Tablet Effect On Storage Industry

Apple’s iPad and a slew of tablets from other vendors like Dell, HP, and even RIM are set to take market from PCs. While Sandisk (NASDAQ:SNDK), the leading flash memory chipmaker, is set to benefit from this trend, the leader in hard drive and storage solutions, Seagate (NASDAQ:STX), is facing a setback and was considering a buyout as a strategic option.

Sandisk on a Roll

Thanks to the tablet and smartphone phenomena, Sandisk recently reported that 50% of its revenue came from the mobile phone end market, up from virtually nothing five years ago.

SanDisk reported third quarter revenue of $1.23 billion, up 32% y-o-y. Net income was $322.1 million, or $1.34 per share, compared to $231.3 million, or $0.99 per share last year. Cash and equivalents increased sequentially by $1.3 billion to over $5 billion. Gigabytes sold increased 8% q-o-q and 71% y-o-y, while ASP per gigabyte declined 5%.

SanDisk now expects its 2010 full-year revenue to range between $4.75 billion and $4.825 billion, at the idle point of its July forecast of $4.7 billion to $4.9 billion. Its annual revenue in 2009 was $3.15 billion. It believes that despite the limited retail growth due to macroeconomic weakness, particularly in the United States and Europe, retail demand is expected to increase for the holiday season. For the fourth quarter, the company expects revenue of $1.25 billion to $1.325 billion.

SanDisk CEO, founder, and chairman, Dr. Eli Harari, is retiring on December 31, 2010, and Sanjay Mehrotra, currently SanDisk’s president and chief operating officer, will be taking over as the CEO. The stock is currently trading around $50 with market cap of about $11.5 billion. It hit a 52-week high of $50.55 on June 21.

Seagate’s Financials
Seagate (NASDAQ:STX), the leader in hard disk drives and storage solutions with annual revenue of $11.4 billion, reported another disappointing quarter in October mainly due to weakness in consumer markets, especially in the United States and Europe. First quarter revenue was $2.7 billion, up 1.3% on shipment of 49.2 million disk drives (5.12% q-o-q). Net income was $149 million or $0.31 per share down from $179 million or $0.35 per share last year. The company had projected first quarter revenue of about $2.7 billion to $2.9 billion.

Buyout Talks End
Seagate ended the quarter with total debt balance of $2.17 billion, with $560 million due this quarter. Emre Peker and Boris Korby on Bloomberg report that Seagate plans to raise $850 million in loans and bonds to refinance its debt after rejecting buyouts from private equity firm TPG Capital and Western Digital Corp. Competitor Western Digital was offering 10% to 50% more than the $7.5 billion bid by TPG.

The offer from Western Digital was rejected because it would have prompted management defections and would have faced serious antitrust issues. While Western Digital has smaller sales than Seagate, its market value is larger at about $8 billion, and it has a cash balance of about $2.9 billion and $375 million in debt. Western Digital last quarter overtook Seagate as the No. 1 hard drive manufacturer in shipments. Seagate was the overall market leader in 2009 with a 31.4% share, and Western Digital was second with 29.6%.  Seagate leads the desktop market and has a 65% share of the enterprise market, while Western Digital leads the mobile market.

Seagate ended the talks to sell the company early this month after its board said the bids were too low. Seagate is currently trading around $15 with market cap of about $7 billion. It hit a 52-week high of $21.45 on March 1 and a 52-week low of $9.84 on August 27.

Tablet Effect
Apart from the increased competition and declining prices, the tablet phenomenon is also another area of concern for Seagate. While the tablet phenomenon does threaten to cannibalize sales of hard disk drives, it might increase the need for storage. Alex Dobuzinskis on Reuters reports that research firm IDC expects the strength of the tablet market to cause a 2% to 3% loss to global hard drive shipments. But it still expects total hard drive shipments to rise 16.7% to 650 million units this year, because of heightened need for storage for everything from security videos to business data.