Seagate Partners With Micron To Improve Presence In Enterprise SSD Market

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Hard drive manufacturer Seagate Technology (NASDAQ:STX) recently announced its strategic partnership with chip maker Micron Technology (NASDAQ:MU) to collaborate on building next-gen solid state drives (SSDs). [1] Both companies will initially work on NAND and next-generation SSDs, but will soon engage in developing enterprise storage solutions by using NAND flash memory developed by Micron. Under the agreement, Seagate will source NAND flash chips from Micron that will enable the hard-drive maker to expand its SSD product offerings and ensure cost savings on raw materials. Micron is a key NAND chip manufacturer with a 12% market share in the global NAND flash market.

This deal is similar to competing storage company Western Digital’s (NASDAQ:WDC) subsidiary HGST recently extending its agreement with Intel (NASDAQ:INTC) to use the latter’s NAND flash technology to build SSDs. [2] Below we take a look at how the Micron deal can benefit Seagate in a market where its presence is still very limited. We further take a look at the impact of vertical integration with the NAND-flash chip maker to its margins.

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Seagate’s Presence In The SSD Market

Seagate offers solid state drives for both enterprise use and embedded in personal computers and laptops, and a range of branded solid state drives which it sells via its retail channel. Its share in the SSD market is significantly lower than competing companies such as Samsung (PINK:SSNLF), Toshiba, SanDisk (NASDAQ:SNDK), Intel and Micron. At the end of 2013, Samsung led the pack of SSD manufacturers with a commanding 28.5% share in the SSD market, according to a Gartner report. [3] Next in line was Intel with a 13.7% share, followed by SanDisk, Toshiba and Micron. [4] Both Seagate and Western Digital have often downplayed the importance of pure SSDs in the past and focused on either hybrid drives that use flash-based storage as cache memory riding on top of a HDD, or alternates to SSDs such as ethernet-connected drives or helium-filled storage drives. It wasn’t until mid-2013 that Seagate announced its 600 series pure solid state drive in the consumer market. [5] Because they entered the arena much later, Western Digital and Seagate are dwarfed by Samsung, Intel and SanDisk (after acquiring Fusion-io) in worldwide SSD sales. On the other hand, Seagate (including the $450 million LSI acquisition) had a fairly sizable presence compared to its peers in terms of enterprise SSD market share. [4] This is the market segment which Seagate is targeting to further enhance its presence with the Micron collaboration.

Seagate generated about $100 million from SSD sales in 2013, where competing hard drive maker Western Digital generated almost $500 million from enterprise SSD sales in the same period. The company bought the PCIe flash business LSI in a $450 million acquisition to fuel growth in the SSD domain. LSI was 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. Moreover, the agreement with Micron could not only help the hard drive manufacturer to enhance its portfolio, but also help save costs due to vertical integration. This move signals a definite shift in Seagate’s strategy to increase its focus towards developing flash storage and solid state drives. The enterprise flash market was estimated to be about $1 billion in 2014, with robust growth expected over the next few years. [6] According to the Storage Newsletter, the enterprise SSD market could potentially grow to become a $4 billion market by 2016, which gives Seagate a vast market to cater to. [7]

SSD Market Trends And Pricing

Seagate faces a tough battle to sustain sales of traditional rotating-disk drives in the coming years as its core competency lies in manufacturing hard disk drives. Since the introduction of flash-based memory chips, there has been a constant rise in the adoption of flash-based storage. As a result, hard disk drives are likely to eventually become obsolete in the long run. NAND-flash based storage, or solid state drives (SSD), have numerous advantages over rotating-disk drives, ranging from the sheer speed of read/write operations, low latency in data access, relatively low power consumption, as well as lighter and more durable drives with a greater resistance to mechanical shock. However, SSDs are significantly higher priced than hard disk drives according to latest prices. Traditional storage drives currently cost around 7 to 8 cents per usable gigabyte, whereas even the best-priced SSDs cost over $0.40 per usable gigabyte. However, it is interesting to note that SSD prices have been falling drastically in the last few years as demand has picked up. Although SSD prices are falling at a significantly higher rate than hard disk drives, it does not imply that SSDs could become cheaper than HDDs anytime soon. [8]

Impact Of The Micron Deal

In the current quarter, Seagate expects mild growth in consolidated revenues over the prior year quarter t0 $3.45 billion. Management expects its $374 million Xyratex acquisition to contribute about $200 million to net revenues, while the LSI-flash acquisition should also start contributing meaningfully to the company’s top line. Moreover, the NAND-chip sourcing agreement with Micron could help push cost of revenues lower. The company’s adjusted gross margin for the full year stood at 32.6%, which was slightly higher than the company’s targeted long-term margin range of 27-32%. 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. We currently forecast Seagate’s company-wide gross margin to gradually improve to 33.7% through the end of our forecast period owing to a shift in the product mix, improved product portfolio and cost savings due to vertical integration with chip makers. You can modify the interactive charts below to gauge the impact a change in Seagate’s company-wide gross margins will have on our price estimate for company.

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Notes:
  1. Micron, Seagate Announce Strategic Alliance, Seagate Press Release, February 2015 []
  2. HGST Leading SAS SSDs for Data Center Application Acceleration Will Continue with NAND Flash Technology Leader Intel, HGST Press Release, September 2014 []
  3. Samsung remains the world’s largest maker of SSDs, KitGuru, July 2014 []
  4. IBM officially biggest all-flash array shipper, The Register, June 2014 [] []
  5. Seagate launches the 600 SSD, its first solid-state drive for consumers, Engadget, May 2013 []
  6. The Short and Exciting History of the Enterprise Flash Market, XtremIO, December 2014 []
  7. Enterprise SSDs to Grow Over 10x by 2016, Storage Newsletter, November 2012 []
  8. When Will SSD Have Same Price as HDD?, Storage Newsletter, April 2014 []