Seagate Strengthens SSD Portfolio - Analyst Blog

In a bid to strengthen its flash storage capabilities, Seagate Technology STX is set to pay $450 million to acquire the Accelerated Solutions Division (ASD) and Flash Components Division (FCD) from Avago Technologies AVGO. These divisions were part of LSI Corp. that Avago acquired in December last year.

The current acquisition will not only boost Seagate's enterprise-class PCIe (Peripheral Component Interconnect Express) flash offerings but also provide solid state drive SSD controller capabilities. The current acquisition makes sense for Seagate as PCIe-based SSDs are in demand from enterprises dealing in online transaction processing and data warehousing.

Seagate is one of the largest manufacturers of hard disk drives (HDDs) and is making its presence felt in the SSD segment due to the robust demand for SSDs from enterprises. Enterprise-class SSDs are faster and more energy efficient than traditional hard drives, which is the main factor driving demand.

SSDs also occupy less space, which makes them more suitable for mobile computing devices. These are also being used in servers due to the reduction in latency, which in turn helps in faster response to real-time applications.

Seagate expects to garner $150 million in revenues from enterprise SSDs in fiscal 2015. Though a higher mix of SSDs is likely to boost gross margins, the company expects it to have a $30 to $40 million negative impact on operating income. The company expects the SSD segment to make a positive contribution to operating margins from 2016.

We believe that the secular growth of digital data, modest growth in the total addressable market and higher demand for storage will remain the growth catalysts, going forward. Additionally, synergies from acquisitions and product innovations continue to drive growth.

The company also has a significant exposure to high-end corporate desktop and enterprise server markets, which will help it to compete with rivals such as Western Digital Corp. WDC, SanDisk Corp. SNDK and Fusion-io in the long run.

Nonetheless, 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 for the current quarter. Despite the company's efforts to manage costs, margin contraction remains a headwind.

Currently, Seagate has a Zacks Rank #3 (Hold).