Storage Business: Record Everything for Seagate – Is it Breakout Time for the Stock?

The storage business is red hot.  Why?  We all need more storage.  Seagate puts out their earnings and yesterday I sat down with Seagates Chief Sales and Marketing executive, Brian Dexheimer, to preview today’s Q1 earnings result.   Sales are soaring.   Here is Seagate’s press release. 

Update: Eric Savitz reports that Bill Watkins says that he has sold out Q4 and can’t deliver on all the orders.   Bill in his own style says to Eric “I have tons of orders I can’t fill.”

The results were awesome for Seagate.  Record everything…shipments, revenue, net income, industry shipments, new products,..etc.  The stock has been hovering and seeing a resistance at and around $28 per share for two years.  Will it break through and go higher and higher?  We shall see.  The disk drive business is changing and so is Seagate. 

Highlights from my video podcast with Brian Dexheimer:

1. 132 million units a record for the industry
2. shipments represent 36% of the entire industry shipments
3. margin expansion 25 points
4. $3.3 billion in revenue
5. 60 cents EPS (non gaap); started at 44 cents at the beginning of the qtr
6. pricing dynamics – best conditions in all of the past 4 quarters
7. demand was strong
8. strongest trend in the overall growth is in the high capacity area
9. hottest area is the digital home

Seagate is seeing the results of the Maxtor acquistion in terms of leverage and scale in the gross margin expansion  –  operational efficiency.   Solid state disk drives will be upcoming on the horizion.  Branded products up and the upcoming qtr looks strong.  New security solutions are doing well with the demand for secure data.  Average sale for the consumer side is over 350 GB. 

Seagate has a strong presence in the consumer, enterprise, and the emerging web 2.0 service provider area.  The web 2.0 service provider area includes Google, Facebook, Myspace, and many new niche applications such as surveilllance among others.

Seagate has a secret weapon.  Green Disk Drives.  Green drives are a major growth area.  On the clients side the hybrid is looking good – combing flash and rotating storage to reduce the power budget of the PC which frees up battery life and screen life..  On the enterprise side there is a tremendous shift toward small form factor devices.  These devices are consuming 35% less power and 40% of all their shipments came in the area of the new form factor. 

The industry is still cyclical, but the cycle has dampened – lower lows and higher highs.  This is due to the consolidation in competition and in the supply chain components available (motor, heads, media, etc).  This leads to efficiencies and scale that gives Seagate more margin room.  Also it gives Seagate stabilized component prices, fewer competitors, and allows them to gain more scale and more efficient business models from the stability in competition and critical component prices.  The storage business is turning into a major growth sector. 

Price wars?  There is a change in behavior in pricing from competitors. 

What’s different?  Seagate has multiple business growth areas.  Single biggest trend is in the digital home – 70-80% growth and it’s early.  Storage deployment in the home is a nice growth area to compliment their traditional enterprise area.  Add the consumer electronic market and Seagate is now twice as big.  Seagate will approach $13 billion this year.

Seagate is breaking out and breaking records.

Here is the video of my exclusive interview with Brian DexHeimer

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On the strength of 47 million disk drive shipments, the Scotts Valley, Calif., company reported revenue of $3.29 billion, vs. $2.79 billion in the year-ago period. Analysts polled by Thomson Financial expected revenue of $3.22 billion.

Seagate reported GAAP net income of $355 million, or 64 cents per diluted share. Excluding charges associated with the company’s acquisitions of Maxtor and EVault, Seagate earned $385 million, or 69 cents a share. Analysts predicted earnings of 64 cents a share.

“The first fiscal quarter has historically been a strong one for Seagate, and this year, we benefited from unit demand greater than expected,” CEO Bill Watkins said in a company statement. “We believe we are well positioned to continue driving year-over-year revenue growth, and these record quarterly results demonstrate the effectiveness of Seagate’s business model.”

In other tech stocks Intel’s Q3 profit surges 43% .  IBM profit is up. Yahoo is slightly down but beat the streets estimates.