Western Digital Corp. has more than doubled its share of disk drives for laptop computers in the past year, a feat analysts call “tremendous” in a business known for cutthroat competition.
“It’s not common in our industry,” said Mark Geenen, president of Los Altos-based market tracker Trend Focus Inc.
In the fourth quarter, the Lake Forest-based disk drive maker grew to the No. 2 spot in drives for laptop computers, according to quarterly data from Trend Focus.
In the overall drive market, Western Digital already had been No. 2 behind Seagate Technology LLC of Scotts Valley, driven largely by drives for desktop computers.
The gain in laptop drives shows Western Digital is grabbing business in the fastest-growing part of the market. In the fourth quarter, laptop PCs outsold desktops for the second straight quarter, according to Stamford, Conn.-based market researcher Gartner Inc.
Two years ago, Western Digital had only 6% of the laptop drive market. Last quarter, it was at 20%.
“They have made tremendous strides,” Geenen said. “They are a very close No. 2.”
Western Digital’s closest rival is Tokyo-based Hitachi Ltd., which was No. 1 with an estimated 29% of the laptop drive market in the fourth quarter.
The company has taken business from Japan’s Fujitsu Ltd., which has about 17% of the market and Japan’s Toshiba Corp. and Seagate, which were tied at roughly 15%. South Korea’s Samsung Corp. also has lost ground to Western Digital at 5% of the market.
Growing Markets
Western Digital, one of Orange County’s biggest technology employers with about 1,000 local workers, owes its growth to surging demand for laptop PCs and portable external drives that can be carried around and plugged into different computers.
“We think the company is benefiting from a market leading position in the two hottest areas of the disk drive market,” said analyst Jeff Brickman of New York-based UBS Securities LLC in a recent note to clients. “In the notebook segment, where we think Western Digital has a technological edge, it continues to exhibit rapid growth and we expect the company to continue to take share.”
The company had a record December quarter that beat Wall Street’s profit expectations.
For the quarter ended Dec. 28, Western Digital posted revenue of $2.2 billion, up 46% from a year earlier and in line with analysts’ expectations.
The company reported $305 million in profits,more than double the prior year’s $128 million and beating Wall Street’s expected $229 million.
Western Digital said it shipped more than 34 million drives during the quarter, up from 25 million a year earlier.
Sales Shift
More than half of the sales, 54%, came from what Western Digital calls “non-desktop PC sources,” meaning drives for notebook PCs, consumer electronics and the company’s drives sold at stores.
A year earlier, non-desktop PC drive sales made up 42% of revenue.
Notebook PCs “have been the fastest growing market for all the disk drive makers in the last few years,” Trend Focus’ Geenen said.
Western Digital also is seeing sales growth for its external drives, part of what it calls its “branded products.”
Branded products made up about 18% or $375 million worth of sales during the December quarter. They’re expected to grow 25% in the next five years, according to the company.
Western Digital sees more profits on branded products than on drives that go directly into computers, according to Geenen.
External drives command more of a premium in Asia and the Middle East, according to Geenen. U.S. and European consumers are savvier about finding lower prices, he said.
“Western Digital is willing to compete in markets where being competitive on price matters,” Geenen said. “They are getting into all of the key stores all over the world. They are not out to sell the lowest price box, but if that is required in a certain market, they’ll do it.”
Making it All
The company’s strategy of making virtually all of the parts needed for its drives is helping, Geenen said.
“They’ve gone from a company that was effectively an assembler of other people’s technology to a vertically integrated supplier,” he said. “Roughly 70% of the cost of a disk drive is the materials. By making their own heads and disks, they are saving several dollars per drive.”
Seagate and Hitachi make most of the parts that go into their drives. Fujitsu, Toshiba and Samsung outsource most of the work.
Like other tech companies, Western Digital has amassed a sizable cash horde,$967 million in cash and short-term investments as of Dec 28.
Komag
During the December quarter, it used $240 million to pay down debt from its $1 billion buy of San Jose-based Komag Inc. in September.
Wall Street likes the buy for its potential impact on profits.
“The Komag deal makes a lot of sense strategically given Western Digital’s need to create a more solid long-term position in the volatile hard disk drive industry,” UBS’ Brickman said. “The company will now be in control of the most vital components of a disk drive. Having this control will allow the company to narrow the gap between its margin and industry leader Seagate.”
The company’s shares are up about 30% in the past year with a market value of nearly $6 billion last week.
Western Digital is expecting the March quarter to come in strong.
It recently gave a forecast above analysts’ consensus estimates with projected profits of $187 million to $200 million on sales of $1.9 billion to $2 billion.
