Seagate Earnings Preview: Acquisitions and Enterprise Storage in Focus
Seagate Technology (NASDAQ:STX) is scheduled to announce its Q4 FY 2014 earnings on July 17. Seagate’s net revenues declined by 3% year-on-year (y-o-y) to $3.4 billion in the last quarter, owing to stagnating sales in the consumer electronics storage, branded hard drives and compute divisions. The only area of growth was enterprise storage, with a mild 2.5% y-o-y increase in unit shipments to 7.7 million units for the quarter. [1] Seagate’s revenue guidance for Q4 FY 2014 is nearly 4% lower than the prior year quarter at $3.3 billion, which includes nearly $100 million that the Xyratex acquisition is likely to contribute. Not counting the Xyratex contribution, the company’s Q4 revenues could be 6% lower than the year-ago quarter. However, the company expects demand to pick up in the latter half of the calendar year. [2]
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Xyratex and LSI Flash Acquisitions
Seagate announced that it will acquire LSI’s flash business from Avago Technology (NASDAQ:AVGO) in May for $450 million. [3] Avago Technology is one of the leading manufacturers of networking semiconductors and chips, with a market cap of around $18 billion. Avago had acquired storage and networking chip-maker LSI Corporation in a $6.6 billion acquisition in December 2013, with the combined entity expected to generate close to $5 billion in revenues annually. Approximately one-third of its net revenues were expected to come from storage semiconductor sales. [4] The flash business is crucial to Seagate because of an increasing mix of solid state drives (SSDs), which use flash components, compared to traditional hard disk drives.
LSI is one of the market leaders with PCI Express SSD technology, which can enhance storage performance of regular storage drives due to the fast connectivity offered. PCIe storage is presently a niche domain, but is expected to mature soon. ((Seagate Drops Bomb On Storage Industry, Buys LSI Flash Business From Avago, Forbes, May 2014)) Going forward, LSI’s components business is expected to contribute an estimated $40-50 million per quarter during fiscal 2015 which should help Seagate compete with other players in the SSD market. [5]
Seagate completed the acquisition of Xyratex in March this year, with the latter likely to contribute about $100 million to Seagate’s top line in Q4 FY 2014. Xyratex was the largest hard disk drive processing equipment supplier with a portfolio that includes disk processing, inspection and testing equipment. Prominent hard disk manufacturers like Western Digital (NASDAQ: WDC) and Toshiba also use Xyratex equipment for testing and inspection purposes. Seagate expects Xyratex to contribute $500-600 million in revenues during its fiscal 2015.
Enterprise Storage Units Could Pick Up
Seagate’s average selling price (ASP) per drive declined from $63 per unit in Q3 FY 2013 to $61 in the last quarter as a result of nearly flat enterprise unit sales. The company reported a slowdown in enterprise storage unit sales, with shipments growing by only 2.5% y-o-y to 7.7 million units. Comparatively, the company witnessed a 7% increase in enterprise unit shipments in 2013. [6] Consequently, Seagate’s net revenues for the March quarter declined by over 3% to $3.4 billion, compared to the prior year period.
With the contribution made by Xyratex likely to be accretive starting this quarter, the company remains optimistic that these shipment volumes will pick up in the coming quarters. [2] Additionally, LSI’s flash components business acquisition could help Seagate in more than just product sales. Seagate could source flash components at cheaper prices which could help reduce production costs and maintain competitive pricing. This could in turn result in higher unit shipments of enterprise storage products.
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Notes:- Seagate Q3 FY 2014 Supplemental Information, Seagate Investor Relations, April 2014 [↩]
- Seagate Q3 FY 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩] [↩]
- Seagate To Buy LSI’s Flash Businesses From Avago For $450 Million, Wall Street Journal, May 2014 [↩]
- Avago To Acquire LSI: Strong Synergies Plus Diversification, Forbes, December 2013 [↩]
- IBM Officially Biggest All-Flash Array Shipper, The Register, June 2014 [↩]
- Seagate Q3 FY 2014 Supplemental Information, Seagate Investor Relations, April 2014 [↩]