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Seagate, SanDisk Recovering Nicely

Posted on Thursday, Dec 17th 2009

Last year, Seagate was expected to take over SanDisk as part of its plan to enter the solid-state drive (SSD) market. That did not happen, but Seagate has entered the market organically. The company recently launched Pulsar, its first enterprise SSD for blade and general servers. On the other hand, pSSD Gen2 SSD from SanDisk was recently adopted by Sony for its new Vaio X ultra-thin laptop. SSDs act as replacements for hard disk drives (HDDs) in PCs by using flash memory to store data. The rising demand for notebook PCs that have low storage needs has boosted the prospects of the SSD market, which is expected to grow at CAGR of 143% from 2008 to to 2013 to reach $10.8 billion. Let’s take a look at Seagate and SanDisk in this post.

On October 20, Seagate Technology (NASDAQ:STX), the leader in hard disk drives and storage solutions with annual revenue of 9.8 billion, reported its first quarter results. Q1 revenue was down 12% to $2.66 billion. The company swung to a profit of $179 million or $0.35 per share from a net loss was $81 million or $0.16 per share last quarter. Gross margin improved 700 basis points to 24.5% with the success of its products in the notebook and desktop markets and more efficient capacity utilization. The company brought down its debt in the quarter by $665 million and ended the quarter with $1.8 billion in cash. Q4 analysis is available here.  
 
During the quarter, Seagate shipped 46.3 million disk drive units (down 4% y-o-y, up 14% q-o-q) while the overall industry shipped 153 million units, up by 16% q-o-q. The TAM in the desktop market for the September quarter was about 58.4 million units, up 7% q-o-q and Seagate maintained its leadership position in this market, with shipment of 23.3 million units, up 6% q-o-q. The mobile computing TAM was up 28% q-o-q and 32% y-o-y to 70.6 million units, and Seagate’s shipments grew 22% q-o-q and 41% q-o-q to 13.9 million units. Seagate shipped 4 million drives for mission-critical server and storage products, maintaining its leadership position.

For the second quarter, Seagate expects the overall industry demand for disk drives to be 153 to 160 million units. The company expects revenue of $2.75 billion to $2.85 billion, and gross margin is expected in the 22%-26% range. Fiscal year 2010 revenue is expected to be more than $10.5 billion while diluted GAAP EPS should be more than $1.90. The stock is currently trading around $16 with market cap of about $8 billion. It hit a 52-week high of $17.23 on November 17.

Chart for Seagate Technology (STX)

SanDisk Corp. (NASDAQ:SNDK), the leading flash memory chipmaker with annual revenue of $3.35 billion, reported a strong third quarter on October 20 with strong gains in its OEM business, which accounted for 56% of product revenue, versus 41% in Q2.

Q3 revenue increased 14% y-o-y and 28% q-o-q to $935 million. Net income was $231 million, or $0.99 per share, compared to net loss of ($166) million or ($0.74) per share last year and net income of $53 million, or $0.23 per share last quarter. Last quarter marked SanDisk’s return to profitability while Q3 marked its return to revenue growth on a y-o-y basis. Q2 analysis is available here.

Non-GAAP product gross margin improved 39% versus negative 17% last year. SanDisk has made excellent progress in reducing product costs and is ahead of its plan to exceed 50% cost reductions for the full year. The company ended the quarter with $2.58 billion in cash.

The mobile phone market continued to be the key growth driver for SanDisk, accounting for 38% of total revenue. Product revenue was up 18% y-o-y and 33% q-o-q to $814 million. License and royalty revenue was $121 million, down 8% y-o-y and up 1% q-o-q. Gigabytes sold increased 107% y-o-y and 37% q-o-q. The average price per gigabyte sold declined 43% y-o-y and 3% q-o-q.

For the fourth quarter, SanDisk expects revenue between $1.1 billion and $1.2 billion, including license and royalty revenue of between $100 million and $110 million, including Samsung royalties. The stock is trading around $24 with market cap about $5.5 billion. It hit a 52-week high of $24.25 on October 21 after its strong earnings report.

Chart for SanDisk Corp. (SNDK)

Early in the year, both SanDisk and Seagate were struggling with losses as the economy took a nasty turn. However, both have managed the situation well with changes in strategy and cost reductions. As the economy recovers, we can expect to see further improvement in each company’s performance.

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