Needham & Company Disk Drive Industry Update: Reality Bytes

March 19, 2012 9:50 AM EDT
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Needham & Company Disk Drive Industry Update: Reality Bytes

Analyst, Richard Kugele, said, "After a week of travel on the west coast with numerous meetings with key industry contacts, we believe that the HDD industry is proceeding in its recovery as expected. Unit production TAM in March should be 130-135, consistent with guidance, with margins and pricing solid. We believe both Seagate (NYSE: STX) and Western Digital (NYSE: WDC) should exceed initial March guidance, with margins the greatest lever. Finally, we summarize some of the noise from last week and offer our rebuttals based on our meetings/discussions. With the WD/HGST merger now completed and the final triumvirate assembled, we reiterate our positive stance on both companies, our expectation for the space’s long-term profitability and near-term attractive valuation."

"The Dell (Nasdaq: DELL) 10-K Datapoint That Wasn’t. Another nugget from last week came from Dell’s 10-K (published early last week but not noticed till later in the week), and that was a reference to the long-term agreements Dell has signed with certain disk drive companies. Of particular interest were the comments about pricing for this volume being designed to be “competiti ve” and that the LTA would expire in December. While both of these items are technically correct, this is not some treasure trove of new info but more akin, in our view, to Geraldo’s opening of Capone’s vault. As we have written in the past, pricing discounts were front-end loaded for customers under Seagate LTAs, with stability expected through the period of shortages before market competitive pricing taking hold (as determined by Seagate, we would add). Last, we also would not be surprised if Dell, like many other OEMs, actually extended their LTAs as we see little risk for them to guarantee a certain percentage of their volume if it is competitively priced. There is no news here, in our view."

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