Western Digital, Brocade Face Challenges Despite Rebound: Report

A report on data storage specialists Western Digital and Brocade finds the companies face future economic challenges.

While tablet computers such as the Apple iPad and Samsung Galaxy Tab threaten to eat into traditional computer companies' revenues, the data storage device industry seems well-insulated from this, according to a study from IT research firm The Bedford Report. The report found low-cost data storage options do not seem to be affected by higher-end products, and with the increase in popularity of new technology that supports media-rich content, customers are again looking to supplement their technology arsenals with data storage devices.

The Bedford Report examines the outlook for companies in the data storage device industry and provides research reports on Brocade Communications Systems and Western Digital. This year a large majority of major data storage companies have been reporting dramatic increases in demand for their products, according to Bedford research. According to Standard & Poor's, key drivers in the industry's rebound have been content digitization of old media such as paper and film, longer record retention for compliance with government regulations, as well as the increasing popularity of social networks.

Western Digital specializes in the design, development, manufacture and sale of memory devices, most notably hard disk drives, for the PC, server and consumer device markets. The company's drives are used in desktop and notebook PCs, enterprise storage, workstations, video surveillance equipment, networking products, DVRs, set-top boxes, and other applications. "Going forward we argue that upside is expected to be limited in the personal computer segment," the report noted. "WDC has claimed that competitive production decisions and pricing strategies will pressure margins going forward."

Brocade supplies end-to-end IP-based Ethernet and storage area networking solutions for enterprises and service providers. Its data storage segment offers infrastructure products and solutions, including directors, switches, routers, fabric-based software applications, distance/extension products, management applications and utilities to centralize data management; and host bus adapters, converged network adapters, mezzanine cards and storage area network switch modules for blade servers.

The report noted Brocade's IP segment has rebounded sharply this year-aided by revenue recovery in its federal business, and in the second quarter Brocade recruited top talent from the networking industry in an effort to reinvigorate its sales efforts. However, Bedford research noted revenue growth is a concern for Brocade investors. Revenues grew just 2 percent year over year, compared with industry peer Qlogic's 16 percent year-over-year quarterly revenue growth. Overall, the data storage industry saw 18 percent revenue growth year over year.

"It is certainly buying season for major tech players hoping to boost their product portfolios at a time when the lines in the data center market are blurring. Shares of Brocade skyrocketed in late September due to rumours, including a couple reported in Barron's, that IBM was considering acquiring the networking gear maker," the report noted. "Also in acquisition news, Western Digital announced this summer that it has completed the previously announced acquisition of the magnetic media sputtering operations of Hoya Corporation for roughly $233 million."