Seagate Technology (Nasdaq:STX), the leading disk drive vendor, reported a good set of numbers for the Dec 09 quarter, its second fiscal quarter. Dec09 quarter revenues increased 33% YOY to $3.03B and operating profits came in at $578M for the quarter compared to a loss of $(2.4)B in Dec08.(Dec08 quarter included a goodwill impairment of $2.3B).
Source: Gridstone Research
In my earlier articles I talked about how Western Digital (WDC) has outshone Seagate over the recent quarters thanks to its lead in the notebook segment. (Read earlier articles here and here). Though I expect Western Digital to report an equally impressive set of numbers (reporting today- Jan 21st), the fact is that both WDC and STX are in an advantageous market position.
Consider the disk drive market in terms of size and market share: Total addressable market [TAM] size was ~160-165M units in Dec09 quarter and Seagate shipped ~50M units. Since WDC shipped more units than STX in Sep09 quarter, WDC can be expected to ship at least 50M units in Dec09 quarter. This gives the two firms a combined market share of at least 60%. What is more interesting is the following comments by STX management in the earnings call( Read full transcript): Management clearly believes that in Dec09 quarter demand>supply:
We believe the TAM for the December quarter was approximately 160 million units. At these demand levels the industry experienced constraints throughout the supply chain. As we plan for the March quarter we are assuming muted seasonality with a TAM in a range of between 155 and 160 million units...
Management also has limited capacity addition plans i.e. add capacity to maintain marketshare and nothing more...
We have aligned our current capital plans with industry analyst forecasts of a 650-670 million unit TAM for calendar year 2010 as well as customer demand for our high performance, high capacity product.
... and expects the supply constraint to persist throughout the year 2010.
So we still believe throughout calendar year 2010 supply is going to be short of demand throughout the calendar year. We are going to have to work pretty hard to be lined up for September and December.
So with a ~15% growth in market size by units, Seagate expects a constrained supply environment which can only spell good news for both Seagate and WDC in terms of pricing.
Price Stability Is Rare In The Disk Drive Industry
Source: Gridstone Research
So after a pretty steep decline in price realizations in 2008-early 2009, the pricing environment looks quite optimistic. Notice how prices climbed earlier in the second half of 2007 and that was more due to a better mix - notebook disk drive units increasing at a higher rate than desktops. This time the pricing could be more stable (i.e. for a longer period), as both the top vendors seem intent to let the supply-demand imbalance continue in a growing market. Also Seagate expects the unit mix to be richer with enterprise and high capacity / performance units towards the latter half of 2010 as enterprise spending has turned the corner and server / storage capacity expansion in 2010 is expected to be much better than 2009. This could also lead a positive impact on prices due to a richer mix.
To sum up, the competitive and market situation for Seagate looks like this : double-digit market size growth, steady price realizations and market share and continued demand-supply balance in a duopoly. In short, you can't pray for a better market situation to exploit and boost profits than the one prevailing now. The 30.5% gross margin achieved in Dec09 quarter looks less like a one-time bonanza (a full 16 percentage points above Dec08) when viewed in this perspective.
Record Gross Margins
Source: Gridstone Research
Disclosure: No Positions
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