Citing improving margins and a favorable hard drive supply/demand balance, Argus has upgraded Seagate (STX +3%) to Buy. Archrival Western Digital (WDC +2.2%) is also rallying.
Seagate had a 28% GM in its December quarter (flat Q/Q and +100 bps Y/Y), and guided for margins to be roughly flat Q/Q in the March quarter. Western had a 30.1% GM (+30 bps Q/Q and +140 bps Y/Y), and guided for March quarter GM to be near the midpoint of a 27%-32% target range.
Both companies have seen a margin boost from hard drive industry consolidation. Seagate reports on April 29, and Western on April 30.
IDC estimates global PC shipments fell 4.4% Y/Y (less than a 5.3% forecast) in Q1 to 73.4M, after having declined 5.6% in Q4 and 7.6% in Q3. Gartner thinks shipments only fell 1.7%, and totaled 76.6M.
IDC chalks up the narrower decline to healthy commercial demand, as buyers purchased Windows 7 systems ahead of Microsoft's (MSFT) termination of Windows XP support. The firm also thinks slowing tablet growth helped out.
IDC thinks Japanese shipments rose 7%, and U.S. shipments only fell 0.6% thanks to 3.5% desktop growth. Emerging Asia-Pac and Latin American markets, where tablet cannibalization is at an earlier stage, remained weak..
A mix shift towards developed markets benefits both Microsoft (higher ASPs, less piracy) and Intel (INTC - higher ASPs).
IDC estimates market leader Lenovo (LNVGY) had a 17.7% share, +220 bps Y/Y. #2 H-P's (HPQ) share rose 150 bps to 17.1%, and #3 Dell's 170 bps to 13.4%. #4 Acer's (ASIYF) share fell 130 bps to 6.8%, and #5 Asus' 20 bps to 5.9%.
The Q1 numbers suggest IDC's prior full-year forecast for a 6% shipment drop might prove too pessimistic.
With demand pressured by PC weakness and SSD cannibalization, Gartner forecasts global hard drive shipments will post a 2.9% CAGR from 2013-2018, growing from 552M units to 635.1M.
High-capacity business-critical drives, beloved Web/cloud service providers, are expected to fuel much of the industry's growth by delivering a 25.1% CAGR. Western Digital's (WDC) new Helium drives are aimed in large part at this segment.
The market for high-margin performance-optimized drives, where Seagate (STX) has a leading position, is expected to see a -4.9% CAGR. In addition, the segment's ASP is expected to fall 17.1% annually.
PC drives are a mixed bag: Sales of 3.5" desktop drives are expected to see a -7% CAGR, but 2.5" mobile/notebook drives are seen growing at a 4.2% annual clip. CAGR forecasts for 2.5" and 3.5" consumer electronics drives are respectively at 4.4% and 2.4%.
Though both Seagate and Western have both launched SSDs, Western has been more aggressive at increasing its flash exposure, as evidenced by the sTec, VeloBit, and Virident deals. Seagate is looking to strengthen its hard drive position through the just-closed Xyratex acquisition. Both firms are pitching 5mm-thin ultra-slim hard drives as an alternative to notebook SSDs.
With Xyratex's third-party hard drive equipment clients likely to start looking elsewhere, the business is expected to produce just $500M-$600M in revenue during Seagate's FY15 (ends July 3, 2015), and be neutral to EPS during the year. Xyratex had revenue of $814.3M and EPS of $0.15 during its FY13 (ended Nov. '13).
Analysts have argued Xyratex rival Teradyne (TER) will benefit from the deal, as Western Digital/Toshiba step up their orders.
Opinions have been mixed on whether the deal is a smart move for Seagate: Those who like it think Seagate's hard drive manufacturing ops and /R&D will benefit from further vertical integration, and see a major opportunity to sell Xyratex's ClusterStor systems to Web/cloud providers. Those who don't are worried about channel conflict with both hard drive equipment buyers and Seagate's storage OEM clients.
Seagate (STX +2.8%) chairman/CEO Stephen Luczo, a member of Microsoft's (MSFT +2.7%) board since May 2012, has stepped down.
Luczo: "With the CEO search completed and Satya off to a strong start, this felt like an appropriate time to make this change so I can turn my full attention to leading Seagate."
His departure follows a February board shakeup that coincided with Satya Nadella's appointment as CEO. Bill Gates resigned as chairman (while remaining a director), lead independent director replaced him, and Nadella gained a board seat. Since then, ValueAct president Mason Morfit has officially joined.
Steve Ballmer remains a board member for now. News of Luczo's resignation comes on a day when Microsoft closed above $40 for the first time since 2000.
After falling 3.5% Y/Y in Q3, external disk storage system sales rose 2.4% in Q4, says IDC. The growth came even though sales of the servers that interact with these systems fell an estimated 4.4%.
Total disk storage sales, which include storage subsystems found within servers, rose 1.3% in Q4 after dropping 5.6% in Q3. IDC attributes the turnaround to "traditional year-end budget flushes, improved economic sentiment, and a strong desire to address long-standing storage infrastructure inefficiencies."
Market leader EMC, which posted strong Q4 numbers to go with light guidance, saw its external disk share rise 220 bps Y/Y to 32.9%, and its total disk share rise 200 bps to 25.8%. The gains largely came at the expense of restructuring IBM, whose shares respectively fell 190 bps and 200 bps to 13% and 14%.
H-P's (HPQ) external disk share rose 30 bps to 9.6%, and its total disk share 40 bps to 16.3%. NetApp (NTAP), which delivered nearly in-line revenue and soft guidance last month, saw its external share fall 10 bps to 11.5%, and its total share stay flat at 9%. Private Dell's total share fell 140 bps to 9.9%.
In addition to missing FQ2 estimates, Seagate (STX) has guided on its CC for FQ3 revenue of "at least" $3.4B; that compares unfavorably with a consensus of $3.46B.
Seagate estimates the total addressable market (TAM) for hard drives stood at 142M (same as Western Digital) in the December quarter, up by 2M Q/Q and 6M Y/Y. The company estimates its share was 40%, flat Q/Q but down from 43% a year ago.
FQ2 gross margin was 28%, flat Q/Q and up 100 bps Y/Y. $1.5B was spent on buybacks, thanks to the Samsung deal.
Enterprise shipments (higher-margin) +7% to 7.8M, desktops -12% to 19.2M, notebooks -2% to 16.9M, consumer electronics +20% to 6.7M, branded drives (also higher-margin) +3% to 6.2M.
Western Digital (WDC) is ticking lower in sympathy with Seagate. The shoe was on the other foot last week.
Though it beat FQ2 (Dec. quarter) estimates, Western Digital (WDC) has guided on its CC for FQ3 revenue of $3.65B-$3.75B and EPS of $1.80-$1.90, mostly below a consensus of $3.73B and $1.95. The company blames a seasonally weaker hard drive market and lower factory utilization.
Western is down 2% AH. Archrival Seagate (STX), which reports on Monday, is down 2.1%, as is hard drive/SSD controller supplier Marvell (MRVL).
Western estimates the total addressable market (TAM) for hard drives was 142M in FQ2; that's slightly above guidance for TAM to be roughly flat with an FQ1 level of 139M. Gaming was an area of strength, no doubt thanks to the Xbox One/PS4 launches.
FQ2 gross margin was 30.1%, +30 bps Q/Q and +140 bps Y/Y, and slightly better than guidance. FQ3 gross margin is expected to be near the midpoint of Western's 27%-32% model range (implies 29.5%).
$150M was spent on buybacks, and 54% of revenue came from non-PC applications. ASP rose by $2 Q/Q to $60, thanks to a stronger mix of branded drive and distributor sales.