As earnings season starts to wind down and investors reflect on how the tech landscape is changing, it'd be easy to ignore one sector seeing the most dramatic changes: the hard disk drive (HDD) industry.
Among HDD makers, Seagate (Nasdaq: STX) reported adjusted earnings per share of $0.25, down a whopping 76% year over year and $0.02 below the consensus estimate. Revenue fell by 12% year over year. Competitor Western Digital's (NYSE: WDC) adjusted EPS declined by 61% year over year and revenue fell by 15%, though at least WDC's EPS of $0.66 matched analysts' meager expectations.
Japan-related supply constraints took much of the blame for the disappointing results. That didn't hold Intel (Nasdaq: INTC) back during the quarter, though. Intel also overcame shifting demand in the PC industry, another cause of HDD weakness -- and one that's unlikely to reverse course. Both consumers and enterprises are shifting from notebooks to tablets. That means they're also shifting from HDDs to flash-based solid-state drives (SSDs).
What's a company to do? Make a deal! Concurrent with earnings, Seagate also announced that it agreed to take over parts of Samsung's HDD business for $1.375 billion in a 50-50 cash/stock mix. Samsung, in turn, will own 9.6% of Seagate and get a board seat. The companies plan to share patents and work together on new storage products. In addition, Seagate will supply HDDs to Samsung, and Samsung will guarantee a supply of flash memory chips (the kind used in tablets and SSDs) to Seagate.
Did you catch that? Samsung is "guaranteeing" flash supply to Seagate, but Seagate is merely "supplying" HDDs to Samsung. That seems indicative of where the trends and needs are going in the tech industry -- i.e., flash is encroaching on HDD territory.
The Seagate-Samsung deal comes on the heels of Western Digital's recent agreement to buy Hitachi's (NYSE: HIT) HDD business. In 2002, Hitachi paid $2.05 billion to IBM (NYSE: IBM) for IBM's HDD business. There are lessons for investors in that deal. It's a great example of how IBM exits commoditizing, capital-intensive, and otherwise unattractive businesses to focus on more attractive sectors. That practice has resulted in impressive -- albeit underappreciated -- earnings and cash-flow growth over the years.
Foolish takeaway
The Samsung deal strengthens Seagate's hand in an increasingly flash-centric world. It also drives HDD industry consolidation that could somewhat offset challenging industry dynamics. Assuming antitrust regulators don't block the deals, the WDC/Hitachi combination is expected to have about a 50% HDD market share, while the Samsung deal is expected to lift Seagate's share from 30% to 40%,.
Still, the real winner is Samsung. It's pursuing the more IBM-like strategy.
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