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SanDisk, Seagate Stabilizing

Posted on Friday, Sep 11th 2009

With an increasing growth in digital content, there is increasing demand for storage. Let’s take a closer look at two beneficiaries of this trend, Seagate and SanDisk. Both have struggled of late, but both seem to be stabilizing.

On July 21, Seagate Technology (NASDAQ:STX), the leader in hard disk drives and storage solutions, reported its fourth quarter and fiscal 2009 results. Annual revenue was down 23% to $9.8 billion while gross margin dropped to 14%.

Q4 revenue was $2.35 billion and net loss was $81 million or $0.16 per share, missing analyst estimates of a loss of $0.10 per share on revenue of $2.3 billion. The company ended the quarter with $2 billion in cash, up $568 million over Q3 due to the debt offering completed in Q4. Seagate has 47,000 employees, 38,650 of whom are located in its Asian operations. Seagate has implemented cost reduction measures that include the closure of its Milpitas, California, media manufacturing facility and its Pittsburgh research facility. It also cut its global workforce by 5,500 employees.

Even as people need to store more content, the disk drive industry is of course sensitive to global macroeconomic conditions and has been affected by the downturn. The total available market (TAM) for disk drives declined 4% in 2009, compared to an increase of 18% in 2008.

During the fourth quarter, Seagate shipped 40.6 million units (up 6% q-o-q) while the overall industry shipped 132 million units, flat from last year but up by 17% q-o-q. Seagate’s close competitor, Western Digital, recently reported shipments of 40 million units mainly because of its focus on the growth spots of the mobile computing and consumer electronics markets.

The economic downturn as well as the shift towards notebooks has resulted in the desktop computing market for disk drives declining 13%. Seagate maintained its leadership position in this market, with shipment of 22 million units in the quarter; this was flat from Q3. The enterprise storage TAM declined 18% in 2009, while in Q4 TAM was up 5% q-o-q to 5.9 million units. Seagate shipped 3.6 million units in Q4.
The mobile computing market grew 16% in 2009. In Q4, the overall TAM was 55 million units, up 23% y-o-y and 27% q-o-q while Seagate’s shipments grew 27% q-o-q to 11.3 million units. Disk drives in the consumer electronics markets used in gaming and DVRs also declined 11%.

For the first quarter, Seagate expects the overall industry demand for disk drives to be 135 million to 140 million units. The company expects revenue of $2.4 billion to $2.6 billion and gross margin to improve by 200 to 350 basis points. CEO Steve Luczo recently purchased 100,000 shares for $1.24 million. The stock is currently trading around $15 with market cap of about $7.5 billion. It hit a 52-week high of $15.06 on September 9.

Chart for Seagate Technology (STX)

SanDisk Corp. (NASDAQ:SNDK), the leading flash memory chipmaker with annual revenue of $3.35 billion, reported a return to profitability in its second quarter results on July 22; the performance was driven by increased pricing and higher royalty revenue. Q2 revenue decreased 10% y-o-y and increased 11% q-o-q to $731 million, beating analyst estimates of $710 million. Net income was $53 million, or $0.23 per share, compared to net loss of ($74) million or ($0.33) per share in last year and net loss of ($208) million, or ($0.92) per share last quarter. Excluding charges, net income was $83 million or $0.36 per share, beating analyst estimates by $0.52.

Product revenue was down 11% y-o-y and up 4% q-o-q to $610 million. License and royalty revenue was $120 million, down 7% y-o-y and up 68% q-o-q. Gigabytes sold increased 118% y-o-y and decreased 7% q-o-q. The average price per gigabyte sold declined 59% y-o-y and increased 12% q-o-q.

During the second quarter, SanDisk improved its non-GAAP product gross margin to a positive $47 million or 7.7% of product revenue. Its ASP per gigabyte increased by 12% and product revenue increased 4% sequentially. However, unit sales decreased 6% sequentially as the company chose not to pursue low price bids. It ended the quarter with $2.34 billion in cash.

For the third quarter, SanDisk expects demand for its products to grow modestly, with growth mainly from OEM mobile customers. It expects Q3 revenue between $725 million and $775 million, including license and royalty revenue between $110 million and $115 million. Its new licensing agreement with Samsung should start impacting its license and royalty revenue from the second half of Q4 2009. 

Last year Samsung tried to buy SanDisk for $5.9 billion, but with the new license agreement in place for lower royalties, Samsung announced that it has dropped its acquisition plans. Samsung’s acquisition withdrawal last year sent SanDisk’s share price plunging to $5, but with this new agreement with the market leader, SanDisk’s shares have recovered to around $19.5. Its market cap is about $4.5 billion, and the stock hit a 52-week high of $19.55 on September 9. It was upgraded by Deutsche Bank from Hold to Buy.

Chart for SanDisk Corp. (SNDK)

The storage industry still has need for a tremendous amount of high-end R&D to keep up with the advancing technological needs due to continued miniaturization, price pressure, and innovation in related sectors such as smartphones. It is good to see that the two companies are stabilizing, because innovation can only be driven by companies whose survival is not hanging from a cliff.

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