Major Trends Driving Storage Vendors SanDisk, Seagate

With the booming digital content adoption, storage vendors are predictably showing strong performance. Sandisk is also benefiting from the convergence device movement, as the devices are becoming increasingly storage-heavy. Weaker consumer market notwithstanding, I think, both movements would continue.

On January 28, SanDisk Corporation (NASDAQ:SNDK) released its Q4 and 2007 financial results. An earlier post is available here. For Q4 that ended December 30, 2007, revenue was $1.246 billion (up 7% y-o-y and 20% sequentially) meeting its earlier estimates.

GAAP net income was $106 million, or $0.45 per diluted share, compared to net loss of $35 million, or $0.17 per diluted share last year. License and royalty revenue was a record $128 million, up 51% year-over-year and 8% sequentially. Product revenue was a record $1.118 billion, up 4% year-over-year and 22% sequentially.

For fiscal 2007, revenue was $3.896 billion, up 20% and net income was $218 million, or $0.93 per diluted share, up 10%. SanDisk repurchased 7.5 million shares during the year. Product revenue increased 18% and license and royalty revenue increased 36%.

SanDisk continued to reap benefits from the convergence movement and the online video trends. MicroSD cards helped double mobile product unit sales, which accounted for 35% of the total revenue. License and royalty revenue was $450 million or 12% of total revenue, up from 10% last year mainly due to a new licensee. NAND MLC component prices continued to be aggressive and ASP per megabyte declined 60%.

A significant design win for SanDisk in the quarter was HP including its 16 GB SSDs in its dc7800 line of PCs. Another major development was the filing of patent infringement actions against 25 companies. Following this, 8 companies have signed patent cross license agreements with SanDisk.

For Q1, SanDisk expects revenue to be between $775 and $875 million, reflecting a sequential decline similar to last year. For 2008, it expects growth of 15% to 25% assuming softness in consumer demand that is likely to be offset by its growth in international markets. The Beijing Olympics are also expected to help sales in Asia Pacific. Its stock is trading around $27 and market cap is around $6.11 billion.

Another company that is benefiting from the online video trend is Seagate Technology (NYSE: STX). On January 17, it reported Q2 revenue of $3.4 billion (up 14% y-o-y and 3% q-o-q) in line with its earlier expectations. GAAP net income was $403 million (up 188% y-o-y and 13.5% q-o-q), and diluted net income per share was $0.73. It repurchased 9.3 million of its common shares for approximately $250 million with another $474 million available for share repurchases. It declared a quarterly dividend of $0.10 per share.

Disc drive unit shipments were 50 million, up 20% y-o-y and 6% q-o-q. This was 35% of the total industry volume and it continued its lead in the enterprise, desktop, and consumer electronic markets with sequential growth of 15%, 3%, and 41%, respectively in shipments. It also grew substantially in surveillance equipment and gaming markets. However in the mobile computing market, its shipments decreased 18% sequentially and increased 46% y-o-y. The sequential decline was mainly driven by the delay in the release of its 250GB notebook product and capacity constraints.

For Q3, Seagate expects revenue of $3.2 to $3.3 billion, and GAAP diluted net income per share of $0.57 to $0.61. Its stock is currently trading around $22 after hitting a 52-week low of $18.60 on January 22. Its market cap is around $11.94 billion.