Some Perspectives On A Potential Kioxia/WDC NAND Merger

Lately there have been rumors within the press of a potential merger of Kioxia and Western Digital’s NAND flash and SSD division. Western Digital might have sought a possible buyout of what had been Toshiba Reminiscence (since renamed Kioxia) when it was spun out from Toshiba to boost cash to fund operations of the troubled mum or dad firm in 2018. Greater than probably Western Digital was leveraging its flash reminiscence three way partnership with Toshiba to get the very best phrases for its continued NAND flash and SSD enterprise.

The current hypothesis is pushed by a settlement in June 2022 with activist investor Elliot Administration saying that WDC would contemplate separating its laborious disk drive and flash reminiscence enterprise. Since then, the corporate has thought-about whether or not creating separate companies, promoting the flash enterprise or different choices make sense. Latest rumors point out {that a} determination on the way forward for WDC’s storage companies shall be made within the close to future.

Let’s have a look at what the advantages and prices could possibly be for WDC promoting its flash reminiscence enterprise to Kioxia. First let’s have a look at the market share of the main NAND suppliers. In response to Trendforce in Q3 2022 Samsung had 31.4% of the market adopted by Kioxia with 20.6%, SK hynix and Solidigm (Intel’s former NAND enterprise) at 18.5%, WDC at 12.6%, Micron at 12.3% and different firms at 4.6%. On its face, combining Kioxia and WDC’s NAND enterprise would result in the most important NAND producer at 39.1%, however issues by no means work out that method.

If Kioxia and WDC mixed, it’s probably that some clients would transfer a few of their enterprise from the brand new joint firm to different distributors with the intention to scale back their dependence upon that firm and to assist its opponents. That definitely was the case when there have been main mergers of HDD firms within the 2010’s. So, a mixed Kioxia and WDC won’t be the market chief, a minimum of not for lengthy.

Additionally, let’s have a look at WDC’s flash and HDD revenues and income from their quarterly experiences to see how the 2 WDC companies examine to one another. The chart under reveals the corporate’s NAND flash and HDD quarterly revenues from CQ1 2020 by CQ3 2022. From a income perspective the 2 companies considerably observe with one another, with the HDD enterprise normally producing essentially the most income every quarter.

Within the following chart we present the gross margin of WDC’s NAND flash and HDD enterprise. WDC’s NAND gross margins typically exceed these of its HDD enterprise. Gross margins ought to typically correlate with the companies’ profitability. Notice that the bit drop in HDD enterprise margins in CQ2 2022 was resulting from a significant correction within the firm’s HDD enterprise with persevering with declines within the firm’s legacy enterprise after a lift in the course of the pandemic and extra stock within the nearline HDD enterprise. We’ll discuss WDC’s NAND profitability once more after speaking about Kioxia’s financials over the previous few years.

The next chart reveals Kioxia’s gross sales and revenue in Yen from their quarterly experiences. Gross sales have been typically rising from CQ1 2020 by CQ3 2022 however the firm’s revenue is much extra dynamic. Kioxia and WDC get their NAND flash from the identical fabs in Japan, why is there such a distinction if the profitability of the 2 companies?

Analyst Jim Helpful of Goal Evaluation wrote an article analyzing the profitability of WDCs NAND enterprise and Kioxia’s enterprise again in 2019. Jim factors out that the enterprise association between WDC and Kioxia (then Toshiba Reminiscence) enable WDC to take as much as 50% of the output of the three way partnership fab. Nonetheless, they don’t must take the complete 50% of their share and so they solely must pay Kioxia for the product they take from the three way partnership fab. NAND flash fabs are very costly to construct and as soon as constructed, it is smart to fabricate as a lot product because the manufacturing facility is able to to get a return on the capital value of the manufacturing facility.

When demand is down for flash reminiscence and the costs are declining this offers a bonus for WDC. The corporate can management potential losses by solely taking as a lot manufacturing from the joint fab as they’ll promote, whereas Kioxia must attempt to promote their share plus what WDC doesn’t take. This causes further worth strain for Kioxia. Because of this settlement then WDC NAND enterprise profitability tends to be extra regular than Kioxia’s.

With this data, would it not make sense for WDC to promote its NAND flash enterprise to Kioxia? Kioxia would positively acquire, however WDC would lose an excellent income and revenue. So,it will be stunning it WDC would try this. They might separate the 2 companies as separate firms, so long as the brand new NAND enterprise retained the product cope with Kioxia, nevertheless it doesn’t appear to make sense for WDC to promote its NAND enterprise to Kioxia.

Wanting on the fab association between Kioxia and WDC and the historical past of NAND enterprise profitability for the 2 firms a merger could be rather more advantageous for Kioxia than WDC. This makes it troublesome to imagine that WDC would spin out this enterprise to Kioxia, however time will inform.