We downgrade Seagate to Neutral after the company reported a dismal
second quarter wherein the top and bottom lines not only declined
year over year, but also missed the Zacks Consensus Estimate. The
increase in investments to provide new and innovative products,
sluggish macroeconomic conditions and a flattish price environment
prompted the company to provide a modest guidance. Nonetheless, the
company is gaining traction with its 5-mm drives and other hybrid
drives which is a positive. Moreover, Seagate's cloud-based
applications have received ample customer interest. However, stiff
completion and margin contraction remain the headwinds for the
Headquartered at Dublin, Ireland, Seagate Technology plc (STX)
is one of the largest manufacturers of hard disk drives (HDDs).
HDDs are used as the primary medium for storing electronic
information in systems ranging from desktop computers and consumer
electronics to data centers delivering information over corporate
networks and the Internet. The company's HDDs address desktop,
notebook PC, game console, PVR/DVR, and enterprise storage markets,
among other HDD sub-segments. The company operates in an
industry-leading vertically-integrated model with internal control
over the majority of its key component suppliers. Seagate also
develops other electronic data storage products such as SSD (solid
state drive) and solid state hybrid drives (SSHD).
The company offers its products under three heads Enterprise
Storage, Client Compute and Client non-compute. The company
enhanced its position in SSDs with the acquisition of Samsung's HDD
operations and the French drive maker, LaCie.
Seagate primarily sells to original equipment manufacturers
(OEMs) but supplements this with sales through distributors and
retailers. Major OEM customers include Dell, EMC, Hewlett-Packard,
IBM and Sun Microsystems (acquired by Oracle Corp). In fiscal 2013,
revenues from OEMs made up 68.0% of total revenue distributors
generated 21.0% and retail accounted for the remaining 11.0% of the
In 2013, the company generated 54.0% of revenues from the Asia
Pacific, 27.0% from America and the remaining 19.0% from Europe
Middle East Africa (EMEA).
The disk drive market is highly competitive and witnesses
frequent pricing pressure. Companies operating in this market
compete to acquire a limited number of prime customers. Alternative
kinds of storage, such as flash memory, tape, optical and SSDs
further pressurize the key players, Seagate, Western Digital
Corporation and Toshiba Corporation.
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