How Seagate Technology Is Morphing Into a Company for the Future

Seagate Technology (STX) is one of the world's leading enterprise storage products manufacturer. The company accounts for 37% of all laptop hard disk drives, or HDDs, sold around the world, and is on target to sell about 70 million desktop HDDs in fiscal 2014. Seagate also manufactures enterprise cloud storage products, as well as TV, DVR, and console storage products. Close peer Western Digital (WDC 0.34%) accounts for almost half of global laptop HDD shipments.

The decline in global PC sales, as well as the growing preference for solid-state drives, or SDDs, and hybrid drives, to traditional HDDs has been taking a heavy toll on Seagate's topline growth. The company managed to ship only 7.7 million its enterprise storage units in the third quarter of 2014, a modest 2.5% year-over-year growth compared to 7% growth for the comparable quarter in 2013. To cope with these industry headwinds, Seagate has adopted several strategies that range from making strategic acquisitions that strengthen its promising businesses, to changing its product mix to reflect industry trends.

Strategic acquisitions
Seagate acquired Xyratex, a leading provider of data storage technology and testing equipment maker, for $374 million in 2013 to enhance its enterprise storage offerings. Seagate now operates Xyratex as a stand-alone unit.

Xyratex owns several key businesses. The company is a premier provider of HDD testing equipment. The average capacity per drive is growing rapidly, and HDD test time is also rising. Seagate will use Xyratex's HDD testing equipment to streamline its own HDD supply chain.

Prominent hard disk manufacturers such as Toshiba and Western Digital use Xyratex's HDD testing equipment. Xyratex has about 3 million test slots installed worldwide using its legacy Drive Processing Systems that enhance factory yields.

Xyratex has two other main businesses, ClusterStor HPC storage hardware business and OneStor, which is an enterprise data storage business that manufactures embedded storage and other storage application products. Xyratex's ClusterStor and OneStor businesses make it the largest OEM storage disk manufacturer that serves heavyweight clients such as HP and NetApp.

The Xyratex acquisition will give Seagate pricing power over other HDD manufacturers. It will also help the company reduce HDD manufacturing costs and maintain competitive HDD pricing. This is important in the current environment of falling HDD prices. The average HDD unit selling price fell from $63 in 2013 to $61 currently.

Xyratex's contribution is likely to become accretive starting from the current quarter, by adding about $100 million to its top line.

Seagate acquired Avago Technology's LSI flash business for $450 million in cash in May.The flash business is important for Seagate because of the increasing popularity of SSDs; SSDs use flash components. The LSI flash business will help Seagate on two fronts. First off, sourcing flash components is likely to become considerably cheaper for Seagate, which will help the company offer more competitive SSD prices. Second, it will help the company integrate a leading technology in its SSD products, which will give it leverage when negotiating SSD prices with customers in the future.

Although the LSI acquisition will add a mere $40 to $50 million per quarter to Seagate's top line starting from fiscal 2015, small acquisitions can sometimes bring a lot more to a company's table than just top-line growth. Think of Cisco's Insieme ac for $863 a million in 2013, or VMware's acquisition of Nicira for $1.26 billion in 2012. These acquisitions were relatively small compared to the size of the companies that bought them. Yet, the two acquisitions have given both Cisco and VMware a sizable lead over their competitors in the SDN, or software-defined networking, market, which is predicted to grow at a CAGR of 80% to reach $35 billion by 2018. Cisco's and VMware's SDN strategies are currently regarded as the ones most likely to gain traction in the market.

Seagate is using a similar strategy to hedge its SSD bets, by making small but highly strategic acquisitions. SSDs are not likely to fully replace HDDs any time soon because of their high cost. SSDs are, on average, 7-8 times more expensive per unit storage than HDDs.

Source: Zetta.

But, with chip companies such as Intel releasing CPUs with more cores and more cache each year, traditional disk technology has been lagging behind CPU technology, which has resulted in a significant performance gap. However, this shortfall represents a huge growth opportunity for SSD that can help to fill disk I/O performance and latency.

HGST, a Western Digital Company, predicts the enterprise SSD market will grow from 5.8 million units shipped in 2014 worth $3.8 billion, to 13.1 million units shipped in 2017 worth $6.7 billion, equivalent to CAGR of 21%. That implies the ASP of SSDs might fall 22% over the next three years, making them even more affordable.

Conclusion
The disk storage market is gradually moving toward higher-performance solid-state disks. Although there is no clear consensus on when SSDs will become mainstream, Seagate is making the right moves that will help it dominate this important market once it reaches maturity.