The data storage industry is witnessing a major paradigm shift from traditional storage system to advance and hybrid storage solutions with higher speed. Data storage market is also growing briskly, with customer need to store more and more flat files over the system.
The market for the traditional SATA Hard Disk is being replaced by Solid State Drives (SDD), prices of SSD has also been reducing, this is one the major factor for customer migrating to SSD from their conventional storage solutions. As we notice, SSD drives are becoming more economical, the big market for this storage media is the PC market. It is anticipated that by 2017, SSD would capture over 1/3 of the global PC market. Analyst expects that by 2017, over 227 million PC will incorporate SSD, up 600%, it was 31 million in 2012. Such growth statistics is stimulating various storage manufactures to acquire major market share of the SSD. Seagate Technologies (STX, Financial) is one such storage manufacturer that is all focused on the SSD market to influence its top and bottom lines
Quarter Analysis
The company recently released its fourth quarter results for the fiscal 2014 which was moderate. Revenue decreased by 3% year over year, to record $3.3 billion as compared to $3.4 billion in same period last year. Total unit shipped in the quarter was 52.5 million as compared to 53.9 million year ago quarter, drop by 2.6%.
Gross margins were marginally better by 0.5% year over year, the company reporter gross margins of 28.5% as compared to 28% in same period last year. The prices of the storage media has been constantly falling, ASP (average selling price) were $60.0, down from $63.0 as compared to year-ago quarter. Despite the decline in price, the gross margins did increase although marginal, this illustrates that various cost saving measures are applied by the company and can be more beneficial in future, in terms of margins and bottom line.
The non-GAAP gross profit reduced by 1.9% year over year, to report $939.0 million, lower revenue and the falling price did offset the gross profit of the company. Cash balance towards the end of the quarter was $2.63 billion higher as compared to $2.26 billion in the same quarter last year. We should also consider that Seagate had few acquisitions in the quarter and still recorded growth in cash balance.
Strengthening Portfolio through acquisitions
As already mentioned, the market for SSDs is constantly growing. Seagate does eye this growth market and it further enriches its SSD portfolio with few acquisitions that it made in the quarter. The need for speed is the prime concern of a customer that is like a steroid for the growth market of SSD.
The company spent $374 million to acquire Xyratex Ltd broadening its product portfolio to serve a wider customer base. This will empower Seagate to provide value added products to their clients with a wider array of storage solution. The company will now be able to serve the need of the Exabyte growth more efficiently as the cloud enabled application are on role for growth and storage market asking for more speed.
Furthermore, the company has also settled to pay $450 million to acquire two divisions (Solutions Division and Flash Components Division) from Avago Technologies. This acquisition will provide a product portfolio to Seagate which will comprise of PCle based SSD. PCIe SSD technology (higher speed performance) is the latest incarnation of the solid-state drive with revolution sweeping the data centre. This will further expand the customer base of Seagate as datacenters are migrating from conventional mechanical Hard Disk to SSD, for speed and consistency.
Payouts
In the fourth quarter, the company declared a dividend of $0.43 per share to their shareholders, the execution of the dividends was completed last month in August-2014. Seagate paid $140.0 million in form of dividends and spent around $26.0 million under its share repurchase programs. In fiscal year 2014, the Company paid back around $2.5 billion to shareholders in the form of dividends and share repurchase programs.
Conclusion
The company is focusing on the ever booming SSD market which was exemplified by few acquisitions. These acquisitions will influence the revenue growth for the company in future. The company also has a fair exposure to high end desktop market and enterprise server, this also will provide tailwind to the company. As an investor I would have opted Seagate in my portfolio for long term growth.
