Seagate’s Revenues Decline But Growth Potential Remains For Enterprise Storage

Seagate Technology (NASDAQ:STX) announced its Q2 FY 2014 earnings on Monday, January 27, reporting total revenues of just over $3.5 billion, a 4% decline from the same period last year. Revenues were slightly lower than the midpoint of guidance given by the company last quarter, primarily because of a 4% sequential decline in enterprise storage units shipped. ^[1]

The company was positive about the response to its 5-millimeter hard drives, which are increasingly gaining share in the mobile market, with Seagate being the leader in the segment. Additionally, as desktops and notebooks are shifting from purely solid state drive (SSD) memory to high-performance solid state hybrid drive (SSHD) based memory solutions due to price considerations, Seagate looks to gain more share in the fast-growing SSHD segment.

Based on mixed quarterly results, Seagate’s stock price dropped by 7-8% after the earnings call. We are in the process of updating our model to reflect these earnings and other trends.

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Lower Than Expected Shipments Across Most Divisions

Although the 7.8 million enterprise units shipped was a ~7% year-on-year increase, it was lower than what we expected, considering they increased by almost 30% y-o-y in Q1. ^[2] Additionally, in line with the company’s expectations, the combined desktop and notebook units – or the compute-segment units – continued to decline, with an 8% y-o-y decline.

Similarly, within the non-compute segment, external hard drive (branded products) units shipped during the quarter were nearly the same compared to same period last year. However storage drives for consumer electronics such as TVs, DVRs and gaming consoles were up by 20%, which Seagate attributed to a healthy response to their network attached storage (NAS) initiative. The company witnessed an increase in the adoption of Seagate Central, its personal cloud, as well as its wireless hard drives under the LaCie brand.

The company did not mention any impact of the launch of two new gaming consoles by Sony and Microsoft (NASDAQ:MSFT) on its non-compute shipments, quite contrary to how Western Digital has touted the consoles having driven its strong consumer electronic sales in the last quarter. We expect the growth in Seagate’s consumer electronics shipments to be driven by the consoles as well, since the Xbox One is equipped with a Samsung hard drive, and Samsung’s hard disk division is owned by Seagate. ^[3]

Enterprise And Cloud Storage Lagging

Seagate sold fewer enterprise storage units than expected in the quarter, with a 4% sequential decline in the units shipped. Seagate’s strategy to drive enterprise storage growth focuses more on alternatives to solid state drive-based storage in the long term, with its Shingled Magnetic Recording (SMR) drives and the Kinetic Open Storage Platform to start contributing this year. Seagate’s future plans also include a Heat Assisted Magnetic Recorded Drive (HAMR), highlighting the company’s focus away from SSD.

Secondly, Seagate acquired Xyratex late in the previous quarter to bolster the fast growing enterprise storage industry. The effect of the acquisition on enterprise and cloud storage should be apparent from the third quarter onwards. ^[4]

Going forward, the company expects to generate revenues of $3.5 billion in Q3 with margins remaining flat. Seagate expects PC and laptop sales to pick up slightly as the company feels that the sales have been bottoming out for a while. There could be a small growth in these compute units in the next few quarters, especially with the hybrid drives having a solid customer response. The overall mix of products in the compute segment shifting towards SSHDs could lead to healthier margins in the long run.

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1. Seagate Q2 2014 Earnings Call Transcript, Seeking Alpha, January 2014 [↩]
2. Seagate Quarterly Supplemental Sheet Q2, Seagate Investor Relations, January 2014 [↩]
3. iFixit Teardown Microsoft Xbox One, iFixit, November 2013 [↩]
4. Seagate SMR And HAMR Drives For 2014, Extreme Tech, September 2013 [↩]