Western Digital’s Skyera Acquisition Adds To Flash Storage Consolidation

by Trefis Team
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Hard drive manufacturer Western Digital Corporation (NASDAQ:WDC) announced that its subsidiary HGST (Hitachi Global Storage Technologies) will acquire flash storage array maker Skyera in an all cash transaction. The financial terms of the deal have not yet been disclosed, but the acquisition has been estimated to cost Western Digital somewhere between $200 million and $500 million. ((Drive-making kingpin WD gobbles Skyera..to give to HGST, The Register, December 2014)) Western Digital has acquired multiple companies in the flash storage arena in recent quarters, leading to a better solid state drive (SSD) portfolio and constantly increasing high-margin SSD sales. Among these acquisitions were SSD manufacturer sTec, enterprise flash systems maker Virident Systems and storage input/output optimization software company Velobit for a combined $1 billion. Below we take a look at Skyera and the possible impact on Western Digital’s flash storage offerings.

We have a $100 price estimate for Western Digital’s stock. Our price estimate is slightly lower than the current market price, which has risen by about 10% since the company released its Q1 FY 2014 earnings in late October.

See our full analysis of Western Digital here


Skyera And Other Flash Array Startups

Skyera was founded in 2010 as an enterprise solid state storage systems startup, which sells rackmount SSDs. Skyera launched its first 44 terabyte SSD rack skyHawk in August 2012, which was priced at $131,000 or just under $3 per usable gigabyte. [1] Over the last two years, the company has tripled the storage capacity of skyHawk, recently releasing the upgraded version of skyHawk single-controller all-flash array with a storage capacity of 136 terabytes. Skyera, unlike most SSD makers, designs its SSDs in house, due to which its pricing is lower than most competitors. As a result, the skyHawk costs customers as low as $2.5-$5 per GB where storage array prices could go up to $20 per usable GB. [2] [3] The company initially intended to release its massive 250 TB skyEagle array this year, but has postponed the launch to early 2015. Skyera has received an estimated $80-90 million in funding, mostly from Dell, in the last few years. [4]

At the end of 2013, consulting firm The Spur Group released a report in which it compared the sales channels of five major storage system vendors including EMC (NYSE:EMC), NetApp (NASDAQ:NTAP), Dell (NASDAQ:DELL) and Oracle (NASDAQ:ORCL) and compared it to the leading flash storage companies such as Fusion-io, X-IO, Violin Memory, Skyera and Whiptail. [5] According to the report, the flash storage companies were outpacing the market, with a significantly higher growth rate than traditional storage, which drew interest from large storage companies. After witnessing a strong customer adoption for flash-based storage solutions, EMC launched its XtremIO all-flash array, NetApp released its EF550 all-flash array, SanDisk Corporation (NASDAQ:SNDK) acquired Fusion-IO and Cisco acquired Whiptail. [6] Other prominent (and currently independent) players in the storage array market are Pure Storage, Nimbus Data, Kaminario, and Solidfire.

Western Digital’s Presence In The SSD Market

Western Digital and competing hard drive maker Seagate Technology (NASDAQ:STX) have both 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. However, Western Digital’s 2013 acquisitions were indicative of a perception shift among both hard drive makers. Consequently, Western Digital’s enterprise SSD revenues touched nearly $500 million in 2013, up from about $200 million in 2012. [7] However, the company has little presence in the storage systems market segment, which is dominated by EMC, NetApp, Dell. HP and Hitachi Data Systems (not Western Digital-owned HGST). Western Digital’s sTec acquisition in June last year helped the company grow its SSD portfolio from beyond SAS and Fibre Channel SSD drives to include PCIe SSD product line. Although PCIe storage is presently a niche domain, it is expected to grow substantially. Offering PCIe connectivity with storage could have a long-term impact for storage companies if it gains popularity among consumers.

According to data compiled by Gartner, the solid state array (SSA) market grew at an explosive pace from $240 million in 2012 to about $670 million in 2013. [7] In that time, small players such as Pure Storage, Nimbus Data and Solidfire gained share in the growing SSA market. At the end of 2013, IBM, Pure Storage and Violin Memory were the largest shippers of solid state arrays, closely followed by EMC and NetApp. According to an early forecast by IDC, the SSA market could be worth over $1.2 billion in 2015. [8] The SSD market as a whole is expected to grow at a CAGR of over 26% through 2018 to be an $11 billion market according to IDC. [9]

With Skyera’s flash array business under its belt, Western Digital will have an opportunity to cater to the fast growing flash array market. Since Western Digital has already lost the first movers advantage in the SSA market, it is unlikely that the company attains a dominating presence in the market in the near term even with the Skyera acquisition. However, the company could reap benefits in the long run with combined capabilities of its various subsidiaries in the consolidated SSD arena and grab a sizable chunk of the $11 billion market in the next few years.

We currently forecast Western Digital’s enterprise storage unit shipments to increase from about 30 million in 2014 to nearly 60 million by the end of our forecast period. If the rise in popularity of SSD unit shipments, especially PCIe connected storage units, increase more than anticipated and the company ships out 70 million enterprise units by the end of the decade, it could imply a 7-8% upside to our price estimate for Western Digital.

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Notes:
  1. Skyera SkyHawk Launched – 44TB of Flash Storage with Built in Networking, Storage Review, August 2012 []
  2. Skyera launches 136 TB skyHawk, delays meatier skyEagle, Tech Target, October 2014 []
  3. Western Digital To Acquire Skyera, Anand Tech. December 2014 []
  4. Drive-making kingpin WD gobbles Skyera..to give to HGST, The Register, December 2014 []
  5. Violin Memory and Skyera Lead in Branded Channel Adoption among SSD/Flash Storage Companies, PR Newswire, October 2013 []
  6. Cisco Completes Acquisition of Whiptail, Cisco Press Release, October 2013 []
  7. IBM officially biggest all-flash array shipper, The Register, June 2014 [] []
  8. $1.2 Billion in Revenue by 2015 for All Flash Arrays, Storage Newsletter, April 2013 []
  9. StorTrends Sees Strong Momentum as $10.9 Billion Market for Solid State Drives Escalates, Yahoo! Finance, August 2014 []
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