprise customers, which now includes Chinese web services provider Baidu. However, shipments have risen by a combined 13% y-o-y in the current fiscal year. Despite the rise in volumes, the company faced pricing pressure in both the client and cloud enterprise market segments. Furthermore, the company expects cloud demand for enterprise storage to remain low in the coming quarters.

In terms of compute units (desktops and notebooks combined), Seagate sold 16 million desktop storage units, which was a decline both sequentially (-14%) and annually (-17%). Comparatively, notebook and netbook storage continued the growth spree with unit shipments rising by 17% y-o-y to 19.7 million units. Management mentioned sales have been slow in the current quarter – a trend which could continue in the coming quarters. The company expects low single-digit percentage growth in the total addressable market in the compute storage domain.

Seagate’s consumer electronics units for gaming consoles, DVRs and other media devices, and branded external storage products continued to be underwhelming. Consumer electronics storage units declined by 9% y-o-y to 6.1 million units in the December quarter, while corresponding shipments of competing hard drive manufacturer Western Digital (NASDAQ: WDC) have witnessed double digit growth in consumer electronics storage units through the first three quarters of the calendar year. Unit shipments rose by 50% y-o-y to 19.5 million units in the first two quarters of 2014 alone. ^[3] The growth in Western Digital’s consumer electronics storage units was fueled by demand for storage drives for newly launched gaming consoles from Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. ^[4] Additionally, Seagate’s branded product sales, which include external drives, personal cloud and wireless storage drives for end-users, also declined by over 3% to 6 million units for the quarter.

Impact On Margins

Seagate’s consolidated revenues were 5% higher than the prior year quarter at $3.7 billion – in line with the company’s expectation. The company’s gross margin (GAAP) in the second fiscal quarter stayed flat over the prior year period at 27.8%, which was within the company’s targeted long-term margin range of 27-32%. As a result of a relatively unfavorable product mix, Seagate’s non-GAAP gross margin had declined by about 20 basis points over Q1’14 to 27.8%. In the coming quarters, the company expects margins to improve slightly in the coming quarters despite a higher mix of low-end storage product sales in the coming quarters. Seagate is targeting non-GAAP gross margins to be around 28.5% in the coming quarters.

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1. Seagate Q2 FY 2015 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. Seagate Q2 FY 2015 Supplemental Information, Seagate Investor Relations, January 2015 [↩]
3. Western Digital Q4 FY 2014 Supplemental Information, Western Digital Investor Relations, July 2014 [↩]
4. PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]