Seagate Posts Mixed Quarter Amid Declining PC Sales, Enterprise Market Lends Support

by Trefis Team
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Seagate Technology (NASDAQ:STX) announced its Q1 FY 2014 earnings on October 28, reporting total revenues of around $3.5 billion, or a decline of 6.5% over the same period last year. Revenues were slightly lower than the midpoint of guidance given by the company last quarter, mainly due to the continuing decline in PC and notebook sales. [1]

The storage company shipped a total of 55.7 million units during the quarter, which is down 4% from the units shipped in Q1 FY 2013. Other than the the Compute Client division (units for PCs and notebooks), all the other business segments showed year-on-year growth in sales, driven by strong enterprise demand for cloud computing storage and booming tablet and smartphone sales. However, this couldn’t offset the decline in PC demand, which accounts for about 45% of its total revenues.

Even though the overall storage requirements are rising – as evidenced by the fact that Seagate shipped around 49 exabytes (1 exabyte = 1 billion gigabytes) of storage in Q1, which is 14% higher than last year – it is not reflected in the units shipped. This is because of a corresponding increase in the average disk capacity, which has gone up to 875 gigabytes per disk this quarter, a 19% y-o-y growth. The average selling prices (ASPs) were nearly constant at $62 for all quarters since Q1 2013, which further weighed on the growth rates. Stable ASPs and a slight decline in overall demand have also kept the gross margins stable at around 28% over the last few quarters. [2] We have revised our price estimate for Seagate to $51, to reflect earnings and recent trends.

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PC Sales To Stagnate Going Forward, Enterprise Business To Drive Growth

According to latest IDC report, PC and notebook sales dropped over 8% last quarter, making it the longest ever period of sustained decline. It was attributed to slowing demand from emerging markets, consumer softness in mature markets and IT spending cuts amid a weak macroeconomic environment. The cannibalization from tablets and smartphones are expected to cause the PC and notebook sales to decline even further.  Accordingly, any potential near-term growth in the units shipped for the Cloud Compute division seems unlikely going forward.

The enterprise business continued to do well on the back of demand from cloud storage providers. We believe that its enterprise business will be the major growth driver of revenues in the coming years as storage demand from data centers continues to scale new heights. The high growth rate of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, back up and use digital content. Various remote storage services like iCloud, Dropbox, Skydrive and Google Drive provide several GBs of free storage and cost as little as $10 per year for a 20 GB storage space. Low pricing and features such as loss protection and syncing with multiple devices are making these services very popular with users. As remote storage services continue to gain traction with retail customers, data storage requirement in data centers is increasing (Read Seagate’s New Enterprise Hybrid Drive Has Big Growth Potential).

With more data moving to the cloud, servers need to support higher input/ouput operations per second (IOPS), and require efficient storage from faster drives to do that. Solid State Hybrid Drives (SSHDs), a combination of Solid State Drive (SSD) and Hard Disk Drives, have performance and size comparable to SSD drives while being relatively cheaper. They provide higher IOPS and increase the responsiveness of HDDs by adding solid-state storage for advanced caching of large, frequently used chunks of data. SSHDs are expected to see a larger adoption especially in the enterprise space as well as the tablets and smartphones market. Seagate, in its attempt to tap the growing ultrabook and tablet market, became the pioneer in the launch of 5mm SSHD earlier this year. This is more likely to benefit Seagate in the SSHDs market than its competitors in the coming quarters. (Read Seagate Targets Ultrabook And Tablet Markets With Thinnest Ever Hard Disk Drive)

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Notes:
  1. Seagate Technology Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, October 28 2013 []
  2. Seagate Technology Reports Fiscal First Quarter 2014 Financial Results, Seagate, October 24 2013 []
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