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Ngoc Do Information Technology ndo2@fordham.edu March 22, 2015

Seagate Technology PLC (STX) www.seagate.com Investment Thesis: We issue a Buy rate on Seagate Technology PLC. Our expected EPS for 2015 and 2016 are in line and lower than consensus. The drivers for our valuation include strong growth in enterprise storage unit shipment at 5.7% in the next 2 years, new product portfolio in HDDs and SSDs market, and strong record of operating efficiency over the past few years compare to other comparables. Current Price: $57.43 Market Cap ($mil): 18,856 Fiscal Year End: June 3 Mo. Avg Daily ($mil) Vol: 3,448,232 Upside Target: $66.78 16.3%

EBIT Margin of 13.3% applied to 2016 revenue give $4.77 EPS x 14 = $66.78 Downside Target: $28.62 -50.2%

EBIT Margin of 13.3% applied to 2016 revenue give $4.77 EPS x 6 = $28.62 Differentiation from Consensus

FY Consensus EPS

P/E GBA-SMF EPS

P/E EPS Below

2015 Est 4.79 11.98 4.67 12.30 0.12 2016 Est 5.16 11.13 4.77 12.04 0.39

FY Consensus Revenue

P/S GBA-SMF Revenue

P/S SPS Above/Below

2015 Est 14,193 1.33 14,130 1.34 0.01 2016 Est 14,228 1.33 14,421 1.31 -0.02

Headquarters YTD Chg. LTM PE Dublin, Dublin, Ireland -15.02% 9.2x Sector 1 Yr. Chg. Price to Book Information Technology 12.68% 6.6x Industry 52 Wk L/H Price to Sales Technology 48.49/69.40 1.4x Exchange Beta Price to EBITDA NASDAQ 2.48 7.3x Dividend Payout L.T. Growth Rate EV to EBITDA 24.0% 0.00% 7.5x

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Company Background: Seagate Technology is the leading provider of electronic data storage solutions. Their main products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. In addition to HDDs, they produce a broad range of electronic data storage products including solid state hybrid drives (SSHD) and solid slate drive (SSD). Electronic Data Storage Industry

1. Enterprise Storage: Application for operation of large-scale enterprise workloads, requiring high performance and high reliability storage solutions

2. Client Compute: Desktop and mobile compute applications 3. Client Non-Compute: Consumer electronic devices and disk drives

used for external storage and network-attached storage Demand Trends

1. Electronic Storage: The continued advancement of cloud, mobile and open source computing

2. Disk Drives: Growth in digital content requires increasingly higher storage capacity in order to store, aggregate, host, distribute, manage, backup and use such content

3. Increased use of client non-compute devices that consume media-rich digital content streamed from the cloud increases the demand for high capacity disk drives

4. Growth of mobile devices such as tablet and smartphone, which require less in storage capacity and more in speed helps increasing demand for flash-based storage

STX Business 2014 2013 2012 Revenue by Channel (%) OEM 68% 68% 72% Distributors 20% 21% 21% Retail 12% 11% 7% Revenue by Geography Americas 27% 27% 26% EMEA 19% 19% 19% Asia Pacific

54% 54% 55%

2013: Each Dell and HP accounted for 13% of total revenue

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Reasons To Buy:

- Strong growth in enterprise storage and cloud computing over the next 3 years will be the main driver for Seagate’s revenue. IDC predicts that enterprise will spend more than $107 B in public cloud service in 2017, with a 23.5% CAGR the next three years. Seagate will also be benefited from this trend with average growth in unit shipment at 5.7%. Also, price per unit of enterprise storage is estimated to rise from $122 per unit to $140 per unit as flash-based storage gains traction. Asia Pacific, accounted for 50% of Seagate’s revenue, also shows strong growth in cloud and SaaS markets.

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- Seagate’s new product portfolio showed vigorous effort to match consumer demand and catch market’s trends. In the HDDs market, STX’s market share dropped from 43% in 2013 to 39% in 2014 while biggest competitor WD grew from 43% to 45%. STX then introduced multiple products with new technology to compete for bigger share. In the SSDs market, IDC expected robust growth from worldwide shipment would jump to 171.9 billion in 2017, implying CAGR of 22.3%. Seagate’s recent acquisition of LSI’s SandForce PCI Express, Xyratex, and Avego indicated that the company is getting serious about the pure SSD business. Quarterly report shows a consistent increase in R&D expense margin from 8.6% in June 2013 to 10.4% in March 2015. We expect Seagate would introduce another new line of products by the end of 2015 or the beginning of 2016.

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- STX also operates very efficient compare to the rest of the peers. Total asset turnover is at 1.44x, inventory turnover is at 9.96x and cash turnover is at 4.29x. Aside from that, the firm also generates the highest dividend yield at 2.93%. In addition, STX is trading at the lowest multiple at 9.36x compare to the rest of the peers at average of 25.30x; the industry average is 17.2x. The closest comparable is Western Digital currently trading at 15.5x with very similar EV/EBIT and EV/EBITDA

- Strong growth in mobile device units in 2015 with tablet device in the lead at 23.9% increase from 2014, while mobile phone unit sale is expected to grow at 3.1%. Other device like ultra book, premium laptop and hybrid unit sale will grow at a surprising rate of 70%. This will positively impact revenue for SSHD and flash-based storage

- Seagate has strong price competitiveness compare to Western Digital – its biggest rival due to it vertical manufacturing design. Western Digital’s average selling price per unit for enterprise storage, which considered the most promising market in the industry, is $146 comparing to Seagate at $124

Risks:

- The biggest concern in technology industry is always the product cycle. New cutting edge products and better technology platform can create a big impact on Seagate’s revenue, especially something regarding network bandwidth and storage utility

- A vertical integrated model tends to have less flexibility when demand moderates as it exposes the company to higher unit costs as capacity utilization is not optimized

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- The company operates in many parts of the world and is exposed to a high level of foreign exchange risk. Only 27% of the revenue comes from Americas and most of Seagate production occurs in China and Singapore. U.S.’s economy is in the right track at the moment, thus makes the dollar appreciate to almost any other currency. Seagate does engage in foreign exchange hedging activities but there is no assurance that the activities will significantly offset the fluctuation of the exchange rate

- Operating in a very competitive market, Seagate pricing strategy is very sensitive to other competitors. Buyers have the power to choose from various products with many substitutes, which in turn creates price erosion. Management concerns that lower margin due to price erosion will hinder company strategy to heavily invest in R&D

Competitive Positioning: SWOT Analysis: Strengths

- High Efficiency Ratios: Seagate generate total asset turnover of 1.44, inventory turn over of 9.96, and cash turnover of 4.29 times compare to average industry at 0.77, 5.48, and 2.95 respectively. In addition, the company has shown a very consistent track record of efficiency over the past 5 years.

- Diversified Product Portfolio - Vertical Manufacturing: Seagate utilizes a vertical design and

manufacturing strategy which enable the firm to improve efficiency and cost

- Geographically Diversity: Seagate has diversified operations all over the world, which benefits it from presence in low cost manufacturing countries and low transportation cost to near major OEMs of the world

Weaknesses

- Dependence of OEMs: 68% of Seagate revenue comes from long standing relationship with OEMs

- Declining Margin: The company record shows a decrease in margin over the last two years from 14.6% to 13.2%. The decrease can be explained due to extensive R&D, M&A and price erosion over the past few years. Recent earning calls inform that continuing low margin would hinder the company expenditure for R&D in the future

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Opportunities - Flash-Based Business: Seagate has recently acquired Avago

Technology’s flash business showed that the company is ready to upgrade its current products base. Flash-based products are pricier than traditional storage platforms and commanding higher margin

- Growth in Cloud Computing and Remote Storage Services: According to industry estimates, the global spending on public IT cloud expected to touch $107 billion by 2017, growing at 23.5% CAGR 2013-17

- Positive Outlook for Tablet Market: Shipment of tablet PCs is estimated to grow at a CAGR of 14.9% from 2012-17. The strong outlook will drive the demand for the company’s SSDs, SSHD and flash-based storage

Threats

- Highly Competitive Market: Seagate operates in a very dynamic and competitive industry. Technology changes everyday and companies always have to look further to have competitive advantage. Buyers have various options choosing from similar product to substitute and a slightly change of price would alter their decisions. Most recent earnings call raise a question of price erosion and whether or not this was a only periodically

- Declining PC Market: PC market is forecast to contracted at around 3% next year and the trend will be likely to continue in the future. Even though PC market has shown weakness over the past few years, PC HDD still is one of the biggest portions of Seagate’s revenue

Monitoring Points:

- Seagate fiscal period end at June 26, 2015 and investors are looking for the company’s annual report.

- Global demand for spinning disk hard drive and a transition to SSDs - Seagate has acquired Avago’s flash-based business and announced a

strategic partnership with chipmaker Micron Technology to deliver new and innovative flash-based solutions, including next generation SSDs.

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Income Statement

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Balance Sheet

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Statement of Cash Flows

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Revenue Model